22 April 2013

OECD: Reforms essential to make Ireland's pension system fairer

The OECD Review of the Irish Pension System recommends that the Government put in place either a universal basic pension scheme or a single means-tested pension, both topped up with a compulsory private pension. The review says that today Ireland spends much less than most European countries on public pensions, at 7.5 per cent of GDP compared with an EU27 average of 11.3 per cent. But despite a higher effective retirement age, an ageing population will push up spending to 11.7 per cent by 2060, closer to the EU average of 12.9 per cent.

John Martin, OECD Director of Employment, Labour and Social Affairs, said: “Ireland needs to make its pension system more affordable in the long-term. With public finances under pressure and to avoid a rise in pensioner poverty, private pension coverage needs to be increased urgently.”

The simplest, least costly and most efficient way of reaching high and even coverage rates across all income groups is compulsion, says the OECD. Auto-enrolment, whereby workers are enrolled automatically by their employer in a private pension scheme unless they explicitly decide to opt out, would be a second-best option that requires careful design and may be costly. Payments into private schemes could be targeted at workers above a certain income level. The household benefits package and free travel could be transformed into a cash supplement, available to all or means-tested.

Linking benefits to contributions more transparently and fairly is essential, says the OECD. Under the current scheme, some pensioners who started working early but had gaps in contributions during their career can find themselves receiving less than others who started working late but paid in continuously during the last ten years of their career.

Among the other OECD recommendations are that Ireland could:

• Link the retirement age to life expectancy after 2028 when it is scheduled to rise to 68.
• Allow retirees to combine work and pension income.
• Payments to Defined-Contribution plans should be determined by how much income people receive from the State pension
• Phase in more quickly the new rules of the occupational scheme for public workers.
• Alter the tax deferral scheme for private pensions to make them more attractive to low and middle earners. This should be via flat subsidies and matched contributions.
• Make defined-benefit plans more secure by strengthening legislation to protect members if plans wind up and reform laws to make them more flexible.
• Take into account the payout and accumulation phases when designing the Defined-Contribution scheme, and keep costs and fees as low as possible.

Full review

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