The main reason for complexity of Irish pensions is that there are too many different types of vehicles in place. Do you know your OPS from your BOB or your ARF from your PRSA? There are 13-15 different such vehicles in the Irish system. We need one or two. How can that be achieved?
Pensions Act 2002 outlawed Buy Out Bonds (or PRBs) by turning them into PRSAs. Only, at the time, life company interests intervened and the section in the Act was never commenced. It has remained there, redundant for 16 years. Which allows us to conclude that some pensions simplification can be achieved by a simple ministerial commencement order.
The next step is to change practice, which is dictated by Revenue, whereby Approved Retirement Funds must be run as separate vehicles. It’s an unnecessary complexity – there is no reason why pension drawdowns should not take place from the pension itself. It’s within Revenue’s remit to change this practice and get rid of the ARF vehicle.
So, by a ministerial commencement order and a change of Revenue practice, we can eliminate 2 of the unnecessary vehicles.
The next step would require some, minimal, intervention by the Oireachtas. At the moment, every Occupational Scheme in the country is set up, one scheme, at a minimum, per employer. This practice has obviously led to a proliferation of schemes - for no apparent regulatory gain. In the UK, the trend is that occupational schemes are set up as master trusts, in effect clubbing all the efforts of service providers under the one umbrella. The effort has the effect of reducing the cost of running these schemes. There is no reason why master trusts could not gain traction in this country – if only the Pensions Authority took on the job.
An Occupational Pension of the DB variety is no doubt a train which long since has left the platform. Even if proposed legislation, currently debated, and aimed at curtailing employers’ ability to walk away from their pensions obligations is successful, the demise of DB is a simplification measure which inevitably will succeed. There is no need for intervention – market forces will make it happen.
The last group of pensions to eliminate is the insured kind, also known as personal pensions. As a rule, they are expensive and there are few consumer protection measures in place to make sure that consumers are treated fairly. The important thing to remember is that personal pensions do not have any particular qualities which are not shared by PRSAs. To keep them is an unnecessary doubling up of the effort to provide pensions structures that suit the need of savers. Legislation should be introduced to turn personal pensions into PRSAs.
We have now reduced the pension structures to 2 (PRSAs and DC Occupational Pensions). It’s all we need.
This roadmap is without doubt a high-level picture of how pensions simplification can be achieved. More work has to be done. However, this blog is an attempt at showing how pensions simplification could be relatively straightforward and largely achieved by a ministerial commencement order, the rolling back of some archaic Revenue practices, and a bit of legislation. There is certainly no need to plead “complexity” as a defence for the paralysis which has been allowed to subsist for the past 16 years.
Author: Tommy Nielsen
*Please note this content is the view of the author and not of Independent Trustee Company