Business Irish

Wednesday 23 January 2019

Richard Curran: Government's pensions roadmap doesn't show us the potholes

Taoiseach Leo Varadkar. Photo: Gerry Mooney
Taoiseach Leo Varadkar. Photo: Gerry Mooney
Richard Curran

Richard Curran

The Government has drawn up another roadmap. This time it involves auto-enrolment for pensions. At some point, the Government will take out one of these roadmaps and actually set off on a journey somewhere.

Roadmaps on the future of pension provision have been knocking around since 2006 or even earlier. So it was a little ironic when Taoiseach Leo Varadkar referenced an old adage from Benjamin Franklin when announcing details of the new 'map'.

"Don't put off till tomorrow what can be done today." Sadly, when it comes to this issue, a more appropriate version might have been, "don't put off till tomorrow what you can put off till next year".

Auto-enrolment is a good idea and the new road map should be welcomed but it is all long overdue. The reason is simple. Successive governments don't like introducing policies that involve people having less money to spend today, even if, in the long run, they are a good idea.

Ministers may have simplified things a little too much in endorsing how the scheme might work. It was presented as workers are automatically enrolled in a company scheme and employees and the company could each put aside 6pc of salary. The state could then top it up by a further 2pc and hey presto - nobody is in penury relying exclusively on the state pension in years to come.

But why not make it easier for employees to put aside 6pc of wages by sorting out the rental and housing crisis? It isn't easy to put 6pc of your income aside at any time, but especially when you might be paying rents that have been allowed to rocket in recent years.

It turns out that around 60pc of private sector workers are currently without workplace pension coverage. But the current environment makes it easier for employers to use casual labour, the gig economy and even bogus self-employment to save on the need to provide pensions. The definition of a worker would need to be tied down quite strictly in these new plans or many will find themselves in the very same boat.

Similarly, if 60pc of private sector workers are without workplace pension coverage and auto-enrolment brings that up to 90pc perhaps, what a boom for the pensions industry? Good for them as long as they are providing a quality, efficient and relatively inexpensive product. Surely a piece of legislation that will automatically ensure employees become customers of pensions firms, should come with all kinds of assurances from the industry on costs and value for money.

This is a good move by government but it won't be as easy as they are making out.

State's strategy on bailout banks is finally paying dividends

AIB chief executive Bernard Byrne didn't give any sense that he planned to sell home ownership mortgages to vulture funds any time soon, when he announced the bank's full year results on Thursday.

Emphasising the bank's various restructuring options for customers, he seemed confident that the bank can work through its non-performing loans - excluding buy-to-lets, some of which may well be sold.

There was even some speculation last week that AIB mortgage holders in deep arrears were coming forward more to the bank in recent weeks, as they were afraid of their mortgage being sold on. Byrne suggested the higher level of communication from defaulters may be due to rising employment and better economic circumstances. If that were the case, then the same should apply at PTSB.

This really is a story of two different banks between AIB and PTSB. Both have unacceptably high non-performing loan rates (PTSB 28pc and AIB 17pc), but two different solutions. PTSB is selling mortgage loans. AIB says it isn't. AIB has the luxury of being able to take a slower approach and work through non-performers itself, because it still made pre-tax profits of €1.3bn in 2017.

AIB's profits dipped but net interest margin was up and the bank continues to benefit from a strengthening economy. Its dividend payment of €326m out of overall profit of €1.1bn, is a good enough reason alone for the State to retain a majority stake in the bank.

The State will bag nearly €250m from that dividend alone. Earlier in the week, Bank of Ireland announced a dividend of €124m on an underlying profit of €1bn. The state should get around €19m there.

However, Bank of Ireland chief executive Francesca McDonagh signalled that the bank would move towards paying out closer to 50pc of profit in dividends in future years. On static profits, that would mean €75m in dividends for the state from its 15pc stake in Bank of Ireland. By 2019-2020, the State could collect in excess of €325m a year in bank dividends - without anything from PTSB.

To put it in perspective, the entire dividend from every state and semi-state company last year, including ESB, DAA, Bord na Mona, Coillte etc, came in at €232m.

Taxpayers deserve to get all of their money back from the bank bailout. As long as the State doesn't need to get it back ASAP, then there are better ways of doing it - and selling off AIB any time soon isn't one of them.

Only hard choices left for Naughten on rural broadband

The sudden resignation of Enet chief executive Conal Henry last week, cast new doubts about the future of the Government's National Broadband Plan. The Government may be in line to do a bad deal.

Communications Minister Denis Naughten seems determined to go ahead and award the contract despite Enet being the only remaining bidder. There was some beating of breasts last week, not least among Fianna Failers, who presided over the privatisation of the Eircom network in 1999, and sort of regret it now.

Eir pulled out of the National Broadband Plan tender having bagged the low hanging fruit in the form of 300,000 rural homes with the least cost and greatest possible return.

Enet is determined to go ahead but there is very little being said about the cost of subsidising the venture. One bidder changes the power dynamic. The cost of the plan will be whatever it is. Then the Government will negotiate how much it is willing to subvent that cost by, as opposed to two bidders vying to say they need the least subvention to pay for it.

With just one bidder, nobody, including the minister and the government department, will ever know what the company might have been willing to pay if there had been other competitors.

Enet is now 78pc owned by the Irish Infrastructure Fund. The biggest contributor to this fund is the Irish Strategic Investment Fund (ISIF) which put in an initial €250m into it. ISIF emerged from the old National Pension Reserve Fund, which was set up by Charlie McCreevy. Ironically, the NPRF started off with around €7bn from the proceeds of selling Eircom back in 1999.

This looks like State money coming full circle, in that some of the proceeds of selling telecommunications infrastructure in 1999 might be used to build new telecommunications infrastructure in 2020.

If a bad deal is one on the National Broadband Plan, it might represent bad value for money for the State. In such a scenario who would get a good deal and benefit? Funny enough, the State would be among the beneficiaries through ISIF and the performance of the Infrastructure Fund. So too would other Enet investors and Eir, which will charge for use of its network along the way to more rural areas. Denis Naughten is caught on this one. He wants to deliver rural broadband and has been talking about it since he became minister. Pulling the plug on the tender process now would be politically very damaging and would deprive 430,000 rural homes of broadband for longer. Going ahead could be slower and more costly than originally envisaged.

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