Budget 2013 - Business

The first measures announced by the Minister in Budget 2013 were a series of initiatives designed to help the SME sector – the 10 Point Tax Reform Plan.  The importance of the sector was highlighted by figures set out in an accompanying paper from the Department of Finance. The paper shows that 99% of businesses in Ireland are SMEs and they account for almost 70% of people employed in the State, with 64% of private sector workers being employed by indigenous non-exporting firms and 56% by indigenous non-exporting SMEs.

Without going into any detail, the 10 points cover positive changes and extensions to the 3-year corporation tax relief for start-ups, the close company surcharge on undistributed income, the R&D tax credit, the VAT cash receipts basis threshold, the foreign earnings deduction, the EII scheme and stock relief and CGT for farmers, as well as reviews of venture fund CGT and reducing the compliance burden on micro enterprises.  None of these changes is particularly momentous in itself, and that was acknowledged by the Minister, but it is hoped that the cumulative effect will help drive employment growth in the sector. Beyond the 10 Point Plan, there were various announcements, including:

- The by now usual “100 per cent” commitment to the 12.5% corporation tax rate.

- The extension of film relief to 2020. Interestingly, though, it was indicated that from 2016 access to it may be closed to retail investors, which would mean the death of the various film schemes that have been promoted in recent years.  Quite how it will operate beyond 2016 is not yet clear.

- The removal of “top slicing relief” on “termination” or ex gratia lump sum payments for employees on the portion of that payment which is in excess of €200,000.  This is a very valuable relief by which the taxable element of any such payment is subject to the taxpayer’s average tax rate over the previous 3 years.  Unfortunately, this relief is being abolished for sums in excess of €200,000, so that the excess will be taxed at the marginal rate, which will be considerably in excess of the average.


However, and this could be a useful planning point for advisers and their clients to consider, the change does not take effect until 1^stJanuary 2013, giving a few weeks for appropriate action to be taken to avail of top slicing relief before it is restricted. It is worth noting that while such payments are usually made when an employment contract is being terminated, it is also available for major changes in the nature of the employment.

There were announcements of other measures, including various funding supports for SMEs and other businesses, as well as the usual hike in excise taxes, but in general the feeling is that an attempt has been made, within the tight constraints within which the government feels obliged to act, to help businesses.  Whether they will have anything other than limited value remains to be seen.

Jeremy Mitchell

Director 

ITC Consulting
 

Budget 2013 - Local Property Tax

Not since the abolition of the maligned Residential Property tax in 1997 have we had a tax based on the value of the dwellings of ordinary citizens.  However, in economically strained times the unpalatable becomes acceptable and frees politicians to re-consider long-abandoned revenue raising measures to make ends meet. And so with Budget 2013 the Minister of Finance announced the re-introduction into the tax code of the concept of a property tax, which from 1^st July 2013 will be levied on all owners of residential property; homes, second homes and buy-to-lets, situated within the State.

The news did not come as a surprise however, the Household Charge and the Non Principal Private Residence charge having cleared the way. The new tax will replace the Household Charge which is abolished from 1^st January 2013, and the Non Principal Private Residence charge which is due to come to an end on  1^st January 2014. Investors should note that there is an overlap for a period after 1^st July 2013 where they potentially are liable both to the new Local Property Tax and to NPPR.

The property tax is applied in accordance with an ingenious system, but basically at a rate of 0.18% of property valued up to €1M and at 0.25% on property above €1M.

Quite apart from the fact that the tax seemingly is breaking with a 15 year absence of property tax from the Irish tax code there a number of aspects of the tax which gives food for thought:

- Significant is the increase in the costs of owning property.  In his speech the Minister, somewhat disingenuously declared that the tax when compared to the Household Charge only represented an increase of €57 for a property worth €150k. He forgot to mention however that this comparison would only be valid for the year 2013 where only ½ year of tax will apply. In years to follow, the increase is €114. On a private residence worth €500k the owner has since 2011 paid an annual charge of €100. From July 2013 that figure is increased to €855.

- The tax is based on a percentage of the Gross Asset Value of the property. There are no deductions for the mortgage. For debt ridden Irish homeowners there are no deductions for the portion of the property “owned by the bank”. For many it will be a tax not on wealth but on debt.

- The Local Property Tax is in the main a tax on already taxed monies.  The homeowner above  who pays marginal income tax and PRSI has to make €1282.50 on average in order to pay property tax of €855 for 2014. With that fact in mind it is difficult to see how the Minister arrived at the conclusion that the property tax is “a better alternative to increased taxes on income” (but he did).

