Éamon Ó Cuív questions private pensions, urges pay-related model

I suppose my first question is was there due consideration given to the model that you intimated was available in other European countries where actually what you got was a pay release with a basic state pension and a pay release to top up on that funded by the state through the state system through contribution there and were the comparisons carried out between that method of funding which presumably is on a pay-as-you-go basis as compared to what's been proposed my second question is can you give us statistics on the real return from pension funds in other words when i started working i was getting 16 pounds a week now if i've been putting 10 percent of the income in it was 160 pounds now okay there's a little bit of inflation there there for the euros and really in real terms taking inflation into account wouldn't be much good to me today so how have we got figures on the average real return net of inflation in other words your buying ability with money uh on pension funds over say 30 40 years now my next question is we live in an island in a small island and i've asked some money belonging to the taxpayers going to be handed over to these private funds have you any statistics in our case in the irish pension case as to how much of that is invested on the island to regenerate our island you know it's a mega amount of money that you're handing out how much of that actually is retained when they invest in gilts and then they invest in bonds at the end and my understanding is that towards the end of the last 10 years of your pension they get conservative with the pension funds managers and they put them into german bonds they won't even put them into irish bonds which should give a better yield because they don't trust the irish state so we're state we'll give you state irish money and you won't put it back into our own state so have we any figures on that and the drain out of our economy of all of this money and the effect that that's going to have because a that's in my view something we have taken into account now the next question i have is the cpa is it going to instead insist on ethical investments are we going to allow investments and follow fossil fuels are we going to follow the european codology where they had a taxonomy and then they suddenly decide the natural gas was part of the taxonomy so if we invested in natural gas it was considered a renewable fuel these are all serious questions massive biggest question before we get down to the nitty-gritty of this uh return obviously return the great thing about the pay as you go as the present system in i the people paying the peer aside today paid in today to the pensioners today so we're all paying in in the real value of the same money and when the pay the person who's paying in now becomes a pensioner they pay in at the value of today for the pensions coming out and generally speaking the state pension has proven more resilient to inflationary impacts in fact as our economy has grown it has grown disproportionately um are you concerned about what happened in pension funds we'll say in the noughties at the end of noughties in two eight two nine to ten for we suddenly found this movement away where people had thought they had bought into defined benefits and there was a whole movement to try to change them all into defined contribution post-act of 20 years on does that kind of uncertainty in the private pension industry well which is just a commercial industry i mean they they want to get the money but that's what they live off but i'm concerned about the history of pensions here in ireland and you know how workers didn't get out what they they taught in lots of cases they were paying into uh so you basically you are you absolutely wedded to this private pension scheme where i make amount of money and my final question is a technical question that i can't get an answer to from the state for some reason uh normally if you put in if you are earning a salary and you take out 100 euro we'll just take around figure 100 euro and you put it in a pension fund then there's tax relief at your marginal rate of interest or your marginal rate as well as the 30 percent going in from the state is they're going to be interest they're going to be tax relief from that money finance have said that they haven't made a final decision because i asked parliamentary questions on that have they clarified to you what they wouldn't clarify to me that there will definitely not be any tax relief from this and that raises another issue has there been confirmation from the department of social protection that in various means system various schemes that they will discount your investment in this scheme in terms of means testing as not considered as income and thank you for coming in here and making your presentation and you're the first stop a number of questions there and thanks debbie i i do think that uh some of those questions um if the committee haven't already uh planned to invite the pension authority in i think uh that the committee would benefit uh from hearing that that they'll be able to answer these questions in much better uh detail not uh i'm sure my colleague will be will make a good stab of it so maybe i shouldn't uh tar him to my own brush um so to start off with um why are we going down this road and not the pay related uh pension model that's common across uh continental and nordic europe um i don't know if it was that's the answer i don't know if it was originally thought which uh which road we go down the auto enrollment are moving to pay related uh pensions we do know from media reports that cabinet at the moment are considering uh moving towards pay related job seekers and possibly pay related maternity and other family payments so that would be a significant uh move um i'm sure the deputy remembers uh back in the 80s and early 90s we would have had pay related uh payments for that uh just over a decade but there seems to be some willingness having learned from the um the experience of the pup how that was uh pay related and the the the job that did of protecting uh workers uh living standards when they couldn't work uh when the economy was shut down so i don't know if auto enrollment um was compared to uh moving towards a pay related uh pension but at the time that this was being considered new zealand at the time it was 2007 they moved to what's called their kiwi saver which is in all intense purpose uh the same as what we're moving to and then in 2012 the uk were moving to their auto enrollment so the international move was towards that second layer of an auto enrollment rather than move into the continental and scandinavian pay related uh model so i would hope there was some um justification uh for for doing that um your questions on uh the returns again the pension authorities will be uh much better at given that but the department do in their literature i don't have it with me do provide examples of um a worker of a particular age putting in a certain amount of contribution how much their pension pot would be but they didn't tell us the inflation factor yeah i suppose there's limits to how far in advance that they can look at uh you see the thing is we can look back and when you stacked it up it took kind of attractive you put in x and you got out y but the value of that if i if i go back i have been older to most people here if i go back and look at what looked at a large sum of money