Colm’s columns

Colm Rapple
Irish Mail on Sunday, March 7, 2010

Pensions are set to become a hot election issue next time round. The Government can not deliver on the plans it unveiled during the week in advance of the next election that has to take place before July 14, 2012. Only a few of the proposed changes will have been introduced by then. The first increase in pension age isn’t to come into effect until 2014, neither is the proposed auto-enrolment pension scheme for those without private pension cover. There is unlikely to be any change in tax relief before then, either.

So there is plenty of time for the opposition parties to come up with their own variations of the Government’s National Pensions Framework.  There are many alternatives to the proposed changes. The electorate has the right to expect concrete plans and also an indication of how Fine Gael and Labour would reconcile their different approaches. Given their ideological predilections, their proposals will undoubtedly be different.

The electorate should demand concrete rather than fudged proposals. The issues involved are not complicated.

The changes to be introduced by 2012 are not particularly contentious. They include changes in public services pensions. Most will apply only to new entrants. In particular, their pensions will be based on average earnings over their years of service rather than final pay. More contentious is the suggestion that the post retirement increases for all public servants would be related to consumer prices rather than pay rates but that’s obviously open to negotiation with the public sector unions in the context of general public sector reform.

Private sector workers in defined contribution schemes have currently to use the bulk of their depleted pension funds to buy an annuity on retirement. They are to be given the option — already available to the self-employed and in respect of additional voluntary contributions (AVCs) –  of transferring that money into an approved retirement fund and drawing it down as they see fit.

That change is long overdue but there is no mention in the Government proposals of the complementary or alternative option of the State providing annuities at guaranteed rates. This failure is indicative of the overall thrust of the Government’s proposals. They are clearly designed to discommode the private pensions industry as little as possible.

The industry was successful in fighting off compulsory pensions in the past pushing voluntary PRSAs as a way of extending pension coverage to that 50% of workers who have no company or private pension cover. It was evident to anyone that had a bit of sense that it wouldn’t work and it didn’t. But they are still fighting shy of real compulsion and want to retain the management of the funds. The Government has agreed, although there is no reason to believe that this approach will be any more successful than the last.

The auto-enrolment pension scheme will not be compulsory. All workers over 22 who don’t have adequate private pension cover will be automatically signed up but after three months they will be able to opt out although after six months they’ll have to leave their money in the pension fund. That’s not compulsion. Many low income workers are likely to see it as a forced saving scheme providing a lump sum for Christmas or the holidays after three to six months.

For every 4% of pay put in by employees, the employer will contribute 2%. Pay is likely to be defined as anything between €127 and €1,000 a week. That’s a lot less than most employers with occupational pension schemes contribute. So there is a great danger that employers who might have considered setting up their own schemes will opt for this cheaper State version instead while many with existing schemes will close them at least to new entrants.

The end result will be less rather than more pension cover.

It’s right that the contributions should be collected through the PRSI system. Even the pensions industry would agree to that. It’s a cheap and effective collection system. But having collected the money it shouldn’t be transferred over to private pension fund managers. If people are to be encouraged to put money into acquiring pension rights or encouraged to accept a totally compulsory scheme, they need a greater degree of certainty than any private pension fund manager can currently offer.

The solution, which hopefully at least one of the opposition parties will promote and promise to introduce, is a totally pay-related State scheme supplemental to the current PRSI State pension. The extra contributions collected through the PRSI system should be retained and managed by the State to provide a minimum pay-related top-up to the State benefits for all citizens.

The money could be used partially to pay pensions on a pay-as-you-go basis and partially as a pre-funded source of extra finance to cover the inevitable bad years when revenue into the scheme was reduced. The State would, in effect, be guaranteeing basic pensions, partially related to what people had contributed over their working lives and partially related to what society could afford at the time.

That ideal should form the basis of an alternative to the Government model that some political party will hopefully put to the Irish people at the next election.

