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Area man pleads with state to continue to give tax reliefs to ‘save’ private pensions in order to prevent ‘reliance’ on… er.. the state… August 6, 2009

Posted by WorldbyStorm in Economy, Irish Politics.

An entertaining read in the Irish Times recently, a cri-de-couer as it were from a representative of the private pensions industry. For… we read that:

THIS MONTH it was the “Bord Snip Nua” report. Next month we will see the report of the Commission on Taxation. Together they will form the backdrop for Government discussions and public debate in advance of a very, very difficult budget.

There is pressure – justified in many cases – to curtail various tax reliefs and allowances and the Commission on Taxation will undoubtedly have views on many of these. One change that should be resisted is the reduction of tax relief on pension contributions. Doing this to help resolve today’s fiscal problem would simply store up another fiscal problem for the future.

How so?

The Government has already seen this potential problem coming. In 2000, the Government acted to face up to a pension crisis that was appearing on the horizon. The population was ageing and living longer, private pension provision was well below what it needed to be and it looked as if the State would face major difficulties in meeting its pension requirements by 2025.

As part of its response, the Government set up the National Pension Reserve Fund to which 1 per cent of GNP was to be paid each year to try to offset the 2025 problem.

Nine years on, what has changed?

Well, as noted here previously by Fintan O’Toole we’ve made almost no money at all on said NPRF.

Virtually all pension funds have seen hopefully temporary but substantial reductions in their value as a result of the sharp decline in equity prices. Individuals and companies are struggling to make pension contributions because of the effects of recession.

Defined benefit pension schemes are facing grave difficulties. The pension reserve fund itself has been diverted from its long-term strategy and is now helping to fund the recapitalisation of the banks.

The only thing that hasn’t changed is the basic demographic fact that underlays the establishment of the pension reserve fund: we have an ageing population and, from 2025 onwards, the State will face a major challenge in meeting its pension obligations.

Note the ‘hopefully temporary’. We all live in hope. When we’re not living in fear.

The State cannot be expected to fund pensions for everyone. Private pension provision for those who can afford it offers the only prospect of alleviating the burden on the State.

Okay. Let’s hold on right there. What is the basis for this proposition that the State cannot be expected to fund pensions for everyone and that only private pensions offer a prospect for alleviating the burden on the State? I can cite examples from abroad where states do fund pension from taxation with a contributory element from employees and employers.

To ensure as many citizens as possible provide for their own retirement, they must be encouraged to make regular payments into pension schemes. The taxation system is central to ensuring this happens.

Now more than ever, tax relief on pension contributions and investment income and gains should be maintained at the marginal rate.

There is an easy argument made currently that tax relief on pension contributions currently “costs” the exchequer €3.2 billion. This is misleading, though: once a pension fund is being paid out during retirement, income tax is then paid on it, so what is called tax “relief” is in fact only tax deferral.

It is this deferral of tax that makes saving for retirement worthwhile for individuals.

That’s a lovely notion, but it ignores the basic fact that there is a mismatch between the tax relief and the tax take on the final pension. In other words you’re not deferring all your tax through tax relief, but only a portion of it. Furthermore it’s a self-serving argument. He’s still not explained why the state shouldn’t be expected to fund pensions or why the only alternative is [private] pension schemes. Now, it’s his job to be self-serving, he is, after all a representative of the pensions industry. But, it’s also his job to address some basic flaws in his argument.

And there’s one glaring aspect of pension provision in the private sector which curiously he doesn’t directly mention, that being that many can get tax-free lump sums of up to 25% of a fund on retiring as part of their pension plans (although there is some talk that that facility may be closed down ).

And I can do no better than refer you to Pension Schemes and Pension Funds in the United Kingdom by David Blake and this page here …which notes that if we exclude the tax-free lump sum then tax liability is deferred and not avoided although, and here we see a crucial caveat:

(The position is slightly more complicated than this because of the possibility of tax arbitrage, that is, it is possible for an individual to transfer the tax liability from a period where he or she faces a high marginal tax rate – that is, when he or she is in work – to a period where he or she faces a lower marginal tax rate – that is, when he or she is retired.)

