Important changes to the tax regime and legislative basis of pensions provision in Ireland were announced on 3 March 2010 when the Department of Social and Family Affairs published its National Pensions Framework. The proposed changes are not being implemented immediately but will be phased in. They have the potential to dramatically alter the landscape of pensions provision in Ireland well into the future.
The National Pensions Framework (‘Framework’) is scheduled to be implemented over a period of five years, however the Government has stated that the timing of certain aspects of the Framework will only be put in place if it would be prudent to do so and subject to the economic conditions prevailing at that time. The principal changes envisaged include:
- Tax treatment of current occupational and voluntary pension provision
- Increasing State pension age
- Mandatory approach to pension scheme membership
- Approved Retirement Funds (ARFs) for all members of defined contribution schemes
- Future operation of defined benefit pension schemes
- New public service pension scheme
Tax Treatment of Current Occupational and Voluntary Pension Provision
The Framework proposes to amend the current tax relief for contributions to existing occupational schemes, personal retirement savings accounts (PRSAs) and personal pension arrangements to be replaced by a single State contribution equal to 33% tax relief. The current tax relief on employer contributions and tax-free treatment of investment income are to remain. No date by which these changes are to be implemented has been proposed by the Government.
Details of how this tax relief will be delivered have not been worked out. The Framework states that this will be developed during the implementation phase of the Framework. The stated reasons for this change are to improve the equity and transparency of tax incentives available for pension contributions. It is clear that this proposed change has the potential to have a negative effect on current contributors to pension schemes at the higher rate, as higher rate contributors will get relief at the rate of 33% and ultimately be liable to tax on their pension at the higher 41% rate.
The Framework confirms the acceptance of the Commission on Taxation recommendation that the overall limit on Tax Free Lump Sums from pensions should be limited to €200,000. This is a significant reduction from the current limit. No time-frame has been proposed for the introduction of the reduced limit. In addition there is no guidance as to the rate of tax that may apply to lump sums above the €200,000 limit.
Increasing the State Pension Age
The Framework sets out the Government’s continued commitment to maintaining the value of the State Pension with a target coverage of 35% of average weekly earnings. Eligibility for receipt of the State Pension (Contributory) is to be simplified. The level of pension paid will be directly proportionate to the number of social insurance contributions made by a person during his or her working life.
The Framework provides that a standard age of 66 for the purpose of the State pension will apply from 2014 (State Pension (Transition) is to be abolished), increasing to 67 by 2021 and 68 by 2028. Arrangements are to be put in place whereby a person may postpone receipt of the State pension in order to make up pension contributions. While it is acknowledged that people are living longer and therefore may wish to remain in the workforce longer, amendments to the State Pension age will have significant implications in relation to existing pension arrangements. Most defined benefit and defined contribution schemes specify a normal pension date at which benefits become payable. Also, employment contracts frequently specify a contractual retirement date. In the case of integrated defined benefit schemes, such schemes provide benefits on a basis that takes account of the State pension also being payable. In all such cases, scheme pension will become payable at the specified normal pension date, say 65, and when State pension age changes there will be a gap before members of such schemes also start to receive State pension.
Mandatory Pension Scheme Membership – Auto Enrolment
The Government intends to extend the scope of pension coverage in Ireland by the introduction of a new auto-enrolment pension scheme by 2014. Currently, the minimum requirement on an employer who does not provide a pension scheme is to provide their employees with access to a PRSA to which the employer is not obliged to make any contributions.
Under the new proposals, all employees over age 22 will be automatically enrolled in the new scheme, unless they are a member of their employer’s existing scheme and that scheme provides higher contribution levels or is a defined benefit scheme.
The floor and ceiling of contribution levels are to be decided. The proposal envisages aligning contribution levels with the changes to the tax relief on pension contributions discussed above. The total contribution to the new auto-enrolment scheme will be 8% (within a band of earnings) with 4% being paid by the employee, 2% by the employer and 2% by the State. The State contribution will be equal to tax relief at 33% and replaces the current system of marginal tax relief on pension contributions. No details as to the level of earnings which will qualify for the mandatory contributions have been provided under the Framework. Contributions to the new scheme will be collected through the PRSI system and contributions will qualify for PRSI and Health Levy relief.
After three months in the new scheme employees can opt out but will be re-enrolled every two years (unless they again choose to opt out). A once-off bonus payment will be paid to people who stay in the new scheme for five years without a break in contributions. A range of funds, including a low-risk default option, will be available. The Government will not provide any guarantees on investment returns.
The Government has also stated that implementation of this element of the Framework is stated to be subject to prevailing economic conditions.
The new proposals, if implemented, will increase the financial obligations of many employers in relation to pension provision.
Approved Retirement Funds (ARFs) for all members of Defined Contribution (DC) Schemes
The Framework provides that from 2011 all members of DC pension schemes will qualify for the ARF regime. The existing ARF option is currently only available to holders of retirement annuity contracts, PRSAs, proprietary directors and individuals entitled to rights arising from additional voluntary contributions paid to a scheme. It is likely that the specified income limit (currently €12,700) which is required in order for a person to avail of the ARF option will be increased to €18,000 per annum.
Future Operation of Defined Benefit Pension Schemes
The Framework has not set out any specific proposals in relation to the reform of the defined benefit pension system. The Framework does state that the Government recognises that there are significant problems with the typical current design for funded defined benefit pension schemes. The Framework suggests a possible new structure where trustees are considering a radical restructure of a scheme. This is to fix employer and employee contribution rates, with the result that benefits must be flexible in the event of investment losses or other adverse experience. As contributions would be fixed the restructured scheme would consist of core benefits which would be guaranteed and non-core benefits, which would be flexible depending on economic conditions. Implementation of such an approach may be quite difficult to implement in practice depending upon the existing rules of the scheme.
New Public Service Pension Scheme
A single new pension scheme will be introduced for all new entrants to the public service with effect from end 2010. The Framework states that the main provisions of the scheme will include a new minimum public service pension age of 66 which will be linked thereafter to the State Pension age. Pensions under the new scheme will be based on career average earnings rather than final salary.
In relation to existing and future public service pensioners, the Framework states that the Government is considering using CPI as the basis for post retirement pension increases.