- The local aspects of the Local Property Tax are difficult to discern. After the mixed experience of involving the County Councils in the collection of the Household Charge, the Government is now reverting to centralisation. Yes, according to the Minister, the tax is meant to fund public services, and yes the Minister also made some references to the present administration’s commitment to local government – which pledge was backed up by some token powers granted to local authorities in the area of the rates applied. However, this new tax is prescribed by central  not local government,  it will all be collected centrally and the revenue from it distributed, also by central government, in much the same way as any other tax.

- Advisors should be tuned into the fact that there will be a separate tax return to complete in the Spring of 2013. The details of this tax return will be disclosed at a later stage.

- Where the NPPR and Household Charge legislation exempted property held in a discretionary trust, there is no such exemption with regards to Local Property Tax. The exemption in the NPPR and Household charge legislation has been used to exempt property held in pension schemes as pension schemes are often set up as discretionary trusts. This exemption, it seems, won’t be available with regards to property tax. Accordingly, investors with Irish residential property in their self-administered pension should contact their advisor or provider with a view to ensuring the tax compliance of their scheme.

Tommy Nielsen
Legal Officer
ITC Consulting

Budget 2013 - Pension Related Changes

In his budget speech, Minister Noonan declared that it was in everyone’s best interest that the Government encourage as many citizens as possible to continue to invest in pension schemes.  This does not seem to have been the Government’s view over the last few years with, among other things the introduction of the pensions levy and talk of cutting tax relief on contributions introducing a lot of uncertainty into the market.  A number of industry bodies over the last 12 months have been lobbying government in an effort to bring some certainty back in to the market. Now the minister appears to have delivered in this regard.  The positive news from a pension’s perspective in the budget was the clear statements that:

 

• The Pensions Levy will not be renewed after 2014; and
• Tax relief on pension contributions will continue to be available the marginal rate.

These are welcome statements as they will serve to lift some of the cloud that has been hanging over the pensions industry over the last few years.

The minister did announce, however, that future tax relief on pension contributions would only serve to subsidise pension schemes that deliver an income of up to €60k per annum.  These changes will not take effect until 1^st January 2014.  Therefore for now, the question remains as to how this measure will be implemented.  The minister appears to be leaning towards a further reduction in the Standard Fund Threshold (SFT), which currently stands at €2.3m and the minister described as being “very generous”. 

The question remains as to how €60k per annum will be valued for this purpose?  If the same valuation rules as were used for the calculation of the €2.3m threshold were followed, then the capital value of €60k per annum would result in a SFT of €1.2m.  The minister did state that the Government would engage in consultation with the industry on the specific changes required.  This dialogue has in fact already commenced and the proposal from the industry is to capitalise the €60k at a factor of 30 times plus the lump sum to give an SFT of €2m.  If this proposal is implemented, it is estimated that it will affect around 17,000 individuals.  When we consider that the average pension fund is around €100k, a reduction in the SFT should not discourage the majority of the market from continuing to fund for retirement.

The final pension-related change of significance is the provision allowing pension investors to withdraw up to 30% of the value of their AVCs for a three year period from 2013.  Income tax at the marginal rate will be payable on the funds accessed.  The Government estimates that €200m of funds will be accessed in this way over the three year period.  It remains to be seen whether this will apply solely to AVC’s or whether personal pension contributions will be included.  We will have to wait for the Finance Bill in the new year for the detail in that regard.

Overall, it appears that the Government are making a significant attempt to restore some certainty to the pensions market and to encourage investment in pension schemes once again.  While we will have to wait until 2014 for the detail in relation to the maximum tax relieved pension of €60k per annum, the forewarning provides an opportunity for those who may be affected to take action over the next 12 months.

Jennie Faughnan

Tax Consultant

ITC Consulting

Budget - Lucky 13

For advisors and financial planners the Budget offers a number of planning opportunities. By far the most significant is the confirmation of the importance of pensions and the formal statement on two significant tax matters:

1. The removal of the Pensions Levy in 2014
2. The retention of marginal rate tax relief on contributions.

Other ideas are outlined below.

1. EII – Fun(d) for all the Family?The Employment and Investment Incentive or EII is the new name for BES. In 2011 the relief available was overhauled and made more attractive but hasn’t been extensively used. This year the proposal is to extend the relief (subject to EU approval until 2020).

Why is it of interest?

With the increases in tax on savings and the reduction of interest rates on deposits clients will be looking for alternatives – EII could be an option.