Slightly more – eh? That’s a pretty big benefit.

Back to our original article…

There have also been claims that the current pensions regime is regressive – that it favours higher earners over lower earners. However, because both pillars of our pensions system – State pensions and private pensions – are inextricably linked, both must be taken into account when assessing whether the system is fair or not.

The reality is that the State pensions are hugely subsidised by higher earners – and few would argue with this principle – and this far outweighs any benefit these earners gain through the tax treatment of private pensions.

But, by diverting funds that the State has to raise all pensions towards individual tax relief one could easily argue that those higher earners are gaining a personal share that is inequitable when set against the rest of the population who must scrimp by on the lowest, or lower, levels. But there’s a second and more important reason, and oddly it is one which McCarthy in the eponymous Report et al use. We can’t afford such indulgence to higher earners who, by the standards of the OECD have a very light tax burden indeed compared to that which they would experience in all other states.

Indeed think-tank TASC has a useful leaflet on just this topic which notes that…

These tax reliefs have disproportionately benefited the wealthiest in society: the top 20 per cent of earners receive around two-thirds of all pension-related tax subsidies, while the bottom 20 per cent received just 1.1 per cent (employees) and 0.2 per cent (self-employed).

In 2005, the most recent year for which figures are available, a small group of people earning over €250,000 annually shared a staggering €121 million in pension-related tax breaks1. During the same year, the average tax giveaway enjoyed by these top earners was €20,813 – or thirty-four times the tax relief received by someone on an average wage (€616)2.
What this means in practice is that the check-out worker is subsidising her own CEO.
When subjected to a gender-proofing and poverty-proofing process, it is clear that the incentive-backed private pension system is regressive, benefiting higher earners and those in secure, long-term employment. Tax reliefs, and the private pensions they are designed to promote, do nothing to benefit the weakest sections in our society: those on low incomes, women, migrants and atypical workers.

This is hardly a surprise, those on higher wages pay more tax so hence they get more tax relief, but… those on higher wages are on higher wages and therefore in a better position to allow a stream of their disposable income drain into the pension pool while those on lower incomes can only hope for a trickle… hmmm… I don’t do that sort of illustrative language very often… I suspect there’s a reason for it.

Of course even our intrepid correspondent can’t ignore the lump sum issue, but he approaches it from the side…

There are aspects of the current system which are seen as unfairly favouring well-off individuals. Take the advantages currently received by those fortunate enough to be able to put their pension fund into an Approved Retirement Fund (ARF) on retirement. Typically (although not always), such funds are availed of by the relatively well off. People can effectively accumulate substantial wealth within these funds and then take large tax- free lump sums out of them later.

This is not fully compatible with the concept of deferred taxation.

Not fully compatible? Why no, no it’s not!

In these cases, an individual may have made tax-free contributions to their pension fund and then may have been able to use the ARF mechanism as an inheritance-planning device. This is something that could be addressed to ensure fairness and equity.

For example, a reasonable cap could be placed on tax-free lump sums at retirement and the proportion of an ARF that must be distributed each year could also be increased.


Pension provision is currently facing substantial difficulties and the clock is ticking steadily towards the time when Ireland’s current substantial underprovision for retirement will be very badly exposed. In this context, the introduction of a new 1 per cent levy on insured pension arrangements from 1st August is not helpful at this time.

Any further reduction in the tax advantages of providing for retirement may turn a serious problem into a crisis. It could deal a fatal blow to private pension provision, which in the end will increase reliance on the State.

Oh, I know what he means, but could you see any finer encapsulation of the problems with a certain view of these matters? He believes that doing away with tax advantages for private pensions will increase reliance on the state? A tax advantage, or relief is the state underwriting private provision.

