Private sector would have to opt out of pensions under plan
THE Government is planning a massive overhaul of the pension system to encourage private sector workers to save more for their retirement.
And there is also growing pressure to reform pensions for public sector workers, with one cabinet minister bluntly warning that the State might not be able to fund them in the future.
It came after Social Protection Minister Joan Burton confirmed she would be changing the system to allow private sector workers pay into a large pot with contributions from the Government. Employees will have to opt out of a pension scheme rather than opt in. Research from other countries suggests many more people will save for a pension if they have to take active steps to leave a scheme.
The new pension scheme would act as a top-up to the existing state pension and will not replace the present old-age pension.
Ms Burton said such a scheme was needed to boost people's pensions because the state pension was not really sufficient for an adequate retirement.
"People, particularly on low and middle incomes or people maybe moving in and out of different jobs, have very little opportunity to save for a traditional-type pension with their employer," she said.
The far-reaching reforms are being drawn up by the Paris-based Organisation for Economic Cooperation and Development (OECD) at the request of the Government and will be presented to Ms Burton in two months' time.
But Transport Minister Leo Varadkar also put the spotlight on public sector pensions by calling for reforms to be introduced there as well.
"Reform of our pension system is long overdue. People in the public service have very secure pensions, but it's not at all clear that we'll be able to fund them in the future, so in reality, they're not that secure," he said yesterday. The state spending watchdog, the Comptroller and Auditor General, has estimated that it will cost €116bn over the next 60 years to pay the pensions of retired state employees, such as nurses, gardai and teachers at current rates. Mr Varadkar said there were many people in the private sector who had no pensions at all, so it made sense to reform the system for both public and private sector workers to ensure that everyone had proper pensions in the future.
"If you look at other countries, like Canada and Australia in particular, they grasped this nettle 10 or 15 years ago and made pension contributions compulsory and it's worked out really well for them," he said.
The pension pot will be managed by the National Treasury Management Agency (NTMA). New laws will then protect the savings from raids by future governments similar to those already made against existing pension funds. The NTMA previously managed a pension fund for public sector workers which has been depleted to help finance the bailout and recapitalise the banks. The current government has also introduced a special tax on private sector pensions, which will reduce the money paid to private sector workers when they retire.
The new scheme will be formally presented to Ms Burton by the end of February and then published later in the spring. It will be at least a year, and probably longer, before the scheme takes effect, to allow the economy to recover and to give employers and employees a chance to prepare for the overhaul of the pension scheme.
The Irish reforms appear similar to reforms in Australia, where the government recently introduced a new, low-cost default fund for those workers who haven't specified a fund for their pension contributions.
Ms Burton also plans to tackle the problem of pension funds that are wound up, leaving those who have retired with generous pensions while those still working get nothing.
Under the new plans, the burden will be shared by those who have retired and those yet to retire.
Those already in retirement will be paid a minimum pension but the rest of any pension pot will be shared out.