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TILDA Symposium "Pensions in Ireland: Prospects and Challenges" 100 Years of Failure: Ireland’s Public-Private Partnership in Pension Provision Shane Whelan, PhD, FFA, FSA, FSAI UCD School of Mathematical Sciences. The Issues.

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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


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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).


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All appears fine, on average

Breakdown of Income of Retired Couples in Ireland, Year 2000

Source: Hughes & Watson (2005)


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But only on average…distribution uneven

Breakdown of Income of Retired Couples in Ireland, Year 2000

Source: Hughes & Watson (2005)


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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


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Occupational/Private Pension Coverage in Ireland, by Age and Type

Source: CSO(2004)


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Occupational and Occupational and Private Sector Pension End 2007


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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


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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.


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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)


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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.


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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


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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.


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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


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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).


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