Now, I don’t have a problem with that as long as the playing field is leveled so that all gain a better universal pension and those who want more above that pay more from their own incomes. That won’t, short of the communist millennia, guarantee that all will have the same pension payment, but it should allow for a much more equal approach with all on sustainable pension.

And let’s not think that the ‘reliance on the state’ issue is merely confined to an economic view, for it’s not. Indeed we’re talking about a broader attitude in the insurance and pensions sphere which… well, look, consider the submission from the Irish Insurance Federation to the Green Paper on Pensions in 2007 and read why…

* We do not support the idea of mandatory pensions. The introduction of fully mandatory pensions would create more problems than it would solve. There would be a high degree of complexity involved and it would be very difficult if not impossible to design a regime which would be appropriate for all participants. In our opinion the better option is a reasonable basic State pension and voluntary provision on top of this.

* Why not mandatory? Because:
o Enhancing the “Pillar 1” State pension, as recommended, would go a long way towards providing an adequate retirement income for low- to middle-income earners; this in turn reinforces the idea that any additional pension provision – while it should be promoted and incentivised by the State – should remain voluntary;
o It represents an abdication of personal responsibility and it weakens the link between effort and reward;
o It removes personal choice;
o It enshrines the principle that citizens must be taken care of by the State from ‘Cradle to Grave’ and increases ‘Big Government’;
o It creates a dilemma regarding who should manage funds and may result in a lack of individual savers’ control over the management of their retirement funds.

I must comfort myself when – God willing – in twenty two odd years I sit beside the fireplace and realise that despite working fifty and fifty five hour weeks my lack of proper pension provision is due not the abysmal wages I had well into my late 30s but is instead the representation of an ‘abdication of personal responsiblity’ and that were I to enjoy a reasonably financed mandatory pension I would in fact be ‘weakening the link between effort and reward’ and ‘enshrining the principle that citizens must be taken care of by’ ‘Big Government’.

Good to know.

You might think the IIF is a marginal group. You might think wrong. The IIF represents such titans as AXA and Allianz, both of which have extensive pension arms. It’s somehow not at all comforting to know that they’re willing to sign up to such nakedly ideological analyses. Of course they’re in business and they want to extend it… but let’s not pretend that they’re not implicitly by cleaving to that viewpoint essentially dismissing many many working people who through no fault of their own cannot purchase their products.

The submission from the Irish Association of Pension Funds is more measured, but again, it seems to miss the point when it notes that:

We believe that removal of many of the barriers that exist in relation to people taking out pensions is the best means of increasing coverage and adequacy.

Problem is it ignores the primary reason why I and perhaps you don’t take out pensions like this, we’re not paid enough. And our employers aren’t going to cough up the readies to make up the shortfall. As long as that central issue remains unadressed (and here’s thought provoking piece from some years back) I see little scope, or what was that word he used – hope, for change.


1. Michael Taft - August 6, 2009

Thanks, WBS, for bringing us those wonderful observations from the private pension industry: loss of personal responsibility, effort and reward, personal choice, cradle to grave (haven’t heard that one in a while), loss of savers’ control, etc. Outside the industry, you couldn’t make this stuff up.

Despite claims otherwise, a mandatory 2nd-tier earnings related pension operated through social insurance would be relatively simple (especially compared to the current voluntary set-up): employers and employees contribute x percentage and, in return, employees get a defined payment in retirement (e.g. 50% of final salary). According to TASC it wouldn’t necessarily cost any more than current system if tax reliefs are phased out. And it could be highly flexible, with credits provided for periods of home-care, unemployment and illness, return to education, etc. – unlike now where if you don’t pay the contribution you lose out.

Most of all – an earnings related social insurance pension would remove uncertainty, whereas now we are reliant on the vagaries of the equity market and the acunem of pension fund managers, both of which have been wobbling a bit lately.

I have never understood why this reform has failed to gain traction. The idea behind it is hardly revolutionary; rather it’s based on the traditional insurance principle. Any party that ran with this idea in a serious manner would find a welcoming audience – especially the over-40s who must be wondering how the heck they are going to finance their retirement.