in 1980 it looks like junk money today yeah when i put it even more scary in 2002 i keep them up in my office i bought the government estimates for 2002 and you know it's so tiny so the inflation rate is absolutely huge and that's you know looking at the figure they gave it wasn't that impressive at all when you put in a concentration of inflation and then about um the investment the idea of how much of this uh money is going to be invested in ireland i think we're all familiar with uh the property market being run by german and canadian pension funds so there's nothing to say that in future years that it won't be irish pension funds but not necessarily within ireland and the same with ethical investment i mean that's really going to be a matter for both the tendering process and the cpa to put limits on what can be done with the money but it will also be for pension providers if one particular provider wants to make their unique selling point around that they will only do ethical green investments one of the most difficult thing about this is going to be getting workers to choose a kind the investment that they want so if a provider can set themselves up as we will only invest within ireland or ethical and or ethical investment it might be that that gets them more attractive but really it will be down to the cpa and the tendering uh to uh put parameters on how the money can be uh invested um the pension funds we do mention that we do think there is a need especially around as you mentioned the pension levy and that uh pension funds are the the product you thought that you bought isn't the same product as you end up uh receiving there is going to be need for um legislation and reassurance to the public that we have learned from past mistakes and some sort of uh guarantee um there and that that will be a big job of work as to tax relief our understanding is that the the state contribution is instead of tax relief and that's why we have made the argument that it should be one euro for every uh 250 invested instead of one euro for every three so that it's equal to the 40 uh tax relief however there will be tax relief for employers and they will be able to reduce it from their uh corporation um tax bill so um yes you won't be getting the state investment and it will be uh the the the employees deduction contribution will be on their after tax income um there was a proposal 10 years ago to standardize tax relief for 33 and that meant that if you were paying 20 tax you still would have got 33 relief and if you were paying for tax relief and the advantage of that was you weren't once again hitting the people at the bottom end of the way to scale um what you're actually saying is the state contribution here is not going to be anything real because all the high earners were not most people paying pension funds were at 40 percent because the people in the very low wages didn't bother with pensions private pensions because it was more important to get a house and to get to live their lives and rear the kids to be putting away for the rainy day and that's my experience dealing with people at the lower end um that the biggest thing the biggest pension they have going into old age which a lot of younger people will not have is that they nearly universally all own their own property well one of the factors one of the factors kind of that has led to low levels of pension coverage in the private sector particularly for low paid workers is the fact that employee employers did not make pension schemes available to them and so if you i mean and it's not it if you take say a small employer that has five or six employees has a small retail business typically them employers don't make pension schemes available and don't make a pension contribution on behalf of their employees and that is typically what has led to low pension coverage and it's not as it's not as if people had made deliberate choices not to make a contribution to pension scheme but no pension scheme was available to them and what one of the things that this proposal is seeking to address is to raise the coverage of pension and of secondary occupational pension schemes particularly within the private sector so i don't think it's as simple to say that people made economic choices about kind of where they spent their money i think if people had have had the option of an occupational scheme and in their employment they would have availed of it but because employers weren't required to make it available to them if that wasn't available to them and to make that contribution so i don't think it's as simple as that i have to say personally i did make a choice oh yeah it turned out very fortuitous i was in precarious enough employment as it was but surviving was more important than worrying about father chapter 65 but that happened i didn't have to worry i'm still working on him 65. at the risk at the risk i don't think race in one way but then i did own my house yeah well you see at the risk of now kind of of of of of of of not of trying to kind of um not take your point seriously as opposed kind of but you're probably not typical right um the typical experience of people who are on low pay and in small employment has been that they haven't had occupational pensions available to them that probably is true but what i'm also saying is i think the people in the low end on the survival gig or people who would see the greatest pension mean of getting property uh are going to be very tempted anyway and then when they get to 66 the state's going to say well tough you you didn't take the option the great thing about psi is you have to pay and it's mandatory and uh you know i'm i i i think it's not as i see this more as an industry-led gig but can i just comment you know you said you made up you made that point earlier about kind of whether we as an organization are totally wedded to this private model as you call the truck and which it is well sorry just to make a couple of points right so first of all if you go back to when this um this proposal was originally made the department produced this document called the straw man where they set out kind of the some ideas about how the problem of low coverage of second tier occupational pensions in the private sector will be addressed right in our submission to that we argued that if you're going to have auto enrollment it should be entirely controlled by the state right that the money should go into a state agency it should be invested by a state agency that's what we argued the original straw man had actually proposed that what was more akin to an entirely private model whereby the money would go in to um into investment funds and sorry in its pension providers they have moved away it seems to us they have moved away from that propose in the sense that now what they're proposing is a central processing authority that will receive the money from employers and from employees that that money will then be given to investment managers but with parameters around it to say that we expect that we're giving you this money but we expect you to deliver a particular return for us and in fact we we want you to we're going to say to you that we need you to guarantee that we will get that return and the central processing authority will have and i suppose as well it's within the remit of the oirectus to to give a mandate to the central process authority through legislation to address some of the questions you've talked about about its capacity