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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

Pensions Seminar - Tallinn

Orlaigh Quinn


7th September 2005

Demographics in ireland

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)

Structure of pensions system

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

Objectives of the pension system

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

Occupational private pensions

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%

Options for pensions decumulation in ireland

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

The irish annuity market

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

Factors driving annuity prices

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

Pensions seminar tallinn

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

Pensions seminar tallinn

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

Approved retirement funds

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

The state as an annuity provider

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?

Issues for irish pensions system

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.

Reform process

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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