Speech by the Minister at Pensions Authority Conference on the Future Global Trends in Pensions

Speech by Minister for Social Protection Leo Varadkar at the Pensions Authority Conference on the Future Global Trends in Pensions and their Impact for Irish Pension Policy Planning

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Good Morning,

I would like to thank David Begg, Chairman of the Pensions Authority for the invitation to speak at this important event.

As you know the Pensions Authority plays a vital role in the pension sector in Ireland. I would like to thank the Authority for organising this conference at a key time in the planning of our future pension landscape.

This conference will provide an insight for Irish pension policy makers into trends across the globe, particularly in countries that are ahead of us.

Our aims are twofold.

• avoid poverty in old age
• enable and assist people save enough during their working life to maintain a similar standard of living after they retire

I intend to set out a road map in the near future detailing the government’s plans. The actions will include:

• the reform of the State pension

&the rationalisation and reform of supplementary pensions

• the transposition of the IORP 2 directive
• and the design of a universal retirement savings account

Our first pillar State Pension started over a century ago to provide a means tested safety net for older people at risk of dire poverty. We have come a long way since then with the addition of a contributory based State pension and other related benefits like the free scheme. It provides a good basic level of income and continues to be the foundation of the Irish pension system.

The consistent poverty rate of 2.7% for people age 65 is low by international standards and much lower than among the general population under 65.

We need to keep it that way and I believe this can best be achieved through indexation. However, you are all aware of the challenges we face with regard to the sustainability of the State pension.

State pensions already account for the single largest block of social welfare expenditure. In 2017, over €7 billion will be spent on pensions, which represents close to 35% of my Department’s total current expenditure.

There are anomalies in the ‘yearly averaging’ system, and this is to be replaced a fairer approach that upholds the contribution principal.

We are working on proposals to replace the current system with a Total Contributions Approach. This will provide a fairer basis for the calculation of contributory pensions as well as removing anomalies which currently exist. It is intended to implement this fully by 2020 with interim measures before that.

An Actuarial Review of the Social Insurance Fund is underway at present and will report in the middle of this year. The data will allow my Department to accurately cost and project various reform options.

Following analysis of that data, I intend to have a public consultation. This will, I hope, provide a broad understanding of the choices we can make, and to reach some consensus on this element of pension reform.

This will include how we treat gaps in contribution periods caused by homemaking. This is a greater issue for older women than those who are younger, given changes in society over the decades, but it will remain an issue for some years to come.

The likelihood – depending on the outcome of the public consultation, and input from members of the Oireachtas - is some allowance for Homemakers Credits. How these will be financed will of course be an issue that will have to be dealt with, particularly reform should be implemented on a cost-neutral basis. It may be that the number of years of contributions required for a full pension may be higher, but the homemakers provisions more generous, depending on the priorities that emerge from the consultation.

While I believe the range of years required for a full pension should probably be in the range of 30 to 40 years, where exactly that figure will land will depend largely on the figures that emerge from the Actuarial Review.

I have also asked officials to examine options to phase in of the Total Contributions Approach. Data provided by the Actuarial Review of the Social Insurance Fund will assist in this, notably in identifying the likely cost.

The option of deferring pensions is another proposal I favour. Other counties allow someone, reaching State pension age, to opt out of receiving their State pension there and then, and instead defer it, with an actuarial increase when they finally choose to draw it down. I know in the UK, this increases the rate of the pension by nearly 5.8% per year.

While there are issues around potential long-run costs, and how the PRSI system should treat income in the years past State pension age, I believe that this would be particularly attractive to people with gaps in their contribution histories.

I believe providing people with this choice would be positive, as it would support the general message we are trying to make, regarding longer working and greater flexibility around retirement.

I will now turn to supplementary pensions.

In 2014, the OECD published a Review of the Irish Pension System. The Review endorsed Ireland’s pension policy reforms. And it also made a number of broader recommendations for future reform.

Ireland is one of only two of the 35 member countries in the OECD which does not have a mandatory or quasi-mandatory earnings-related pension to complement the State pension.

As a result, Ireland faces a very significant challenge in filling the retirement savings gap and providing satisfactory pensions for our citizens.