for the money to be invested in ireland to be um money to be invested in the netical schemes and the you know kind of stuff like that so i think it's entirely within the gift of the members of the the doll and the shannon to in legislation to say to the central processing agency this is your mandate so i wouldn't underestimate the the possibilities that exists within the houses of the oirectus to ensure that the central processes the agency kind of or authority excuse me and performs the function that has been mandated to perform with the safeguards and that you have spoken about but remember in this process the department were involved in the process the government were involved in the process the oirectus was not involved in the process until now okay and we don't have to buy in we can write any report we feel like we can go back and say that the original model put forward by yourself as the right one that it would be state controlled because every time you your cpa is all very fine and they put all the people from outside on it advising the government and so on it's a lot different the industry and we know that the pension industry doesn't have a great record i was there from the whole thing you know started unraveling and all the promises made and defined benefits and all the rest suddenly gone out the wind now supposing you know this committee could write back and say okay we look at the legislation we think it's fundamentally flawed it should be a state model we can write any report fee if we like that so we're not high bound to government we're the adapters and i i'm a member of government party but i don't feel tired by the government when i'm sitting in here because we're not you know so i don't feel yourself confined to what the government have decided uh we're we're we're not because we're not as confined as you probably think we are no and and we want to look at this very very fundamentally because we want to you know test every theory because uh as i said if we look over the long term last 50 years you know things people think they can legislate into certainty with all these bodies we find that they take a life on their own and they tell you for this reason and that reason and the other reasons they can't control this and they can't control that and can't control the other whereas if the state controls at least they can keep changing the gig as it goes along but it's only with the will of the directors that that can happen whereas when you get these independent bodies they can go all over the place well as i said um we believe that the original model that was proposed in the straw man has been for has been significantly changed to put give more state control over how this money um is collected and how it's invested and and the only point i was making really was was that the the functioning of the central processes and agency and how this scheme is going to be run will now be subject to legislation and i think all of the questions that you have raised about the nature of investment where investment takes place and all of that is actually something that um the iraqtis should give very serious consideration to because you can mandate um in legislation to central processing authority to behave in a particular manner but but we could also go back and say think it out again and go for a state model i mean and if and my my question to you straight out is are you convinced now that the state model isn't the optimum model if if you know if we were looking up and let's see we never seen this before we never had any legislation on front of us as a committee before so would your view be that actually the optimum model is the state model or are you convinced that this hybrid model is better than the original model of the state model well we have been asked today to come along and talk about and let talk about kind of a bill that has been placed before the iraqtis and in terms of providing a particular type of pension scheme right so our comments today are you know kind of are are kind of reflective of what we've been asked to comment on in terms of the legislation the question you pose about whether we have a completely state um a completely if you like state provided kind of um pension system where the the there is no occupational pensions and effectively i think is what you're talking about no i'm saying that you contribute the employer employee and the state contribute to this because the state is the basic payer anyway uh to this uh well that's what happens in the state but that's what happens but that's what happens in the state pension at the moment the state pension there's a contribution made to the state pension on behalf of employees on behalf of employers and the government kind of make a contribution as well so that's what happens at the moment so so what i'm so what we're saying right is that there are there there is a state system that that kind of results in the state pension being paid to people and in ireland we have a system where there's occupational pensions that um you know kind of that provide workers with a second tier pension scheme right that scheme the second occupational pensions are some are demanded by our members and supported by our members right and what we have what we have here is a proposal to have a mandatory occupational pension scheme and in the state right so we think that's a good thing right if the state wants to go further and improve the state pension to a point kind of no but can i just finish the point can i can i put it in a simpler term we might allow the yes we might allow the witness to complete this point though have you looked at the nordic model and the continental europe model which provides for occupation pensions my understanding but state occupation of pensions but the question is that a better model the question kind of i suppose we have to fund have to ask ourselves at this point is that our model has evolved to a point now kind of where hundreds of thousands of workers have second tier occupational pension schemes right and what i'm the question i suppose or the the question i would pose back to to you is that if we were deciding to move to a more continental more scandinavian model kind of how would we deal with them how would we deal with them second tier occupational pensions that currently exist what would we do with them no but the point i'm making is that if you're talking about having every pension provided by the state i'm not saying every pension i'm saying that there would be a state pension we have a state pension right but not a roman state pension no but we have a state pension no but a normal roman state occupation pension as your colleagues and if and in our original kind of in our original um submission to the public consultation we call for alternate enrollment to be completely controlled by the state right and the original model that was suggested was no we would have four pension providers that would be completely private sector and provide private sector provided what's been proposed here in airview kind of has moved more towards what we were suggesting in that you have a central processing agency that would control the funds and give mandates to investment managers around how and depend them pension funds or them monies that are put into pension funds would be managed so i think the proposal here is better than the original proposal and that there's more state involvement in it but there's two main requirements for updating it