Colm Rapple
Irish Mail on Sunday, February 8, 2009

It may shave €1.4 million off the public sector pay bill, but the “pensions levy” proposed by Taoiseach Brian Cowen during the week, is patently unfair. It takes no account of widely differing pension entitlements among public servants or of the way those entitlements have influenced benchmarking pay awards. And although the levy appears to bear heaviest on those with higher incomes, the opposite is actually the case when tax relief is taken into account.

A more honest approach would be to simply cut pay on the basis of a sliding scale that would exempt those on low incomes while taking significantly more from those on higher incomes.

In the longer term a fair pension levy related to actual pension entitlements might be devised although the ideal would be to take differing pension entitlements into account in pay rates. The actual value of pension entitlements should have been built into last year’s benchmarking pay awards but, at the behest of the Irish Congress of Trade Unions, they weren’t.

The cost of pensions, according to a report commissioned by the body, varied from a low of 12.4% of pay in the case of some low paid public servants to a high of 32.9% in the case of gardaí. But instead of  taking account of the actual cost of pension entitlements for each group of workers, Congress got the benchmarking body to use an average which was calculated at 20%.

So for the pay determination exercise, the low paid were taken to enjoy pension entitlements worth 20% of pay although they are only really worth 12.4%.

Gardaí are a special case but that 20% average used by the benchmarking body is also certain to greatly understate the true cost of the pension entitlements of top public servants who will normally have spent many years at the lower rungs of the ladder but whose pensions are based on final pay. The opposite is true of staff nurses whose pension entitlements were estimated to be worth only 13.8% of pay mainly because most of them tend to remain at that grade for most of their working lives.

So the recommendations in the latest benchmarking report, while taking some account of pension entitlements, were greatly skewed in favour of the better paid.

That fact highlights the inequity of imposing a supposedly pension related levy simply on the basis of pay while taking no account of all the other factors that go into deciding the value of pension entitlements.  Although public servants will automatically be given tax relief on their levy payments, they are clearly not pension contributions and are in no way related to pension entitlements.

The proposal envisages three rates of levy: 3% on the first €15,000, 6% on the next €5,000 and 10% on the balance. That implies that there will be no exemption for those on very low incomes.

According to Department of Finance figures there are 55,000 public servants on less than €30,000 a year and another 74,000 on between €30,000 and €40,000. So let’s for example take the case of a married man on €35,000 whose wife is not earning. He would be liable for a levy of €2,250 a year or 6.4% of his gross income of €35,000. He’s unlikely to be liable for income tax so won’t qualify for tax relief but will get some relief from PRSI and health contributions. That should reduce the impact of the levy from 6.4% to just over 6%. That’s assuming he’s paying full rate PRSI, as he would if he joined the civil service after 1995.

His boss on €150,000 a year will be subject to a gross levy of 9.2% but will be eligible for tax relief at the top rate of 41% together with relief from a 2.5% health contribution. That brings the effective rate of levy down to 5.2%.

The effective rate for someone on €300,000 will be 5.4%.

So a public servant on €35,000 will be paying an effective levy of 6% while someone on €150,000 will be paying 5.2% and a top earner on €300,000, 5.4%.

That’s hardly fair or progressive without even taking into account the fact that the pensions of higher paid public servants are likely to be costing the taxpayer much more than the pensions of the lower paid not only in absolute amounts, as is obvious, but also in percentage terms.

It’s unlikely that Messrs Cowen and Lenihan are going to back down on their proposals although there may be some room for adjustment at the edges particularly in exempting low earners from the imposition. Even if that is done, however, the package as a whole will remain grossly unfair.

It was possibly right and fair that public sector pay should be cut as a first step towards getting the State finances back into order. Most private sector workers have already suffered, if not job losses or pay cuts, then a sharp erosion in the value of their pension funds. On average Irish managed pension funds values have declined by a third over the past year and are now worth less than they were ten years ago.

But the measure should have been better targeted to ensure that those who have most bear proportionately more of the burden, not the other way around.

