OECD urge for major pension reform

The government has been told by the OECD that it must strengthen laws to protect defined benefit pensions for members when schemes collapse or wind up.

The OECD report, which according to the Sunday Business Post is due to be published today, recommends that the government reform the current system to safeguard the pensions of contributors who are close to retirement, but in danger of losing their entire pension pot.

“The priority currently given to pensioners before other members if a scheme closes because of sponsor bankruptcy should be eliminated,” according to the report, which was commissioned by social protection minister, Joan Burton.

“Healthy plan sponsors should not be allowed to ‘walk away’ from defined benefit plans unless assets cover 90 per cent of pension liabilities.

“This funding requirement would introduce some type of guarantees for members and it would allow at the same time some degree of risk sharing,” it states. It recommends that “Ireland should consider a structural change of the state pension scheme” and urges a compulsory pension scheme, or alternatively an automatic enrolment as “the second best” option for the government.

The OECD has unequivocally concluded that the government’s system of tax incentives disproportionately benefits higher income groups. It recommends that a new tax credit be adopted to incentivise lower and middle income groups to make contributions.

“Tax deductions give the greatest incentive to save for retirement to those with the highest level of income,” the report states.

For those who have incomes that are too low to pay income tax and credits, the OECD proposes either a government subsidy or a matching contribution into an individual’s retirement savings. The state pension should be restructured to include a system of financial rewards for people who remain in the workforce, and deductions for those who retire early.

“Increments and decrements of the state pension could be introduced for early and late retirement.”

It also warns that the new scheme for public servants is being phased in only very slowly and is unlikely to affect a majority of public sector workers for a long time.

The report urges a radical shake-up of the state pension with a new universal basic pension scheme for all financed by taxes and contributions.

A system of compulsory contributions or alternatively a system of automatic enrolment would further boost the basic scheme.

The household benefit package and free travel scheme could be converted into a cash supplement and merged with the basic pension. Alternatively, it could be awarded only to pensioners who need the benefit as “a means-tested cash supplement”.

The report also proposes a single means-tested pension, financed out of general revenue as an alternative to the universal basic pension.

Such a means-tested pension would include all payments under the household benefit package, the free travel scheme and other means-tested allowances. It would also be supplemented by either a compulsory or automatic-enrolment private pension scheme.

The compulsory scheme is the “less costly and most effective approach”, but it has disadvantages. It may be “politically difficult in Ireland because it may be perceived as another tax and as a new burden on employers in the form of contributions to employees’ pension funds”.

It could force some workers “to become more indebted or to divert funds from other necessary expenses such as educating children, or from investing in property or one’s own business”.

“Mandatory contributions to pensions may be perceived as a tax, discouraging people from working,” the report states.