Analysing Pensions: Modelling and Policy Issues

November 14, 2012

News
Taxation, Welfare and Pensions
See Publication

"A FRAMEWORK FOR PENSION POLICY ANALYSIS IN IRELAND" By Tim Callan*, Justin van de Ven† and Claire Keane* (*ESRI; †University of Melbourne) Identification of Trade-offs is Crucial for Pension Policy  Clear identification of the trade-offs faced by public policy on State and private pensions is of critical importance. Analysing these trade-offs requires a complex model to take account of the dynamics of labour market participation and pension savings over the life cycle. ESRI researchers, in collaboration with Justin van de Ven of the University of Melbourne, have constructed a model which captures many of the key features of interest. One trade-off is between the payment rate for the State Pension and the age at which the pension becomes payable. By 2028, the minimum age for a State Pension will be 68, as against 65 in 2010. If the pension age were not increased and a similar saving in expenditure had to be achieved, the reduction in payment rate required would have to be in the order of €30 to €50 per week. Government's stated policy involves reducing the tax cost of incentives to save for pensions. “There may be more efficient and more equitable ways of encouraging private savings for pensions” according to Tim Callan, one of the authors of the paper. “Government's buying power can be used to keep management charges low, as is done through the UK government's NEST scheme. It also changes the default option to automatic enrolment. This can help overcome people's inertia regarding pension provision”.

Note to Editors: 1. This publication is supported under the European Community Programme for Employment and Social Solidarity – PROGRESS (2007-2013). This programme is managed by the Directorate-General for Employment, Social Affairs and Equal Opportunities of the European Commission. It was established to financially support the implementation of the objectives of the European Union in the employment and social affairs area, as set out in the Social Agenda, and thereby contribute to the achievement of the Lisbon Strategy goals in these fields. The seven-year Programme targets all stakeholders who can help shape the development of appropriate and effective employment and social legislation and policies, across the EU-27, EFTA-EEA and EU candidate and pre-candidate countries. PROGRESS mission is to strengthen the EU contribution in support of Member States' commitment. PROGRESS is instrumental in:

  • providing analysis and policy advice on PROGRESS policy areas;
  • monitoring and reporting on the implementation of EU legislation and policies in PROGRESS policy areas;
  • promoting policy transfer, learning and support among Member States on EU objectives and priorities; and
  • relaying the views of the stakeholders and society at large

For more information see: http://ec.europa.eu/social/main.jsp?langId=en&catId=327 The information contained in this publication does not necessarily reflect the position or opinion of the European Commission.

  TCD Pension Policy Research Group, School of Business, Trinity College Dublin.    "EXECUTIVE DIRECTORS' AND EMPLOYEES' PENSIONS: A LEVEL PLAYING FIELD?" By Gerard Hughes, Visiting Professor, School Of Business, Trinity College Dublin Employer Contributions for Executive Pensions 36 Times More than for Other Employees Using information from the annual accounts for 2009 on the pension arrangements for 147 executive directors of 48 large Irish publicly-quoted companies and a variety of sources on the pension arrangements for private sector employees, this paper shows that:

  • The average annual employer pension contribution for executive directors was nearly 36 times more than for other employees (€100,000 versus €2,700);
  • The average employer pension contribution rate for executive directors was almost 26 per cent of salary whereas for other private-sector employees it was about 7 per cent;
  • If executive directors had to retire in 2009 they would have been entitled to a pension of €199,100, or 17 times more than the annual State pension of €11,976 on which most pensioners depend.

The State has an interest in these outcomes because it supports private pension arrangements through generous tax reliefs. In 2009 the cost of these reliefs amounted to €2.7 billion and they were concentrated on executive directors and other high income earners who have higher marginal rates of tax and larger pension contributions. What Can Be Done to Level the Playing Field? The playing field for executive directors and other employees could be made more equitable by taking into account the National Pension Policy Initiative recommendation that the combined value of the State pension and a private pension should replace 50 per cent of gross pre-retirement earnings. This could be done by reducing the present earnings contribution limit from €115,000 to €75,000 and the cap on the size of individual pension funds from €2.3 million to around €0.6 million.

Note to Editors: 1. These papers are published in the Research report "Analysing Pensions: Modelling and Policy Issues", edited by Tim Callan and Philip J. O'Connell (ESRI). It will be published online on the ESRI website on Wednesday 14 November.