From the point of view of corporates EII represents a possible source of finance. Particularly for small scale sums up to €500k it is possible to structure an arrangement for “family and friends” which delivers a cost effective and available alternative to bank finance.

EII should be added to the discussion Advisors have with any SME looking for finance.

2. REITs – a new market for brokers?

Real Estate Investment through REITS is big business globally. As of mid-2012, the global index included 414 public real estate companies from 37 countries representing an equity market capitalization of about $1 trillion (with approximately 68% of that total from REITs).(Source Wikipedia)

The key features of a REIT are that it is:

1.  a quoted company
2. Invests exclusively in property
3. Is tax exempt/tax transparent

The benefits to the Irish economy are the potential for NAMA and the Banks to tidy up their property debt portfolios.

For private individuals the attractions are likely to be:

1. Access to a new investment option to diversify investment portfolios.
2. An opportunity for larger scale property investors to warehouse their investments in more tax efficient structures.

For all clients with a current or prospective interest in property REITs will now be an essential part of the discussion.

3. High Noon(an) for Film Finance?

The Minister for Finance has made clear that tax relief for Film production will continue but that the individual investor will be eliminated from the process by 2016.

This tax break therefore has a limited remaining shelf life.

Any advisors dealing with clients in this area need to be aware that the end is nigh.

4. Deposits and Life Company Investments

The increase in tax to 36% for rolled up investments is a significant negative. The hunt will now be on for better alternatives leaving advisors with the job of rejigging client portfolios. Alternatives will include:

1. Tax exempt Post Office Investments.
2. EII and REITS mentioned above.
3. Pension funding.

The availability of tax free growth coupled with the confirmation of the levy ending makes pensions more attractive than ever. Whilst the ultimate Fund limit is not yet known the fact is that the average pension fund has only €100k value. It will take a lot of saving to come anywhere near the fund limit. Equally clients should have more comfort about this type of saving due to the reassurances on tax given by the Minister for Finance.

Portfolio reviews should be scheduled for all clients in the new year.

5. Termination Payment Magic – a Non Disappearance before your very eyes!

The current tax code allows €200k to be paid on termination of employment without tax. Thereafter tax is imposed at a special rate due to top slicing relief. This ensures that the tax paid is reduced to the average tax paid by the individual for the previous 3 years.

Budget 2013 proposes the removal of Top Slicing Relief with effect from 1 January 2013. In other words it is still available for the rest of this month.

When you recognise that termination payments can be made to individuals who haven’t actually ceased employment you realise your clients should be made aware of this before it disappears.

Don’t write – email TODAY  to ensure clients have considered this option.

6. Capital Tax Increases - a Laboured Delivery?

Given the composition of the government increases in capital taxes were a given, the surprising thing is the range of breaks that weren’t closed off. These include:

           1. Over 55 Retirement Relief – still available at €750k (until 2014 for those aged over 66). This        means you can enhance your retirement with an additional €750k in tax free cash.

Any advisors who haven’t built this into their own financial plans need to set aside some personal planning time over Christmas.           2. Business Property Relief - this allows a 90% reduction in the value of Business assets for CAT  purposes. With the reduction in allowances and the increase in rates every business owner needs to look at this.

 Every business owner needs to know about this – and the fact it could disappear.

7. CGT losses – a valuable asset?

We all know individuals who have suffered significant losses on investment portfolios with bank shares perhaps being the most infamous. Yet we all hang in there in the belief that one day they will recover.

A smarter way of doing this would be to crystallise the loss now for use against other gains – saving 33% on all gains. The shares can then be repurchased by a self-administered pension ensuring the recovery is also tax free.

Turning the black cloud of the Budget into a Tax Refund is a guaranteed stocking filler this Christmas.

8. ARF a Loaf is better than no loaf at all

The assets of an ARF can ultimately pass on to children at a tax rate of 30%. The alternative route is much more taxing - the same benefit passed on in cash could be subjected to income tax of 52% (on extraction from a business) and CAT at 33% (on passing to the next generation).

Clients developing an estate plan need to give serious consideration to the benefits of ARFs. Unlike other pension vehicles they allow the transfer of specific assets to the next generation. The certainty provided by the Minister for Finance on Pensions also means that clients have more security using these types of vehicles for planning purposes.

A compulsory point for every estate planning discussion.

9. PFT Planning – A Personal Tax Free Zone?

The Minister for Finance confirmed that the pension limit will be €60,000. However discussions are still on-going with the pension industry as to the level of fund this will permit in practice. These won’t become law until 2014.

