Charity Begins At Home

The turmoil in government bond markets in recent times has highlighted the degree to which the international investment community is skeptical about investing in Ireland. Should we be surprised at this?

Put another way - would we invest in Ireland?

In the context of pension funds at least the answer appears to be no.

Major economies such as the US, UK, Canada and Australia have, on average, invested 25% of their pension funds in domestic equities. In Ireland the equivalent level of investment is 5%.

European countries have a high proportion of their pension funds invested in domestic bonds. In Ireland, the National Pension Reserve Fund has 0% invested in domestic government bonds – it is legally prohibited from having a greater stake of investment.

There are many good reasons why this should be so – risk diversification, the small scale of the Irish market etc.

For example the liabilities of Irish pension funds are calculated primarily by reference to German bond yields – therefore such funds must invest in German bonds rather than Irish bonds when matching liabilities. This contributes to the ever increasing yield gap between Irish and German Bonds.

Whilst the causes are explainable the fundamental point remains – the recovery of the Irish economy will ultimately be dependent on Investment in Ireland.

And for various reasons the legal and tax systems for pensions prevents this happening in Ireland to the same extent as it happens in other developed economies.

If an additional 5% of Irish pension funds could be encouraged to invest in domestic business it would represent a boost of €3.6bn in capital inflows.

Double that to 10% and you are looking at matching the famous deal Albert Reynolds did with Jacques Delors in 1993 to kick-start the Celtic Tiger.

It is said that charity begins at home. Is the same not true for investment?

The Scales of Inequity

An Independent Trustee Company study reveals costs up to €35,000 a month to fund each Minister’s pension.

According to the report, whilst a self-employed entrepreneur has to toil for 40 years and generally make significant and often unaffordable monthly contributions to their pension funds, Ministers only have to serve 10 years in the role to achieve pensions worth up to €6,870,504.

The Scales of Inequity



Tommy Nielsen comments that “presently, a Minister who has served 10 years is entitled to a pension of 60% of his salary, which is applicable even if that Minister were to retire from his position at 50 years of age. For a private sector worker to deliver such a pension, they would need to build up a pension fund of €6,870,504. This would require pension contributions of approx. €35,149 every month. This figure is effectively what it costs  the taxpayer  to fund these Ministerial pensions - on top of a Minister’s salary which is just under €200,000 and their expenses which have been subject to such media interest”.

Independent Trustee Company’s study looks at the relative value of these benefits and the comparative cost if these were provided under a regular private sector pension.

Ministerial Pension Benefit
Age of Retirement	New Scheme Pension Entitlements		Salary	Capitalised Cost @ CPI escalation	Est. Monthly contribution required
	Minimum	Maximum		Maximum
50	20%	60%	€191,000	€6,870,504	€35,149
55	20%	60%	€191,000	€5,787,879	€29,610
60	20%	60%	€191,000	€4,786,967	€24,490
65	20%	60%	€191,000	€3,875,550	€19,827
Notes:
Based on Annuity Quotes as at 11.10.2010
Assume Male, Married (with 50% spouses pension)
Salary of €191k w.e.f. Dec 2009

If Ministers’ pension benefits were to be subject to benefit-in-kind, it would wipe out their entire salary and they would receive a bill rather than a salary every month.

Entrepreneurs Pension Benefit
In comparison a self-employed entrepreneur must fund the entire cost of the pension benefit out of their own funds – subject only to the benefit of tax relief on contributions.

There is a stark difference between the two benefits with the Minister being provided with a guaranteed benefit which is more than 10 times what an entrepreneur paying maximum contributions can hope to get in unguaranteed format.

For further information log onto the news section of our website:

Full press release
Media coverage
Interview on NewsTalk

Interview following presentation to Oireachtas Committee for Finance

If you have difficulty viewing this video, click here to view or here for website

Family Businesses – backbone of the economy

http://www.hbo.com/the-sopranos/index.html

Currently there are a number of very valuable tax reliefs which allow for the transfer of business assets from one generation to the next, in particular CGT retirement relief and CAT business property relief. 

These are extremely important in ensuring that business transfers do not result in the destruction of the business – to the detriment of the economy and employees.

Provided the relevant conditions are satisfied, the transfer of business from a parent to a child (which includes a step-child, a child of a deceased child or a working nephew/niece) can be done free of CGT and the taxable value of relevant business assets is reduced by 90% for CAT purposes. The assets need to be retained for 6 years after the transfer.

The bad news is last year’s Commission on Taxation report. This report contained a comprehensive analysis of the tax system.  It contained a number of proposals and unfortunately one of its suggestions was that the reliefs mentioned above should be restricted. 

These proposals were not introduced last year; however it seems unlikely that any possibility of increasing tax revenue will be passed up in the forthcoming Budget/Finance Act.

So what were the specific proposals?

Capital acquisitions tax.  The Commission recommended that the taxable value of the assets be reduced by just 75% instead of 90% and that the reduction is to be capped at a maximum of €3,000,000. Any value in excess of the reduction would be taxed at the full 25% CAT rate. 