Colm Rapple
Irish Mail on Sunday, January 11th, 2009

If you are 30 and starting to save for your retirement the Pensions Board estimates that you need to put aside about 18% of your pay each month to fund a pension of two-thirds final pay when you are 65. That two-thirds of final pay would include your social welfare pension.

That’s only an estimate, of course. There are no certainties. It’s based on an assumption that you’ll earn an average 5% annual return on your accumulating pension fund.

Of course, you might. But recent fund performance wouldn’t inspire you with any confidence. Irish pension funds fell by between 30% and 39% in value last year wiping out all of the gains made during the good tiger economy years. They are now valued at much the same levels as they were ten years ago. Fund values would need to have risen by 40% since 1998 just to maintain the purchasing power of the invested money so in real terms values have fallen by 40% over the ten years.

Of course past performance can not be taken as a guide to future performance, and it is possible that starting from their current low ebb, pension funds may achieve an average return of 5% over some future period, as they have over many past periods. There were individual years when returns of over 20% were achieved so over the long-term an average annual return of 5% is certainly achievable.

But it is by no means certain, and we now have ample evidence of the very real risk involved in pension fund investment which, of its nature, involves a fixed or almost fixed maturity date.

Tax relief can help to cushion that risk, particularly for top-rate taxpayers, but it is still a major risk which fewer and fewer people are going to be willing to take. And this at a time when the Government is planning pension initiatives aimed at encouraging people to save more for their retirement.

It’s little wonder that the long-awaited Government policy document on pensions, which was to be published last year, has still not being finalised. According to the Department of Social and Family Affairs, which is responsible for preparing the proposals that will go to Government, it is still being worked on. But the hope is that it will be published “early this year”.

The need for a radical change in pension policy has been obvious for years but all we’ve got has been a succession of study after study, report after report. The present system suited a range of influential interest groups ranging from the pension industry to the public sector mandarins. Decisions were long overdue even before the onslaught of the current financial crisis.

But if the lessons from the current financial turmoil are built into the long-term national pension strategy, the long delays may have served a useful purpose.

It’s now very clear that no amount of regulation can reduce to an acceptable level the risks inherent in current private pension schemes. Markets have proved to be too volatile, funding standards inadequate in the face of that volatility. Those risks are going to become increasingly obvious to those already in pension scheme and effectively scupper hopes of encouraging those currently outside the pensions net from ever joining.

Even the best defined benefit pension scheme operated by larger companies are not immune from risk as Waterford-Wedgwood workers in Ireland, Britain, Germany and Japan unfortunately realised this week.

The latest group accounts show that there was an estimated deficit of €148 million in the group’s pension funds on April 5 last. At that stage almost half of the €705 million assets of the funds were invested in equities which have suffered very sharp downturns since. Total fund liabilities amounted to an estimated €853 million.

There is a hope that new owners will take over the pension fund liabilities but no doubt they’ll look for other concessions in return. The extent of any Irish shortfall is not itemised in the accounts which combine all the pension scheme together. In Ireland, unlike Britain, we don’t have a compensation fund to cover such shortfalls. Any shortfall will be borne by those still in employment.

It’s too late to start shutting that particular stable door and the problem is not going to be solved by putting greater obligations on those companies with defined benefit scheme to meet their open-ended obligations. Such pressure would only result in pension schemes being closed off.

The only sensible solution is for the State to take over total responsibility for pensions. It might sound like a loony left solution but then only a few months ago so too did the nationalisation of banks.

Most of the submissions on the Government’s discussions paper issued a couple of years ago urged some degree of State involvement. There were calls for a new system of tax relief, improved social welfare pensions, guaranteed annuity rates,  compensation funds etc. etc.

It would be better to go the whole hog and simply nationalise the pensions industry. The State already takes responsibility for the pension entitlements of public servants so why not extend that to the private sector. Pension contributions should be made compulsory and collected through the existing and very efficient PRSI system. It would be far more cost effective than the current system and provide a far greater degree of certainty to all involved.

