Government's pension smash and grab was ill-thought out
Standard Life boss Nigel Dunne picks holes in Minister Noonan's pension raid
PENSIONS and long-term savings have not traditionally been emotive for many people -- until you threaten to take chunks of their hard-earned capital and then refuse to rule out that such measures will be resorted to again.
It has been a particularly bad week for prudent savers who, encouraged by previous administrations to save for their old age, are to be punished for behaving responsibly. Most people accept that as a nation in dire financial circumstances, we must all make sacrifices to get us back on track as an economy and society. However, any reasonable person is entitled to expect that burden to be shared as equitably as possible.
We must challenge proposed policies that are blatantly unjust, such as last week's 0.6 per cent levy which the Government plans to impose on ordinary savers -- predominantly in the private sector. Especially as it has long been recognised that those in this sector have either no pension, or are in schemes that are severely under-funded compared to their privileged public sector cousins, who (on average) can still expect to be about 3.5 times better off in retirement.
People are living significantly longer and therefore need much higher savings. The impact of this levy on our own pensions time bomb will be to make the problem significantly worse. In about 20 years' time, a large proportion of our population will be pensioners with perhaps little or no private retirement provision. This risks placing tremendous strain on our nation's limited finances. We may have finished with our current crisis to face into yet another one . . .
• Spread the levy 'load' and lower it -- 0.6 per cent to 0.3 per cent? Given the extreme financial straits facing the Government and conscious of the need to share the national burden, a broadly based levy was suggested as the "least negative" option and preferable to income tax relief being roughly halved from 41 per cent to 20 per cent. The latter would be a death knell to pensions savings.
If the levy was spread more widely, as was previously suggested, across all pension savings and investments and to include the public sector, it could be at least be halved from its current level -- and it would be fairer.
• Have public sector employees already paid their fair share?
It is disingenuous to claim that because public sector workers have recently had to pay an average levy of 7 per cent or approximately 4 per cent (after tax relief) towards their pensions that they have "done their bit".
In addition, retired public servants are probably the wealthiest they've ever been in certain cases. Some civil servants are in the fortunate situation of earning more in retirement than during their working lives. You will recall that public sector pensioners received eye-watering average increases in 2004 under benchmarking --the 4 per cent average reduction this year goes some but not all the way to redressing this extraordinary pay increase.
Note: public sector employees with unfunded pension schemes are exempt from the levy. Funded schemes are not. The latter are in the minority
• Fat cat pensions?
The continuing criticism of private sector fat cats is understandable but misleading. The average private sector saver receives just €100 per month in pension contribution relief.
The average private sector pension equates to approximately €6,000 annually-- or a pension fund size of €112,000.
However, when considering a seemingly modest annual public sector pension of €25,000 requires "nest egg" savings of almost €720,000 for a private sector worker (inflation protected + spousal cover) you begin to understand just how valuable these pensions are -- and how expensive they are for the taxpayer to fund. A €720,000 fund is something the ordinary private sector worker could only dream of.
• We have been inundated with worried customers and advisers asking how it affects their lifelong savings. "What next, is everything to be levied further and where does it end? What's the point of saving if I don't know how much will be taken?"
Uncertainty breeds the risk that savers might simply stop saving, consequently creating a detrimental future burden for the State. Trust has been hugely damaged by the announcement last week. To restore confidence, we need strong, clear and unambiguous statements from Government reaffirming their commitment to long-term savings
Nigel Dunne is the CEO of Standard Life Ireland
Sunday Indo Business