TILDA Symposium "Pensions in Ireland: Prospects and Challenges" 100 Years of Failure: Irelands Publi

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TILDA Symposium "Pensions in Ireland
Prospects andChallenges"100 Years of
Failure Irelands 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 averagedistribution 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 gt100 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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Irelands 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 at www.ssisi.ie.
• Valuing Irelands 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/shan
  ewhelan/publicat.html

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TILDA Symposium "Pensions in Ireland
Prospects andChallenges"100 Years of
Failure Irelands 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 Irelands 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).