The Issues

1. TILDA Symposium "Pensions in Ireland: Prospects andChallenges"100 Years of Failure: Ireland’s Public-Private Partnership in Pension Provision Shane Whelan, PhD, FFA, FSA, FSAIUCD School of Mathematical Sciences

2. The Issues “Adequate provision for the contingencies of old age and dependency is now widely accepted as a priority social commitment which, willy nilly, must be met, the only matters to be settled being the size of the provision, the mechanisms required and the distribution of the burden. • Honohan, W.A., Financial Aspects of a National Income-Related Pension Scheme, Read to the Statistical and Social Inquiry Society of Ireland, 16th December 1976 (Quote from pp. 93-94).

3. All appears fine, on average Breakdown of Income of Retired Couples in Ireland, Year 2000 Source: Hughes & Watson (2005)

4. But only on average…distribution uneven Breakdown of Income of Retired Couples in Ireland, Year 2000 Source: Hughes & Watson (2005)

5. Two or Three Nations in Old Age “already it is possible to see two nations in old age; a greater inequality in living standards after work than in work…” Titmuss, R. (1958), Essays on the Welfare State, p. 381-2. But, on closer view, there are now 3 nations in Ireland • those with no pension (other than State Pension) • those that actually have a satisfactory additional pension • those that think they have satisfactory additional pension, but do not

6. Occupational/Private Pension Coverage in Ireland, by Age and Type Source: CSO(2004)

7. Occupational and Occupational and Private Sector Pension End 2007

8. Missing Idea to Answer Key Questions • the size of the provision • What is affordable? - which requires we know the cost of pensions • the mechanisms required • What is the most cost-efficient system or what system minimises the cost of pensions? • the distribution of the burden • How to divide the cost of pensions

9. The Cost of Pensions • Fair value concept: the price set between a willing buyer and willing seller who both have all relevant information. • Fair value of pension: simply discount the future income stream at the market rate for similarly risky future payments.

10. Consequences of Failure to Adopt Fair Value Approach • Pension Board (2005, 2006) costings assume that the higher the investment risk taken the lower the cost of the pension • Entails cost of state guaranteed pension lower than private sector pension as state can assume even higher investment risk! • Such stupidity encouraged a high equity/property. • Conceals c.€45 billion hole in defined benefit schemes • Conceals the loss of economies of scale when private provision compared to state provision • State (or other monopoly provider) can provide a pension 10-20% higher for the same level of contributions, due to economies of scale. • Past service liability to public sector pensions not €75 billion (which ignores state guarantee) but >€100 billion • underestimate of Public Sector remuneration by the order of 10% of salary for ordinary public servants (recently partly rectified) • considerably higher for Government Ministers, University Presidents, etc. (see 3.29-3.36 of Review Body of Higher Remuneration in Public Sector, Report No. 42)

11. Insights from Fair Vale Approach • the size of the provision • Irrelevant to the design of a new system if beneficiaries pay their fair share • the mechanisms required • A monopoly provider can provide the most cost-efficient system, delivering pension 10-20% higher for the same level of contributions than individual retirement accounts • the distribution of the burden • Cost of the State subsidy to occupational and private pensions not€2.9 bn p.a. (1.9% of GNP) as estimated in Green Paper (2007) but double that (as previous estimate ignores public sector pensions) • Poor subsidise rich - pensions subsidised by average tax payer, with biggest subsidy to those on highest rate of tax! • Private sector workers used to subsidise public sector workers, but now all subsidise special pensions entitlements of Government Ministers, University Presidents, etc.

12. Ireland’s Public-Private Partnership in Pension Provision • State must rethink the value it is getting in this public-private partnership to provide income-related pensions • Subsidy is about twice that previously believed • Only about half of private sector pensions promises secure • Inequitable distribution of cost burden as poorer subsidise the richer • public sector remuneration still too high for Government Ministers, University Presidents, etc. • Immediate action required as wind-up of defined benefit schemes in private sector • Immediate policy measures not adequate (Pension Protection Fund, make pensions a debt on employer) • Must make it orderly

13. Solution Proposed • State must play a larger role in pension provision in the next 100 years • Whelan & Moloney propose detailed solution with transition arrangements: • Retain existing flat-rate state pensions, but simplify and make near-universal in coverage. • Abolish all existing tax reliefs for individuals and employers (including tax free lump sums) and wind up all public sector schemes. • The state will administer a voluntary top-up scheme, where each one-off contribution by the individual buys a pension from age 65 of one-fifteenth of that amount, increasing in line with average earnings both pre- and post retirement. • To ensure the credibility and sustainability of the new system, the state will maintain a stability fund so that contribution rates are immune to likely demographic shifts.

14. My ideas are further developed in… Six Easy Pieces • One Nation in Old Age. Irish Pensions Magazine. Vol. 9, April 2009, 20-21. • Towards One Nation in Old Age. Newsletter of the Society of Ireland (Ire), March 2009. • State Must Take Over Pensions to Plug the €30bn Gap. Opinion piece in Irish Independent, 15 January 2009. • Private Pension Promises are only as Secure as Junk Bonds. Opinion piece in Sunday Business Post, 14 December 2008. • Individual Retirement Accounts are Less Efficient than State Pensions, Finance, Vol. 21, No. 7, 10, August 2007. • A Principled Approach to the National Pensions Debate. Irish Pensions Magazine. Vol. 2 Spring 2007, 12-15. Six Harder Pieces • Pension Insecurity in Ireland. (with Michael Moloney). Read to the Statistical & Social Inquiry Society of Ireland on Tuesday 20th January 2009 and forthcoming in the Journal of the Statistical and Social Inquiry Society of Ireland, Vol. XXXVIII, (2008/2009), currently available atwww.ssisi.ie. • Valuing Ireland’s Pension System. Quarterly Economic Commentary, Economic & Social Research Institute, Summer 2007, 55-80. • Constructive Critique of Pension Policy in Ireland.  Forthcoming in Proceedings of the 21st Annual Conference of the Foundation for Fiscal Studies 2006 (48 pp). • The Quantification of Investment Risk for Pension Funds. Forthcoming in Summer 2009 as Chapter in Micocci, M, Gregoriou, G. & Masala, G. (Editors), Pension Fund Risk Management, Chapman Hall. • Defining and Measuring Risk in Defined Benefit Pension Funds. Annals of Actuarial Science, Vol II, Part 1, (2007) 54-66. • Contribution to Discussion of 100 Years of State Pension: Learning from the Past by Tony Salter, Andrew Bryans, Colin Redman, & Martin Hewitt. Read to Sessional Meeting of Institute of Actuaries, Staple Inn, London, 26th January 2009 and forthcoming in the British Actuarial Journal. All available from http://www.ucd.ie/statdept/shanewhelan/publicat.html

15. TILDA Symposium "Pensions in Ireland: Prospects andChallenges"100 Years of Failure: Ireland’s Public-Private Partnership in Pension Provision* Shane Whelan, PhD, FFA, FSA, FSAIUCD School of Mathematical Sciences • *Talk largely based on arguments developed in: • Pension Insecurity in Ireland (with Michael Moloney). Read to the Statistical & Social Inquiry • Society of Ireland on 20th January 2009. • Valuing Ireland’s Pension System. Quarterly Economic Commentary, Economic & Social Research Institute, Summer 2007, 55-80. • Constructive Critique of Pension Policy in Ireland.  Forthcoming in Proceedings of the 21st Annual Conference of the Foundation for Fiscal Studies 2006 (48 pp).