Wednesday 25 April 2018

Forget forecasts -- only the market's view matters

Both economic doom and salvation can be argued, but our future will be assessed on the bond market, writes Colm McCarthy

The Government's 'jobs initiative' launched last Tuesday may come to be remembered more for the manner in which it is to be financed, through a raid on funded pension schemes, than for any jobs it may create.

Most pension schemes in the private and semi-state sectors have substantial funding deficits, resulting from rising longevity amongst retirees and poor investment returns. The trustees of these schemes are under pressure from the Pensions Board to increase contributions, reduce benefits, or both, and many Irish companies -- including semi-states like the ESB and RTE -- have already begun to face the music. The Government, in levying 0.6 per cent per annum for four years on these funds, will cut their assets by 2.4 per cent, a total hit of €1.8bn. For every €100 saved in the funds, €2.40 is about to go missing. This naturally encourages people to wonder what plans the Government might have for the €97.60 that is left. It also means that the Pensions Board, worried about schemes that only have assets adequate to meet, for example, 70 per cent of promised benefits, can now start worrying about schemes that will have assets to cover 68 per cent of benefits.

About 520,000 workers are contributing to funded pension schemes. To pretend, as some defenders of the Government's proposal were doing during the week, that the €1.8bn will not be missed and represents some magic source of costless revenue, is deeply dispiriting. Government revenue needs to increase. While it is dishonest and misleading to pretend that the fiscal deficit can be closed entirely through expenditure cuts, the pretence that there is a costless source of revenue will come to be seen as the new Government's first breach of trust with taxpayers.

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