Consumers confused by plethora of illogical and unequitable rules...
Sometimes we forget that pensions are as important as wages or salary, and that we all need a decent income in retirement. Unfortunately, decades of layering of legislation, policy initiatives and changes in practice have all combined to make the Irish pensions landscape an unreasonably complex and bizarre place, which offers little encouragement for those without pensions to start saving. There are now, at least, 14 different types of pension arrangements, mainly created by Revenue’s piece-meal interventions. There are, in effect, 4 Regulators, all reporting to different departments. But there is no one Minister with responsibility for managing this crucial national issue.
The broader pensions framework has become so complex that advisors are distracted to spend time guiding clients on how to navigate a path to retirement between the myriad of pensions structures and tax rules, when they ought to be focusing on the end game i.e. building a fund which can provide adequate financial support and protect from poverty in later years.
Pensions can be simple. But in order for that to happen we in the Association of Pension Trustees (APTI) believe that there needs to be one pensions minister, one centre of control, and one who is prepared to engage with all parts of the industry in a constructive way.
To Many Cooks…
If we look at the 4 traditional pension structures (Personal Pension; PRSA; Occupational Pension; and Buy Out Bond) which all private pensions savers are part of, we can at a glance see where the complexities begin.
There is a dysfunctional relationship between these structures. Some can transfer to each other and others cannot. For example, Personal Pensions can transfer to PRSAs, but PRSAs can’t transfer to Personal Pensions. Personal Pensions cannot transfer to any other of the three structures, yet PRSAs can transfer to Occupational Schemes but not the other two. Confused yet? And that is just the tip of the iceberg!
The worst part of this is, that none of the restrictions serve any meaningful purpose.
The Added PRSA Layer
The introduction of the PRSA in 2002 could have been the solution to this puzzle. Instead, it has become part of the problem as it ended up not replacing any structures; it simply added yet another layer. Why for example, should an employer contribution which exceeds the personal contribution limits be taxed as benefit-in-kind (BIK), when a company pension plan can fund for 66% of final salary without any BIK? Does it make sense that a transfer from a company pension to a PRSA is allowed if you have less than 15 years of scheme service, while it is prohibited if you have more than 15 years’ service?
PRSA investment options also have their own idiosyncrasies, frequently requiring investment institutions to have segregated investment portfolios. And while PRSA charging structures are regulated with the intention of controlling costs, market forces have pushed pension costs down across the board, the result being that the PRSA is now probably the most expensive pension contract on the market.
The PRSA could still be the basis for the future of individual pensions. The basic PRSA principle – a portable contract-based savings vehicle is laudable. But it needs to be simplified and harmonised with other pension types
Individual Pensions V Big Trusts
Yes, there are hundreds of thousands of pension schemes out there, but the assumed conclusion - that the elimination of individual pensions and the introduction of bigger trusts will benefit pensions coverage - is unfounded. It may be a complex task to regulate pensions but the aim of pensions simplification should be to provide better coverage for the population first, with regulatory convenience a distant second. Experience among APTI members tells us, unsurprisingly, that consumers are unhappy to relinquish their individual dedicated plans in favour of a group pension over which they have far less control.
In 2017, APTI commissioned a survey which found that the number of clients in self-managed pensions has doubled to 22,000 since 2010 and funds under administration now stands at €7.7 billion. Self-managed pensions now account for over 12% of the Defined Contribution pensions sector. This sector is growing rapidly as pension savers seek to exercise greater control over their pension.
Behind Closed Doors
For some time now, APTI has been calling for action to be taken to simplify retirement savings such that it benefits the consumer. While financial advice is critical, a basic pension, just like a savings account, should be capable of being understood by the average consumer without recourse to experts to decipher it. That is simply impossible at present.
APTI welcomed the Pensions Authority initiative to simplify pensions launched in October 2016. However, we are concerned that the process has arrived at conclusions before the consultation process has completed. To date the process of pensions reform has continued behind closed doors. An inter-departemental group has been set up but without participation from those who will be affected by the changes. We remain hopeful however that the simplification process will result in just that – a simple, understandable process for consumers.