Mixed blessing for insurers as they fear further moves
FOR years now, the pensions industry has been trying to get mainstream Ireland excited about the Government's pension strategy -- or the catastrophic lack of same.
This week, they finally got their wish when the Government's decision to milk pension funds to pay for a new jobs initiative triggered an avalanche of reaction and was widely condemned as an unprecedented smash and grab on private cash.
To the casual observer, it might seem like the pensions industry is paying a very high price for finally getting a light shone on pension policy.
The new 0.6pc levy on pension funds has been portrayed as devastating for pensions at large, threatening the viability of schemes and giving people very good cause to simply stop paying into pensions.
Life-insurance bosses, however, cast a different light on things.
They don't see the levy as catastrophic, but they're far from happy about the way it was brought in and they're seriously concerned about further revenue-raising pension initiatives being eyed by the Government.
Irish Insurance Federation boss Mike Kemp admits that the insurance industry actually proposed a levy similar to this week's announcement as a means of gleaning revenue from pensions.
The levy they had mooted was 0.25pc, less than half the 0.6pc opted for by the Government, but the concept was the same -- a retrospective tax on money that has already been set aside.
"We would rather it (a pension fund levy) than a curtailment of pension tax relief," says Mr Kemp. "In that sense, what's happened this week is not the end of the world."
Gerry Hassett, who heads up Irish Life's retail pension business, agrees that the pension levy might not be as apocalyptic as some people fear, while Zurich Ireland's pension chief Brendan Johnston says the levy "wouldn't do lasting damage" if it's a "once-off never to be repeated".
But all three men voice fears that what starts out as a one-off levy for four years could snowball into an indefinite levy, something that would "hugely" impact on pension habits according to Mr Kemp.
Sources reject suggestions that the industry should be able to absorb the levy, pointing out that management charges on big pension funds are as low as 0.5pc and therefore insufficient to fund a 0.6pc levy.
Beyond the pensions arena, industry types are concerned that the pensions levy might have whetted the Government's appetite for imposing levies on other areas where people have built up savings.
The Irish Association of Pension Funds has dubbed the levy a "precursor" to a levy on deposits, a stance IAPF director of policy Jerry Moriarty defends on the basis that they've had "lots of calls" from consumers concerned about just that.
Others see the potential for the Government to begin applying a levy to the sums built up in life-insurance policies, although Zurich's Johnston sees this as less likely since it would be relatively easy for consumers to move their cash.
While the levy in itself isn't seen as detrimental, what worries the industry is the way the new levy was introduced as a "bolt from the blue".
Bosses say they had been engaged with the Department of Finance for months, trying to come up with a blueprint that would see the pensions industry contribute about €940m a year within four years, without slashing tax relief.
"We thought we were engaged in a process, then two weeks ago we were hauled in and told there was going to be levy," says one senior industry figure.
"We would certainly have welcomed a bit more consultation."
For its part, Hassett says the industry had been pushing for a more holistic approach to getting revenue from pensions.
"Pensions get tax benefits in four ways," he says. "There's tax relief on the way in, there's tax-free growth for pension funds, there's tax relief for the employer and there's tax treatment in retirement.
"If you spread the cost across several of those sections, it becomes more manageable."
He suggests a cap on the amount of money that companies can put into pension funds as one way to create value for the Exchequer, since companies could no longer get tax relief on unlimited contributions.
The IAPF's Moriarty believes the Government could raise revenue by allowing people to make early withdrawals from their pension funds on a "once-off extraordinary basis" and levying a special rate of tax on those draw-downs.
Other mooted measures include having a levy on the income earned by pension funds, rather than on the total assets under management.
The irony, and the thing that's winding the pensions executives up this week, is the fact that the industry will still have a chance to argue the case for many of those other measures.
Before the "budget-neutral" jobs initiative was announced, the Government was targeting a €940m annual contribution from pensions.
The IIF yesterday wrote to Finance Minister Michael Noonan to establish as a "matter of urgency" whether the original €940m target still stood or whether the pension levy could be offset against it.
"The levy will be painful, but we're more concerned about the future," says Zurich's Johnston. "This seems to be extra to what was originally proposed."
Sources at the Department of Finance said last night that the €470m contribution from the pension levy would not contribute to the original target for pensions, but that the target could be moved because of other economic developments.
"The real question is what happens next year," says Hassett. "If it's a double whammy and people have a levy on their pension funds as well as more cuts to tax relief, then at a certain point the thing will become uneconomic."