Colm Rapple
Irish Mail on Sunday, December 7, 2008

Pensions have always been way down the agenda at wage negotiations. Even in the broader context of national agreements, little more than lip service is paid to the need to improve, protect and extend pension coverage. Employers don’t want the extra cost and the trade union negotiators know that most of their members regard pensions as a low priority item.

So instead of moving forward, we’ve been slipping backwards.

Existing pension scheme members have been all too willing to accept the closing off of their own favourable defined benefits schemes for new recruits, to secure some short-term gain for themselves. And all too often the trade union establishment acquiesced when they should have been keenly aware of the broader implications.

But pensions were always a low priority. When PRSAs (Personal Retirement Savings Accounts) were introduced, the larger trade unions could have negotiated very favourable deals for their members. They didn’t. And many unions hive off responsibility for advising members on pension AVCs (additional voluntary contributions) to fee charging financial intermediaries who, as a Prime Time programme recently showed, may not always provide adequate advice.

Real pressure for improvements was never applied in the negotiation of national agreements. All parties generally agree that pensions are important, that all retired people should have an adequate income and that the coverage of pension schemes extended. The long-standing target is to have 70% of the population over 30 years of age in some form of occupational pension scheme.

But the issue is then conveniently sidelined. That’s easily done given the long-drawn out process of developing Government policy in this area. Reports have been coming thick and fast for decades. A final Green Paper was published by Martin Cullen who had responsibility for pensions as Minister for Social and Family Affairs. He promised to unveil policy initiatives by the time the Dáil rose for this year’s summer recess.

But he was succeeded by Mary Hanafin and to help put her stamp on the issue, she hosted a conference last April which she described as marking the end of the consultation period. “The Government is determined” she said, “to bring this process to a successful conclusion by the end of the year by publishing a framework for pensions policy that will deliver a pension income for all our people which will allow for the type of retirement we all aspire to.”

Surprisingly this promise wasn’t mentioned in the thick of the latest scare created by the leaking of a memo from Minister Hanafin to her Cabinet colleagues. The timing could have something to do with efforts to influence government decisions.

The problems highlighted in the leaked Government memo that created the scare, are not new. They existed and were recognised long before asset values hit bottom earlier this year. It’s time they were tackled and tackled in a way that enhanced rather than diminished pension entitlements.

The ideal should be to provide all private sector workers with the type of pension security enjoyed by civil servants. That is best done through defined benefit pension schemes where the pension is based on final salary and years of service. But such schemes create problems for employers. Worker contributions are usually fixed as a percentage of pay and employers face an indeterminate liability to make up the rest.

When investments are doing well they can cut their contributions and even take contribution holidays – many large companies were able to do that in the not too distant past. And market downturns need not be catastrophic for larger pension schemes with a good age mix of  members, if they are allowed to take a long term view. But they are not.

The Pensions Board requires pension schemes to have sufficient assets at any point in time to cover liabilities to members if the fund has to be wound up. It’s an understandable and prudent requirement. Companies do fail. But most don’t. The Board does allow some flexibility but more is obviously needed.

It might not stop employers closing off their defined benefit scheme to new members but it might slow the process down by giving them one less excuse for so doing.

But that’s only one of a multitude of pension issues that the Government has to tackle and the quicker the better. This week’s decision to give members of defined contribution schemes two years from pension date to buy their annuity is only tinkering at the edges of the many problems that exist.

Employers are fearful that they will be forced to make pension provision for all workers yet it’s very clear that the only way to extend pension coverage is by compulsion.

The easiest, cheapest and most effective solution would be to simply extend PRSI, the State social insurance scheme. It already provides pensions to most workers. The collection system is in place and operated by all employers and, the existing National Pension Fund offers ideal investment vehicles from the very risky to the very safe.

Of course, there is no money in that for the pensions industry and a few months ago any move to even partially nationalise pension provision would have been unheard of. But not now when even hardened right-wing commentators are calling for bank nationalisation.

