THE INSTITUTE OF BANKERS IN IRELANDDUBLIN REGION – ANNUAL SEMINAR

ANNE MAHERChief Executive 23 February 2004The Pensions Board

PENSIONS – THE ESSENTIAL INVESTMENT

2.

WHAT I WILL COVERWHAT I WILL COVER

Background Issues

Recent Irish developments

Current Irish pension arrangements

Private pension options for the individual

What next?

And finally why ‘essential’.

3.

BACKGROUND ISSUESBACKGROUND ISSUES

Demographic changes Falling birth rate Longer life expectancy Increasing old-age dependency

Pressure on public finances Pension cost increasing as % GDP Increase in other age-related costs IMF, ECB and OECD calls for reform

Pension system sustainability in EU Some have private funded pensions Enlarged EU Threat to monetary union

4.

BACKGROUND ISSUESBACKGROUND ISSUES

0

510

15

2025

30

2000 2030 2050

Public pension expenditure as % of GDP

Source: Economic Policy Committee (2001)

5.

RECENT IRISH DEVELOPMENTSRECENT IRISH DEVELOPMENTS

A national pensions consultation and research process from 1996 to 1998 called the National Pensions Policy Initiative (NPPI)

NPPI culminated in a report by the Board to Government in 1998 recommending a pension reform package (Securing Retirement Income report)

NPPI recommendations now implemented through the National Pensions Reserve Fund Act, 2000 and the Pensions (Amendment) Act, 2002

Major changes are: Substantial increase in basic Social Welfare pension Establishment of explicit mechanism to partially fund

Social Welfare pensions and public service pensions Wide range of changes to the voluntary private pension

system including introduction of new pensions vehicle called Personal Retirement Savings Account (PRSA)

6.

PRESENT IRISH PENSION PRESENT IRISH PENSION ARRANGEMENTSARRANGEMENTS

Social Welfare (First Pillar) pension providing either:

Old age contributory pensions for those satisfying certain contribution conditions, or

Old age non-contributory pension subject to a means test for those not qualifying for contributory pension.

Social Welfare pension arrangement funded on a pay-as-you-go basis supported by National Pensions Reserve Fund

Public Service pension scheme which faces greatly increased costs (also supported by National Pensions Reserve Fund)

Private pensions for over 50% of the workforce arising from funded occupational pension schemes and personal pensions

7.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Company pension plansCompany pension plans

Personal pensionsPersonal pensions Retirement Annuity Contracts (RACs)Retirement Annuity Contracts (RACs)

Personal Retirement Savings Accounts Personal Retirement Savings Accounts (PRSAs)(PRSAs)

Substantial Tax Reliefs AvailableSubstantial Tax Reliefs Available

Used for saving and financial planningUsed for saving and financial planning

50.7% of workforce have private pensions50.7% of workforce have private pensions

8.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

2 types Defined Benefit (DB) Defined Contribution (DC)

Private sector 49% DB membership 51% DC membership

Tax Relief on employer and member contributions and investments

Benefit at normal retirement age is Pension up to 2/3 rd salary or Tax free lump sum up to 1 ½ times salary plus

reduced pension

Maximum benefit limits

Company Pension Plans

9.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Funding issues for Defined Benefit (DB)Adequacy Issues for Defined Contribution (DC)Shift from DB to DCDB investment profiles

Typically 65% - 75% equities Asset/liability matching problems Increased focus on risk Regulatory requirements

DC investment Usually in Managed Funds May include member investment choice

Pension investment is long-term

Company Pension Plan Issues and Investment

10.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Average Managed Fund Returns

-11.6%

13.5%

1.2%

47.0%

-4.2%

17.6%15.4%

34.2%

19.1% 19.9%

2.6%

-5.70%

-18.90%

12.30%

1.1%

8.2%

Source: Mercer Human Resource Consulting

11.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Personal pensions Must be Insurance Contracts Available to self-employed or people in non-

pensionable employment Tax Relief on personal contributions and

investments No benefit limits Benefits can be taken between 60-75 Benefit can be

Tax free lump sum up to 25% Annuity Transfer to ARF or AMRF or taxable lump sum –

subject to income condition

Retirement Annuity Contracts (RACs)

12.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

New type of personal pension Individual investment account – contract between

individual and authorised PRSA provider 2 types

Standard Non-standard

Available to employed, self-employed, unemployed, etc. PRSA Provider is

Investment firm Insurance company Credit institution

with approved PRSA product(s). Mandatory employer access

Personal Retirement Savings Accounts (PRSAs)

13.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Product approval jointly by Pensions Board and Revenue Commissioners

Regular information Charges

not in cash terms % of contributions and/or assets Maximum charges for Standard PRSAs

No charge/penalty on transfers from another PRSA provider/pension arrangement

No charge on termination of contributions or suspension/recommencement of contributions

Tax Relief on member contributions and investment Benefit is normally between 60 and 75 and can be

Tax free lump sum up to 25% Annuity Transfer to ARF or AMRF or taxable lump sum – subject to

income condition

PRSA Key Features

14.

PRIVATE PENSION OPTIONSPRIVATE PENSION OPTIONS

Standard PRSAs can only invest in pooled fundsGreater range of fund and manager choice for

Non–standard PRSAsDefault Investment Strategy (DIS) for each

product Automatic unless contributor indicates otherwise Complies with specified requirements linked to general

good practice for retirement investment Certified by PRSA actuary

PRSA Investment

15.

WHAT NEXT?WHAT NEXT?

EU Pensions Directive to be implementedPan European pension plans?Pension opportunities for Ireland Inc. from EU

single market?

At National LevelRegular monitoring of Irish pension coverage

progressProgress Report to Oireachtas in Autumn 20062006 Progress Report likely to trigger debate

on our pension strategyMandatory private pensions could be a

possibility

At EU Level

16.

PENSION PROVISION ESSENTIALPENSION PROVISION ESSENTIAL

People are living longer More old people/less young people Increase in dependency ratio could lead to

Poorer pensioners Higher retirement ages Taxes increasing

State only able to provide basic pension So everyone must consider their own future needs in

time Tax encouragements make pension investment very

attractive and Pension Investment delivers.

Because

17.

THE MESSAGE ISTHE MESSAGE IS

THINK ABOUT TOMORROW –TODAY!