Capital gains tax.  If the Commission’s recommendation is implemented, that will be restricted in line with the CAT limit, so just the first €3,000,000 will be exempt and the rest subject to the full 25% CGT rate.

Using rough figures, today, the transfer of a family company worth €6,000,000 could be transferred from a parent to three children at a tax cost of €60,000. If the changes are implemented the tax cost would be around €810,000.     

The problem however is far worse than this as the money is the most likely source of this money effectively doubling the total hit on the business to c. €1.5m. Even for a healthy business this isn’t sustainable. The result is likely to be a major reduction in costs i.e. jobs.

Whilst the short term need to increase tax yield is understood it should be managed in a way that does not damage the businesses that will generate future taxes. Otherwise we all suffer. Hopefully sense will prevail in the December budget.

For advisors there is still a window of opportunity to help clients in this area. Transferring a business to the next generation can be achieved quickly, although proper planning for the future does need to be in place. If you haven’t already had this discussion with business clients now is the time to do so. 

A Watershed Moment

There is little doubt that the budget due in December will be of vital importance in terms of Irish economic development. Simply put if we get it right we can look forward to a prosperous future – get it wrong and we could suffer for decades to come.

Before we get too maudlin it is worth looking at the last great financial crisis in Irish history – the currency crisis and how it was viewed by one of Ireland’s leading economists. The following are  extracts from 12 defining moments in Irish history from the Sunday Business Post of December, 2006:

“The day credit liberated ordinary Irish people, David McWilliams
For many, January 31, 1993 is significant. It was the day the punt devalued, interest rates started to fall and the banks started to lend. It was the beginning of the process where the banks did what the credit unions had been doing for years - they started to lend to ordinary people. This greater and more democratic access to credit has done more to liberate millions of ordinary Irish people than any political move by any government in any decade since the foundation of the state. When you have credit, economic possibilities abound, social mobility becomes the norm and the aspirations and dreams of millions are achievable.

…. But quite apart from the economic impacts, the psychological effect of moving from a country where credit was rationed to a country where credit is freely available cannot be underestimated. The most liberating development in post-independenceIreland has been the emergence of credit. This credit has washed over us like a liberating, democratic soothing balm. It has eased the deep neurotic pain of being economically second rate and healed us of the great Irish affliction whereby we can only be financially successful when we are in New York, Sydney or Boston. 

Credit has harnessed our energies for the first time ever, at home. This development, more than anything else, changed Ireland and ushered in the new Ireland.January 31,1993, was the day old Ireland died."

Let us hope for all our sakes that December 7^th 2010 is the date Ireland is reborn.

The Problem with Reality

One of the greatest problems faced by Regulators of all sorts is how to deal with Reality. This isn’t as esoteric a discussion as it might sound. This month has already seen a clear example of how the Real World can upset the best laid plans.

The example is the “Unregulated Products” warning from the Financial Regulator. A sound idea in principle but does it work in the real world?

In the real world financial advisors deal with an array of Regulators and Ombudsmen all inputting to different parts of their business. A self-administered scheme is regulated by the Pensions Board but not by the Financial Regulator. Is this therefore an “unregulated product”?

YES – says the Financial Regulator – we don’t regulate it.

NO – says the Pensions Board – the Pension Board, the Pensions Ombudsman, the Department of Justice and the Revenue regulate it.

HELP – says the Financial Advisor trying to keep both happy.

Author: Aidan McLoughlin

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Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.

How Much is Too Much?

We all know that Irish pension funds lost more value in 2008 than the pension funds of any other major economy. Belatedly the Pension Board has indicated that this is because Irish pension funds have too much invested in Irish equities. How do they know this? The question isn’t as stupid as it sounds.

Basic investment philosophy for at least 5 decades has suggested that returns above inflation are best achieved by investing in real assets such as equities. Various investment gurus have established that the risk inherent in equity investment can be significantly reduced by:

1.                  investing over a long period of time

2.                  investing regular amounts rather than lump sums and

3.                  using a diversified portfolio

All of these are available to Irish pension funds.

In addition, our population profile would suggest we have one of the youngest populations in Europe and (until very recently) a growing population.

Does that not mean therefore that we should have more invested in equities than any other country in Europe? If this is the case then events like 2008 will have a short term impact on fund values. However, overall the fund should continue to out-perform in the long term.

Unless, of course, you decide to get out of equities at the bottom of the market – thereby crystallising the loss and missing the bounce. Which you might do if your Regulator was saying you had too much in equities.

Author: Aidan McLoughlin

_________________________________________________________________________

Disclaimer: 

• The opinions expressed are those of the individuals rather than Independent Trustee Company.
• Independent Trustee Company does not take responsibility for the accuracy of any content.
• The contents cannot be construed as advice.
• We would strongly suggest that any information provided should be discussed with your financial adviser before any action is taken.