Hand waving on an epic scale – a pensions industry representative attempts to rubbish the ESRI report on pensions

Entertaining report in the SBP where a representative of the pensions industry attacks the recent ESRI report – dealt with here – in the following terms:

Frank Downey, head of actuarial with Invesco, said the ESRI report based its conclusions on “historic data from 2008 and 2009 annual reports, and used earnings contribution limits and standard fund thresholds applying in 2009 to compare retiring executives’ pensions to those of an average employee.
“These are meaningless conclusions to draw in late 2012, based on current contribution and fund threshold limits,” he said, adding that the “real issue” was the lack of a level playing field, in pension terms, for private and public sector employees in Ireland.

I think many of us would beg to differ as to his definition of the ‘real issue’. Particularly those who are reliant on the state pension.
Actually, in the context of the Budget there’s further contention about the prospect of tax relief being removed. Peter Vale also writing in the SBP suggests:

There are wider issues than purely tax to be considered here. Tax relief is a significant incentive for individuals to plan for their retirement. If that incentive is removed, there is the spectre of individuals retiring in the future with inadequate provision made for the remainder of their lives. This would inevitably place a further burden on the state in terms of support.

That last is an interesting thought, but let’s contemplate a small stat from the TASC report ‘Making Pensions Work for People’.

Ireland currently operates a mixed pension system, comprising both public (Social Welfare) and private elements. Yet, despite the fact that most pensioners rely on the Social Welfare system for an income, the Exchequer spends almost as much on subsidising private pensions (through tax reliefs) as it does on funding public pensions: €4.3bn on State Pension17 and €3bn on tax reliefs18. And the overwhelming majority of those tax subsidies go to the highest income groups. Eighty per cent of tax relief went to the top 20 per cent of earners (ESRI, 2009). In some cases, these tax breaks subsidise tax shelters … rather than pensions.

Meanwhile Downey continues with his thoughts:

The ESRI report indicated there could be more efficient ways of encouraging private pension savings than via tax relief. It suggested using the government’s buying power to keep management charges low, citing Britain’s National Employment Savings Trust, an auto-enrolment pension scheme, as an example.
However, Downey said this was “a naive assertion”.
“All experience in Ireland and elsewhere shows that tax relief is the only effective way of encouraging long-term pension provision,” he said. “This report doesn’t acknowledge that pension tax relief is essentially a deferral of tax, as pension payments are taxed in full. It seems to suggest that relief be restricted to the standard rate but that pensions should then be taxed at the individual’s marginal rate.”

That’s a lovely line, but it’s not entirely correct.

As Gerard Hughes put it on progressive-economy some years back:

[this line of argument’ ignores the more favourable tax exemption limit for people aged over 65, the fact that up to ¼ of the value of the pension is taken as a tax free lump sum, and that a great many taxpayers who pay tax at the higher rate during their working life only pay tax at the standard rate when they retire. In its country report on Ireland in 2008 the OECD concluded that the overall effect of our favourable tax arrangements for pensions “ … is in effect fairly close to being … [a] system where income channelled through pensions is unlikely to be taxed at any point of the life-cycle.” An earlier report in 2004 by OECD researchers Yoo and de Serres showed that the tax deferral argument of the pensions industry is wrong as the long-term budgetary cost of pension tax reliefs in Ireland, on a present value basis, amounted to nearly 2 per cent of GDP.

There have been some changes since then but in outline that is still largely the status quo. And as noted way back when, here, that’s a pretty big benefit.

By the by a most interesting question to ask is why someone connected with the pensions system would be so antagonistic to an auto-enrolment scheme.

Saving the best for last Downey said:

He added that the issue of charges on pension schemes was “a red herring designed to deflect attention from the reductions already made by the current government in PRSI/USC reliefs and their imposition of the pension levy”.

Er, no. Having some experience with PRSAs and other private pension provision in a commercial context I can attest that both are opaque, at best.
These aren’t ‘red herrings’ and they have important impacts on individuals who realistically are in no position either to push back against charges or the manner in which they are structured and imposed. But then I guess it is better for some to convey the impression that all is fine rather than that the pensions industry is unfit for purpose.

More broadly it seems to me that the only progressive way forward is the phasing out and end of private and public sector pensions, as currently structured, and their replacement by a single universal pension pegged at a genuinely good standard, with the option for individuals to top up. But again, how likely is that to occur any time soon?