Assuming current rules applied the maximum allowable fund would drop to €1.2m. On the other hand the pension industry has suggested:

1. A factor of 30:1 should be used
2. The tax free lump sum should be added to this.

In practice this would give a maximum fund of €2m.

Rather than waiting to see how things will turn out, those clients that are close to these limits can take matters into their own hands. All previous Fund Thresholds have provided an exemption for those with funds in excess of the new limit. Therefore it makes sense for clients to pay in as much as possible in the next 12 months if it will increase their funds over €1.2m. This can then form the basis of their new PFT application in 2014.

Nobody minds a tax if it someone else who is paying. Talk to clients with substantial pension funds in 2013.

10. PFT – Avoiding Excesses this Christmas?

For existing clients who already have PFTs the question arises as to how to manage the excess. The cumulative tax rate on the excess is 79%. However Budget 2013 may offer an opportunity to avoid this.

30% of AVCs can be withdrawn and taxed at a marginal rate at any age. A client with a PFT excess may be able to remove the excess using this mechanism and thereby avoid the 70% rate.

Client with a PFT needs special care – make sure they hear about this idea from you first.

11. 6% ARFs – Nice ARF: shame about the Drawdown!

ARFs worth more than €2m are subject to an extra drawdown requirement of 1%. – That’s an extra €20k in taxable income.

Taking the excess money out before you ARF would make sense and the AVC encashment option is one way of doing this.

Clients building up their PFTs need to watch this – add it to your planning list for large pension clients.

12. AVCs – a three year cooling off period

We all know individuals who can and should invest more in pensions. However, in the current environment, they are reluctant to commit to a long term financial issue in case they need the cash in the short term. The AVC encashment option provides a realistic way of managing this. You can now advise clients:

“commit for 1,2 or 3 years. You will avoid tax on the money invested. If you need the money back in the next 3 years you can pay tax at that stage and get 30% back. If you don’t need it in the next 3 years you can probably let it roll tax free until retirement”

A key market for AVC PRSAs will be the public sector. Time to add them to your 2013 to-do list.

13. AND FINALLY (Tongue in cheek)…….

With all the grief around flooded housing, lack of insurance cover etc it is good to know the Minister for Finance cares!

If severe flooding means your house now floats and you are known locally as Noah then you will be glad to know the Minister for Finance has deemed you exempt from the new Local Property Tax.

While the rest of us drown in debt you can sail happily into the sunset!!

Budget Briefing Webinar Recording and Slides

Our Budget 2013 Briefing in conjunction with the Irish Brokers Association took place this morning. The briefing aimed to give you some guidance around the changes in order to help you plan for 2013. If you missed the webinar you can access the recording here.

We hope that you find the content useful for the upcoming year and if you have any questions in relation to the presentation please e-mail JustAsk@independent-trustee.com.

You can also download the presentation slides here.

Aidan McLoughlin - Irish Pension Personality of the Year

Last night the Irish Pension Awards took place in Dublin's Burlington Hotel. The awards, only in their first year aim to honour the pension funds, small and large, DB and DC, as well as the investment firms, consultancies and pension providers and individuals that have set the professional standards in order to best serve Irish pension funds in these ever challenging times.

ITC are delighted to announce that Aidan McLoughlin won the Irish Pension Personality of the Year award. On behalf of all the staff in ITC we would like to take this opportunity to congratulate Aidan on this very well deserved award.

ITC were also shortlisted for the following awards:

• Administration Award
• Communication Award
• Pension Consultancy of the Year Award - ITC Consulting
• Innovation Award - ITC & ITL

Budget 2013 - Act Now?

Every year around this time we see a lot of clients wishing to take action before Budget day. Whether it is making contributions or accessing their benefits, the general sense is that, while they don’t know what will happen in the Budget, they don’t expect there to be many changes for the better.

This year is no different and with reports in the media every day speculating about what changes Budget 2013 will bring, when it comes to your and your clients’ pensions, what should you do?

Tax Relief on Contributions

There is much speculation that tax relief on pension contributions will be cut for marginal rate tax payers.  This was one of the proposals in the Programme for Government and the National Pensions Framework and one of the few pension related changes that has not yet been implemented.  Tax relief for marginal rate tax payers may be cut to 20%. 

Could you still avail of the higher rate of tax relief if you make your pension contribution before the Budget? 

