Home Knowledge OECD Recommends Reforms to Irish Pension System

OECD Recommends Reforms to Irish Pension System

September 9, 2013

The OECD published its Report on the pension systems in Ireland.  The Report, which was commissioned by the Department of Social Protection, examines all aspects of the Irish pension system including the provision of State pensions, occupational schemes in both the private and public sectors and personal pensions.

Some of the main findings and recommendations of the Report include:

  • Increasing private pension coverage
    The Report argues that to increase the adequacy of pension cover in Ireland, there is a need to increase private pension coverage and suggests that this can be achieved through compulsory membership, automatic enrolment and/or improving existing tax incentives for pension savings.  According to the Report, compulsory pensions have, from international experience, proven to be the least costly and most effective approach to increased pension coverage.  Auto-enrolment is considered to be the next best alternative to increasing pension coverage but the Report warns that such a system could be more costly to establish.  
  • Reforming the State pension 
    The Report found the State pension system to be complex and inequitable and argued that it should be replaced with a universal basic State pension (regardless of the amount of contributions paid through PRSI) or with a means tested pension. The Report also recommends that workers should be given incentives to remain in the labour market for longer and suggested that an increased State pension could be offered to those who take late retirement.  The Report suggests that the State pension age could be linked to life expectancy after 2028 (when it is scheduled to rise to 68) in order to ensure that improvements in life expectancy do not significantly extend the duration of retirement.
  • Improving the design of defined contribution (DC) schemes
    The Report says that the design and set up of DC pension schemes needs to improve.  It recommends that appropriate default investment strategies should be established while also providing choice between investment options.  The Report also recommends that retired members should be encouraged to purchase an annuity at some point during their retirement in order to protect against longevity risk. Significantly the Report also states that while the principle of pension savings being “locked away” until retirement should remain, the Government could consider allowing members to make withdrawals from their pension savings in cases of significant financial hardship.
  • Enhancing the security in defined benefit (DB) schemes
    The Report strongly recommends the strengthening of Irish legislation for the protection of DB scheme members when such schemes wind up.  The Report is very critical of current legislation which (unless the scheme documentation otherwise provides) allows financially “healthy” employers to walk away from DB schemes and suggests that employers should not be allowed to abandon such schemes unless the assets of the schemes cover at least 90% of the pension liabilities. The Report also highlights the inequality between pensioners and other members of a scheme in circumstances where a scheme is winding up in a deficit funding situation.  It recommends that the priority currently given to pensioners on wind up should be eliminated, and that more flexible DB schemes should be introduced which would allow for more risk sharing between pensioners and other members and also allow for accrued benefits to be cut in cases of underfunding.

Comment
Although the need to increase private pension coverage has been self-evident for some time, the reality is that this can only be done in a meaningful way when the economy has recovered sufficiently.