2. Tim Buktu - August 6, 2009

I wonder if Madam’s op-ed editor would allow WBS or M Taft a similar number of words in a similar position (as in: not the letters page) to critique Mr O’Faherty’s thesis.

(And I think it would be wonderful to see the tag under WBS’s name state that her/his qualification to write such a critique is “WBS lacks proper pension provision. This is not due to the abysmal wages she [he] had well into her [his] late 30s but because she [he] abdicated personal responsiblity.“)


3. EamonnCork - August 6, 2009

Reading articles like that is a bit like reading articles which presuppose that the world is flat or that everyone accepts the existence of God without cavil. All this stuff about the evils of ‘big government’ and ‘weakens the link between effort and reward’ belongs to a different age, one in which people could posit the infinite superiority of the market without being laughed out of it. After all, NAMA and the banking guarantee represent the biggest of big government and could be pretty conclusively seen to weaken the link between effort and reward. A free market fundamentalist would surely argue that both banks and developers should be let go to the wall pour encourager les autres. However we’re told this isn’t practical. Fair enough. But you then can’t repeat the old free market nostrums as though nothing has changed.
As a side issue, I note the use of the phrase ‘big government’ with some wonder. It’s an American phrase and has some resonance in that context because of things in the American tradition, nativist libertarianism, states rights, the frontier mentality, which are opposed to big government. But there’s no tradition of being against big government in this country so using the phrase is merely a lazy and meaningless importation of a foreign phrase into the argument. Next thing he’ll be inveighing against welfare cadillacs or saying, “Ireland, love it or leave it, man.”


4. Dr. X - August 6, 2009

>>>“Ireland, love it or leave it, man.”

Well, as it happens, I regularly tell my nieces of 12 and 9 years respectively that they should aim at fleeing from this country as soon as possible, and never, ever coming back.

Being Irish is fine, so long as you don’t actually live in Ireland.


5. alastair - August 6, 2009

Most of all – an earnings related social insurance pension would remove uncertainty, whereas now we are reliant on the vagaries of the equity market and the acunem of pension fund managers

Well – not really. It would hide the vagaries of the equity market behind the facade of the state alright, but the same risks would apply. After all, the National Pension Reserve Fund isn’t proving to be much more successful at playing the markets than any other fund managers.


6. Pax - August 6, 2009

“But you then can’t repeat the old free market nostrums as though nothing has changed.”

Yes you can, (even though you spout from the idealogy that is failing,) when (a) You get something like, maybe, ~ 75% revenue from advertising, or (b) Are the corporate and/or state media, or (a) are Jim Power.

This was easy when it was pointed out about the official enemy’s Pravda being owned and run by the communist party. But for some strange reason, … these things are just-not-said about the corporate party, on one’s own side of the map’s dotted-line.


7. Pax - August 6, 2009

In ref to my previous post. This reminds me of Dan Hind’s excellent piece earlier in the year and titled most appropriately


Basically the left should be doing an awful lot more finger pointing, in order to instill a correct apportioning of blame. There’s just not enough politics of envy going around.


8. Michael Taft - August 7, 2009

Alastair, that depends on the system that is constructed. If pre-funded along traditional lines, yes – it would mean that the state would take a hit on the equity market, as the NPRF suffering. But a Pay-As-You-Go system doesn’t do that. And the NPRF doesn’t necessarily have to play the equity market but act as an investment fund in Ireland (a type of infrastructural bank, if you will).


alastair - August 7, 2009

I’d be guided by the decisions made in Sweden about how to retain their pension provision – which everyone seems to agree are an exemplar of what we should be aiming for. They required at least a portion of front-end pension contributions to be invested in the markets, and their pay-as-you-go buffer fund (€50 billion odd) is invested 70% in equities. I’m guessing the same logistics would apply here if a decent universal pension scheme were introduced.


9. Debt Settlement Program - August 8, 2009

complex post. simply one decimal where I quarrel with it. I am emailing you in detail.


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