Pension Fund Threshold

The pension fund threshold imposes an excess fund tax on pension funds over €2.3m at the date at which they are accessed. This threshold was reduced in 2010 from €5.4m. The Fine Gael manifesto stated that they intended to reduce this to €1.5m. There is much talk in the media that ministers believe that an annual pension of €60k should be enough for anyone in retirement. Using the same capitalisation factor used to value the fund threshold, this would equate to a threshold of €1.2m. In reality, however, a fund of €1.2m would not buy you an annual pension of €60k.  It is more likely to buy an income of around €30k per annum. 

If the threshold is to be reduced in the Budget, should you fund your pension as close to the €2.3m threshold as you can now?

Pension Cap

The other way of restricting pension benefits to an annual income of €60k would be to impose a “super tax” on pension payments above €60k per annum or to limit tax relief on contributions which deliver a pension in excess of €60k.  This would appear to be a more popular method as it would target those on large pensions who we have heard so much about in the media recently. 

However, with the minister for health recently stating that the average annual cost of a nursing home is €100k per annum, the €60k annual pension does not sound like it would go too far if these circumstances arose for you in retirement.  In this context, it may not make sense to fund up to the maximum fund threshold at this time as you may be penalised by the “super tax” when you drawdown your benefits.

Unfortunately, we don’t have a crystal ball and we can not predict what changes Budget 2013 will bring. It does, however, provide an opportunity to review your and your clients’ pension provisions and assess what options may be available.

Jennie Faughnan

ITC Consulting

ITC, in conjunction with the Irish Brokers Association are holding a Budget Briefing Webinar on Thursday December 6th. The briefing will focus on pension changes, capital taxes and retirement planning. Register below to reserve your place. Due to popular demand a second webinar has been scheduled and spaces are limited.

Agricultural Relief and Pensions

When we think of farmers we don’t generally think of pensions, but they clearly are of benefit, not only for the usual pension reasons, but also for tax planning reasons. Agricultural Relief is an example of this worth noting.

Agricultural Relief is a relief available to individuals who receive a gift or inheritance of agricultural property. If a person qualifies for Agricultural Relief, they will only pay Capital Acquisitions Tax (“CAT”) on 10% of the value of the agricultural property inherited. One of the main qualifying criteria for this relief is that at least 80% of the value of the person’s assets, after taking the gift or inheritance, is comprised of agricultural property.

The Revenue Commissioners have confirmed that an interest in a pension or pension fund can be ignored by the holder of this asset when calculating whether a beneficiary meets the 80% agricultural assets farmer test.

 

The effect of this is that a person could avail of significant CAT savings if they were to have long term savings in a pension fund, as opposed to holding these savings outside of a pension.

The examples below illustrate the potential CAT savings that could be made if a person has invested some of their assets in a pension, as opposed to holding them personally.

Example 1 – No Pension/ Pension Fund

Non-agricultural Assets                        €200,000

Agricultural Assets Inherited                 €700,000

Percentage of Agricultural Assets                78%

Person will not qualify for Agricultural Relief as less than 80% of their assets after taking inheritance are comprised of agricultural assets. Therefore, the person will be liable to CAT on the entire inheritance, leading to a substantial tax liability as can be seen below.

Agricultural Assets Inherited                  €700,000

CAT @ 30%                                         €210,000

Example 2 – With Pension/ Pension Fund

Non-agricultural Assets                         €150,000

Pension Fund                                       € 50,000

Agricultural Assets Inherited                  €700,000

Percentage of Agricultural Assets                 82%

Person will qualify for Agricultural Relief as in excess of 80% of their assets after taking the inheritance are comprised of agricultural assets. Therefore, the person will be able to avail of agricultural relief, resulting in a very significant tax saving.

Agricultural Assets Inherited                  €700,000

Less Agricultural Relief (90%)                €630,000

Liable to CAT                                       €  70,000

CAT @ 30%                                         €  21,000

As can be seen from the above examples, a person who has invested in a pension fund will pay 90% less CAT than the person who has not, as the pension is used to reduce the value of the person’s non-agricultural assets which results in the “80% test” being satisfied and therefore Agricultural Relief can be claimed on the inheritance.

Routing a person’s long term savings through a pension/ pension fund can therefore result in significant CAT savings, in addition to the benefit of being able to avail of income tax relief and the benefit of the pension asset increasing in value tax free with a tax-free lump sum at retirement. For anybody who has an expectation of receiving a gift or inheritance of agricultural property in the future, a pension should be strongly considered not only as a way to provide an income in retirement, but also as a potential tax planning tool.