The OECD’s key recommendation was that Ireland should increase pension coverage through a universal mandatory or quasi-mandatory employment-based pension system. I intend to do this.

We recognise that supplementary or private pension coverage is uneven and needs to be increased. Since the review, our rate of supplementary pension coverage has actually decreased further. Latest CSO figures indicate that coverage decreased during the recession from 51% in 2009 to a current rate of 47% and when the private sector is taken alone, the figure falls to just 35%. We also know that many people with supplementary provision are saving significantly less than they need to meet their retirement income goals and expectations.

Without change a majority of our citizens will rely on the State pension in retirement. And for most, that won’t be enough.

So I support the development of a new, universal, retirement saving system for people without supplementary retirement provision. And I want to make it happen.

In 2015, the Universal Retirement Savings Group was set up to look at how such a system could be developed in Ireland.

It’s essential that we choose a system which is best suited to Ireland. All the evidence indicates that introducing a new system will involve numerous policy, legislative, administrative and technical changes. It will take a number of years to implement, and will need to be phased in over a period of time. However, I am confident that with a broad consensus for reform proposals, we will see the first new members enrolled in four years from now.

Detailed consultations have already been held with consumers, employer representatives, trade unions, the pensions industry and advocate/interest groups, as well as a range of Irish and international experts in this field.

International experience makes it clear that building sufficient consensus across political, business and civil society is essential for any new universal supplementary pensions system to work.

There are good examples from other countries of strong co-operation between employers, trade unions and Government helping to drive success in this type of reform. For instance, in Australia which is often cited as a case study of good practice the introduction of the mandatory superannuation arrangements was facilitated through a tripartite agreement between the government, employers and the trade unions.

For this reason we have included the development of a pension’s framework in the work programme for the recently established ‘Labour Employer Economic Forum’. This initiative supported by Government provides a forum for representatives of employers and trade unions to exchange views on the economy, employment and the workplace.

It’s very important that when we talk about a new universal retirement pension scheme we always make the point that it will be designed to supplement State pension provision, never to replace it.

I believe that to successfully deliver any universal system there is a need to reform and simplify the existing pension environment.

Reform and simplification is key to developing a pension system that is coherent and easier to understand, this will in turn increase confidence and engagement among pension savers.

Last year, I launched an open consultation process on the Pensions Authority’s proposals for reform of private pensions.

Many of the provisions contained within the IORP 2 directive will also support positive reform of the Irish occupational pension sector.

There are some immediate challenges, particularly in relation to defined benefit schemes which need to be resolved as soon as possible. I intend to bring forward provisions in the next Social Welfare and Pensions Bill in April to:

• require more frequent provision of information to the Pensions Authority to allow closer monitoring and scrutiny of scheme funding positions
• require employers to provide information regularly to trustees to allow them to plan for future viability of their scheme
• provide for early notification to the Pensions Authority of scheme difficulties or changes in the sponsoring employer that will affect schemes
• prevent solvent employers from ceasing contributions to their schemes without lengthy minimum notice periods and engagement with stakeholders
• give increased powers to the Pensions Authority to take action to direct schemes and sponsoring employers to develop proposals that will allow schemes to survive or put in place well-funded alternatives
• support schemes which are under pressure and give sponsoring employers the space they need to fund these deficits

Separately, following discussions between my officials, the Society of Actuaries and the Irish Association of Pension Funds, the Pensions Authority will shortly bring forward proposals to tackle some of the difficulties in the current operation of the funding standard. These will include:

• examining how pension liabilities are valued to reduce volatility and introduce a degree of smoothing
• looking at the strength of the employer covenant, and
• extended funding periods

The reforms I have spoken about are far reaching. Their impact and benefit may not be felt for many years but they will benefit many generations of our citizens in the years to come as they reach retirement.

That it is why it is essential to plan carefully for the long term, consider the options carefully and make the right decisions. We need to do this thoughtfully and wisely so that future pensioners will benefit from comfortable as well as long retirements. We need to consult broadly and draw from the experiences of other countries. We also need to get busy getting it done.

Thank you.

Ends