It's time to make pension funding mandatory – and that includes public sector
Published 18/11/2012 | 05:00
Senior civil servants may have the most to lose from any such change but it is only fair, says James Fitzsimons
A big debate is raging about pensions and who can have them. Only half of the people put something away for their retirement. Many of those won't have enough for themselves and they might be forced to share what they have with those who saved nothing.
The day is long gone when we can expect the State to provide. Our expectations are higher and if they are not, they should be. The welfare state should be for those who don't have a choice. Mandatory pension funding is long overdue and it should include the public sector.
The minister responsible for pensions, Joan Burton, accepts that it is what we need, but she is willing to wait. Our resources are being depleted to prop up failed foreign banks and a bloated public sector. We should do more, before it is too late. A recent ESRI report plays right into the government's hands, before the Budget. It supports cutting tax relief for private pensions. It reveals that those who earn most benefit most from tax relief. Why should that come as a surprise? They earn most, they save most, they benefit most.
The report, prepared by Professor Gerard Hughes of Trinity College Dublin, claims that tax relief is skewed in favour of high earners. That is not because the relief is there. It is because there is no control. The pension authorities that set it up are solely to blame for the imbalance. They created it and they watched it grow. Prof Hughes may have had an epiphany, but nothing will change. Senior public servants, who guide the minister, have most to lose from the changes and they won't let it happen. Those who have yet to be encouraged to plan for retirement will lose the incentive if tax relief is cut on what they pay.
There are only a few hundred people, at most, exploiting the system at the very top. It would be easier to focus any changes on them and restrict what they can take out. Discouraging pension funding in any way, shape, or form is a bad thing in a country where half the population have not made adequate provision, if any at all. The damage has already been done due to the incompetence of those who set it up. Depriving the rest is not the solution.
There are two schools of thought on how to change the tax relief. One way is to cap the value of the pension fund that a person can have. Another is to cut the rate at which tax relief is given. You don't have to be rich to pay tax at 41 per cent. If you work in the public sector a rate change will have little or no effect. If you are in a company pension scheme you can avoid it, because your employer can get around the system. Until there is universal coverage for all, there should be no more attacks on private sector schemes.
If you or your family earn enough to pay tax at the higher rate, why should tax relief be given based on what you are liable to pay? After all, you are only getting back what you earned from your toil. It's a cushion for your retirement that you will need and, when it pays out, the Government will get its share in tax. We need to control the abuse, not limit the provision. If pension funding was mandatory for all, there would be less inequity. You might get by on the State pension, but is it not reasonable to expect more? If senior public servants can expect pensions of about €100,000, why should those who pay for theirs settle for less?
SIPTU's Jack O'Connor would limit earnings for calculating pensions to €80,000 a year. Currently it is €115,000. When the downturn came, it was nearly €300,000. That's fine if you've been funding your pension since you left school. What if you are 60 and haven't started yet? Roisin Shortall would cap pensions at €50,000. But why should politicians and public servants be treated differently?
Mandatory funding and universal coverage will be a bitter pill, but it could be sweetened to make it more palatable. People are sitting on pension pots they cannot touch while they have loans they cannot pay back. It's a crazy situation when people are not allowed to access these funds in their time of need. They could keep their assets, while maintaining their financial independence for the future and the banks would be taken care of too.
Public service pensions are paid out of current tax revenue. They never need to worry about underfunding as they just increase taxes to get what they want. Two years ago, the cap on funds was dropped from €5m to €2.5m. That brought senior public service pensions under pressure. Even though they have no fund, a hypothetical value would be placed on them using a multiple of 20. An annual pension of €125,000 would require a fund of €2.5m. Anything above it would be taxed. It was so worrying that the Chief Justice petitioned the Taoiseach to exclude members of the judiciary from the provisions.
There are recommendations to change the multiple to 30, because 20 is unrealistically low. This would result in many senior public servants being hit with hefty tax bills. They will do everything in their power to prevent the minister from cutting it any more. They would prefer to cut the rate at which relief is given. Then the private sector would foot the bill.
Mandatory funding is needed now if everybody is to have financial independence in retirement. They should be encouraging pension provision and if that means keeping tax incentives, then keep them. If it transpires that somebody has €100m or so more than the State intended in their pension fund, tax it.
If proper controls were in place this would never happen. The fact that it does – and it does – suggests somebody has made it possible. Maybe it is not just the pensioners who are ripping off the system.
Mandatory funding is already in place in the public sector. It's great if you are a public servant, because everybody else pays for what you get. If those who make the rules think it's right, they should extend the benefit to everyone else. If we cannot afford what it would cost, then it's time we cut it out completely. Why should everybody else wait several years for equity, while those who won't share the burden are provided with outrageous pensions? If they paid for the fund, at least they might suffer tax like the rest.
To bolster their case to cut relief, it is claimed that pension funds have been robbed by outrageous and unseen charges. There are cases, it is true. But if the bureaucrats had done their jobs, this would not happen. More than fund managers have lined their pockets from this multi-billion-euro industry. Now they spread propaganda so that a confused public will accept what is coming.
Keep what we have. It works, all we need is control.
James Fitzsimons is an independent financial adviser specialising in tax and financial planning
MARC COLEMAN: PAGE 28