Paul Wymes

ITC Consulting

We won't go to the same lengths as Will Ferrell...

Have you heard the good news? Aidan McLoughlin, Managing Director of Independent Trustee Company has been shortlisted for the Irish Pension Personality of the Year Award. The award, taking place as part of the Irish Pension Awards aims to recognise the individuals that have truly made their mark in the Irish pensions space in recent years.

The winner of this award is decided through a public vote and while we won't go to the same lengths as Will Ferrell, we would really appreciate your support!

You can vote for Aidan by clicking on the link below and if you could share the details to those within your organisation we would be grateful. 

VOTE Aidan McLoughlin - Irish Pension Personality of the Year Award

We are delighted to announce that ITC Managing Director Aidan McLoughlin has been shortlisted for the Irish Pension Personality of the Year Award. The Award, taking place as part of the Irish Pension Awards on November 21st, aims to recognise those individuals that have truly made their mark in the Irish pensions space in recent years. The voting proccess for this award is slightly different than the rest as the winner is decided through a public vote. We would appreciate your support on this and you can vote for Aidan at the link below. Voting closes on November 7th.

A leading visionary and thought leader in the Irish pensions Industry since 1987. As a solicitor and tax consultant Aidan has pioneered the self-administered pensions market. He passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

 

Aidan passionately combines managing ITC alongside his tireless work with industry bodies developing the Irish pensions Industry.

His achievements include:

• Fellow of the Irish Taxation Institute and Irish Association of Pensions Management 
• Founding Chairman of the Association of Pensioneer Trustees of Ireland 
• Chair of the Irish Brokers Association Pensions committee 
• Editor of the Irish Taxation Institute’s Pensions - Revenue Law & Practice
• Member of the Association of Pension Lawyers of Ireland

Many thanks,

 

Michael Keyes

Sales and Marketing Director

Independent Trustee Company

OECD Review: In 2020 20% will receive nothing

In our third blog post on the OECD Review, we look at State pension receipt. 

As it currently stands, 50% of retirees are receiving a full state pension, this is to decrease to 46% in 2020. Looking at the below chart, we can also see a further decrease in those receiving 90%-100% but an increase in those receiving 33-90%. In 2020, 20% will receive nothing.

Looking at these statistics, how much of an additional sum will retirees need to provide themselves with an adequate pension? The OECD are due to make recommendations on this in the second part of their report.

Dáil Drawdown: Standard Fund Threshold

Minister Noonan went on to say; "there is currently no underlying data available to my Department or to the Revenue Commissioners on which to base reliable estimates of the savings from a further significant reduction in the SFT to the level indicated in the question. Information on the numbers and values of individual pension funds or on individual accrued benefits are not generally required to be supplied to the Revenue Commissioners by the administrators of pension schemes and personal pension arrangements. The estimated savings indicated at the time in respect the Budget and Finance Act 2011 change in the SFT were quite conservative, based as they were, on incomplete data and using very broad assumptions. Indeed, those underlying data and assumptions may not be directly applicable to determining the effect of a further significant decrease.

My Department has been engaging with representatives of the pensions industry with a view, among other things, to gathering private pensions-related data which may be of value into the future in estimating the costs of potential changes in the pensions’ tax area. These engagements are ongoing".

Source: www.oireachtas.ie

OECD Review: Financial Sustainability

In our last post on the OECD review, we discussed how Ireland's policy stance measured up against key criteria, looking at the performance of the Social Insurance Fund. Another item on the OECD's agenda is that of financial stability and how it is evaluated through international analysis. The first step to this evaluation is to look at international comparisons. 

As you can see from the chart below, in 2010, Ireland ranked somewhat average in our public expenditure on pensions, with the inclusion of all government pension costs; contributory, social welfare pensions, non-contributory pensions and public sector pensions.

If you look at the next chart, you can see that the projected change in expenditure is quite significant between 2010 and 2060, Ireland projected to rank third on the table.

The charts highlight the rising cost of State funded pensions which the National Pensions Reserve Fund (NPRF) was intended to offset.

Broadly speaking 1/3^rd of the NPRF covered public sector pensions whilst 2/3rds covered social welfare pensions.

The fastest increasing cost is public sector pensions. These grew from an estimated capital cost of €75bn in 2007 to €129bn in 2009. No figures have been produced since, however it is likely that that cost has continued growing.

Source: OECD Review of Pensions in Ireland, 14.09.2012. John Martin, Edward Whitehouse, Anna D'Addio, Andrew Reilly.