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Pensions Seminar - Tallinn

Pensions Seminar - Tallinn. Orlaigh Quinn Ireland 7th September 2005. Demographics in Ireland. Lowest proportion of older people in the EU - 11.2% No great change for the next ten years 15% in 2021, 19% in 2031 and 28% in 2056

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Pensions Seminar - Tallinn

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  1. Pensions Seminar - Tallinn Orlaigh Quinn Ireland 7th September 2005

  2. Demographics in Ireland • Lowest proportion of older people in the EU - 11.2% • No great change for the next ten years • 15% in 2021, 19% in 2031 and 28% in 2056 • Cost of public pensions (social welfare and public service rising from 6% of GNP to 13% in 2050)

  3. Structure of Pensions System Two Main Pillars • State System • Social insurance pensions • Means tested pensions • Flat rate payments • Voluntary Supplementary Pensions • Occupational pensions provided by employers • Private pensions arranged by individuals

  4. Objectives of the Pension System • Provide a basic income for all residents on retirement • As far as possible to deliver this basic income through social insurance rather than means-tested benefits. • Ensure that as many people as possible have a supplementary pension which will enable them to maintain their pre-retirement standard of living

  5. Occupational/Private Pensions • Intended to provide earnings-related element of pensions system. • Relatively immature (35% of existing pensioners have occupational pension) • Overall coverage of about 55% • 40% Occupational, 13% private, 2% both. • Main target is 70% for those over 30 years of age, currently 62%

  6. Options for Pensions Decumulation in Ireland Annuities offered by insurance companies • Value dependent on time of retirement • Requires conservative investment strategy • Must be used to insure benefits by DC schemes • DB schemes can pay benefits out of own funds • But DB statutory Funding Standard and wind up requirements based on insuring benefits with annuities Approved Retirement Funds • Available to personal pension holders (PRSAs and RACs) • Flexible drawdowns permitted, subject to minimum requirements

  7. The Irish Annuity Market • Limited number of providers • No interest from overseas providers at present, and limited capacity in marketplace • €250m turnover per annum at present, compared to €80 billion of pension fund assets • Will grow over time – pension funds immature and DC becoming more prevalent, must insure benefits • Limited index linked provision – 75-80% of annuities sold are not indexed • Government does not issue index linked bonds

  8. Factors Driving Annuity Prices Long term interest rates • Low compared to historic levels in Ireland, despite recent rate rises Insurer’s expectation of future mortality • Irish life expectancy at age 65 rising rapidly, and insurance companies assume good health • Insurer has only one opportunity to set price so assumptions may be conservative Insurer’s allowance for expenses and profit

  9. Amount of pension payable to a 65 year old male which would have been secured for €10,000 based on annuity rates applicable over the past 26 years (guaranteed for 5 years, with 50% spouses pension, spouse age 63, and 3% pension increases attaching) Source: Irish Association of Pension Funds

  10. Cost of annuities compared to funding of benefits by schemes(Source: Irish Association of Pension Funds)

  11. Approved Retirement Funds • Introduced in 1999 • Available only to personal pension holders • Fund can earn an investment return while the member draws down a flexible income • A view that ARFs are inequitable for other DC members, who do not have access • Policy concerns about whether flexible drawdowns suitable for all pensioners (squandering, mis-selling) • Distortion of EET – some ARFs used for estate planning • ARF holders now required to pay income tax on a notional drawdown if less than their actual drawdown

  12. The State as an Annuity Provider • Could be just as a ‘provider of last resort’; would ease funding requirements on DB schemes • The State to provide annuities more widely, particularly to DC members with ‘small pots’ • State has no capital or profit requirements, and can back annuities provided with riskier investments • But would take on risks – longevity, investment • If mandatory pensions are introduced => increased pressure on State to become involved? Guarantees?

  13. Issuesfor Irish Pensions System • Adequacy – flat rate state pensions and poor coverage of supplementary pensions mean a high risk of relative poverty for pensioners. • Increasing cost of pensions • National Pension Reserve not sufficient • DB schemes under pressure through funding issues and accounting standards - 40% closed to new members • Contributions to DC schemes inadequate.

  14. Reform Process • National Pensions Review 2006 • Social Partnership agreement • Government commitment to a Green Paper on pensions to be published Oct 07 • Consultation process and framework for future policy • All options being considered.

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