Jim Stewart: The recent supplementary budget, while removing a considerable amount of income from almost everyone, also treated some groups in favourable ways in terms of pension provision - for example those over fifty in the public service and those working in universities.
The budget affects pension provision in a number of ways, and indicated that further change is on the way. Some of those in receipt of pension provision were adversely affected. For example former ministers who are paid pensions while remaining a member of the Oireachtas will no longer receive a pension. However, this still means that former ministers who are no longer members of the Oireachtas receive a pension even though they are not at the normal pensionable age. Nevertheless, this is a welcome step to reduce the exceptional cost (by international standards) of our elected representatives.
Proposals to reduce the public sector ‘pension levy’ on low income groups are also welcome. This will reduce the anomaly whereby low income groups contribute to the levy, but are not entitled to a full occupational pension because their occupational pension is integrated with the social welfare pension
The main beneficiaries are those in the public sector aged 50 and over.
In announcing a voluntary early retirement scheme (those aged over 50 may retire without actuarial reduction in their pensions), the minister stated that payment of a lump sum “at normal retirement age of 60 or 65 would be subject to current tax law provisions" or, as stated in Annex D to the Budget, “subject to the taxation provisions in force on the date the application was approved” (Annex D: Incentivised Scheme of Early retirement in the Public Service). The period of exercising this option is from May 1st until “a review before the end of the year”. A key phrase is 'current tax law'. This guarantee does not extend to those retiring beyond this early retirement window. This leaves open the possibility that lump sums will be taxed at a future date - in particular as the Minister noted that he was “looking forward to the recommendations of the Commission on Taxation” which he will receive later this year.
The minister also stated that the Government were committed to “a review of all areas of tax exempt income”. This is likely to mean that tax reliefs associated with pension provision will be examined further, subsequent to the report of the Commission on Taxation and the white paper on pensions reported to be due for publication later this year.
Those in the public sector aged 50 and above now need to carefully consider their retirement decision, perhaps several years earlier than intended. It should, however, be noted that the Minister was careful to state that the decision to retire was not solely at the discretion of the individual but “will be subject to local management arrangements to ensure that the scheme operates in an orderly manner” (Budget April 2009).
There is no doubt that this scheme is advantageous to an individual on an actuarial estimate of the value of future pensions, lump sum etc. The longer the service and the closer an individual is to 50 the greater the actuarial value. There are no costings, and it is likely that the scheme will save money now, but increase costs later on so that overall costs to the State will increase. The main effect is to redistribute costs from payroll to pensions, and to defer certain payments through time. It is likely that those about to retire or considering retirement will avail of this scheme.
However, those not near retirement age should consider their options carefully, because of uncertainty about the direction of future incomes (post tax and post various levies), the absence of alternative employment, the possible ending of favourable tax treatment for those aged 65 and over, and the future level of pension payments, as pension increases may be linked to price changes rather than current salaries.
In the current crisis, being in the labour force gives greater security to the level of current (and perhaps future) income than being retired, because income at work (even after recent increases in levies) will be higher than in retirement. In addition, pension payments are unlikely to match income rises in future periods, increasing the divergence between incomes of those who retire now and those who remain in the work force. Finally, higher current incomes may facilitate savings, to ensure continuity in living standards prior and post retirement.
One other group who benefited from announcements made with the Budget are those working in Universities (see Summary of Supplementary Budget Measures – Policy Changes, Pension Fund Transfer). Even though only partly funded, university pension schemes had an estimated deficit of €1.3 billion and the State will now meet this liability. No extra levies or changes to pension terms were announced. Universities pension schemes were never fully funded. Pensions paid at retirement were funded, but increases to pension payments after retirement came from the exchequer. This deficit arose because of the collapse in asset values and the growth in wage costs (particularly at senior levels without matching increased contributions to pension schemes). In previous years, the pension scheme was also used to fund generous early retirement schemes. The new arrangements essentially involve converting university pension schemes to a fully PAYG system. The University of Limerick and Dublin City University always operated a PAYG pension scheme and are unaffected by these changes.
Finally, the radical proposal to provide a free pre-school year for all children starting next year, although in replacement of the early child care supplement, is welcome. This is a progressive measure and supports the advocates of ‘early intervention’ as a means of ending poor achievement and a higher incidence of social problems amongst lower income groups.
Dr James Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.
He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).