The time may also be ripe for major changes to the iniquitous system of tax relief on pension contributions whereby the greatest benefit goes to the highest earners.  Ignoring charges, a standard rate taxpayers pays €80 for the same pension benefit that a high rate taxpayer gets for €59.

Pensions are going to be in the news for some time.

Colm Rapple
Irish Mail on Sunday, 12th October 2009

The Government’s decision to divest the over 70s of their medical cards confirms, if confirmation is needed, that the PD philosophy is alive and well and that Mary Harney is still punching above her weight. Her ideal is clearly a market led health service with individuals paying their own way and the State’s role confined to providing a safety net for those at the bottom. The original decision to give out medical cards to the elderly irrespective of means was informed by an entirely different ideology.
Of course, taken in isolation, it doesn’t seem fair to provide free medical care to all over 70s irrespective of income. But it’s perfectly justifiable if seen as one small step towards achieving an ultimate objective of free medical care for all. That’s not an impossible dream. If a poor country like Cuba can do it, there’s no reason why we shouldn’t at least aspire to do likewise. And it has nothing to do with the political system.
It’s not an objective that could be achieved overnight and perhaps never. There would always be a need for some charges, if only to discourage waste and abuse, and the tax system used to fund the benefits would have to be accepted and seen as equitable. But, on the basis of the PD’s electoral support and the reaction to Mr Lenihan’s Budget day announcement, there’s a lot more support for a universal health care system than there is for the free market model. We should at least be trying to move in that direction.
Why shouldn’t medical care be free at the point of delivery. Much of it already is, just as many other State services are provided free of charge. Householders don’t have to pay for their water supply or their waste water disposal. You can walk down the street or enjoy a stroll in the local park without charge. Individuals don’t get electricity bills for their street lighting and free education is available to all irrespective of their incomes or wealth.
The notion that this draconian change was needed to save cash is simply not sustainable. The €100 million saving that it’s is supposed to yield in a full year could be raised in many different ways. It’s a relatively small sum in the context of the overall budget.
Capital Gains Tax has gone up from 20% to 22%. The change came into effect from midnight on Budget day. Brian Lenihan felt that he has to excuse the increase, justifying it as a quid pro quo for the stamp duty concession he had handed developers by cutting the top rate on commercial property transactions from 9% to 6%.  The stamp duty change will cost €180 million a year while the capital gains tax change will bring in €160 million.
The developers are going to gain more on the swings than the Exchequer gains on the roundabouts. So why didn’t Mr Lenihan go that little bit further. Raising the gains tax rate to 23% would yield an extra €80 million and the rate would still only be equal to the new rate of DIRT that even small savers will have to pay on their deposit interest. Putting it up to 24% would yield an extra €160 million, more than enough to make the medical card change unnecessary.
That would have been a simple and equitable option. But there are plenty of other alternatives. Putting an extra 1% on the top income tax rate would yield almost €300 million in a full year. That would only bring the top rate back to where it was in 2006. It was only reduced to 41% in January 2007.
And had he really wanted to catch those who gained most from the Celtic Tiger, Mr Lenihan would have introduced a new surtax rate of anywhere between 45% to 50% on  the top slice of high incomes. Combined, those changes could well have yielded enough additional funds to replace the inequitable levy on all income.
Indeed that would have the added benefit of clawing back some of the gains made by those doctors who have done so well from the medical card scheme over the years while also taking money off the high court judges, ex-ministers and property tycoons that Government spokesmen have been so anxious to take medical cards off.
If none of those alternatives suited, the easiest and least painful option would have been to deduct €100 million from the €1.7 billion contribution earmarked for the Pension Reserve Fund next year. Of course he’d have been better taking a contribution holiday and using all of that money to ease his budgetary problem.
In effect the €100 million that will be saved by taking medical cards off the over 70s will be given to the National Treasury Agency to be invested on the world’s stock markets and not touched until 2025.  At that stage it is more likely to be used to finance civil service pensions. Public sector pensioners will certainly have first call on it.
The €100 million certainly isn’t being used to extend medical card coverage to other more “deserving” medical card applicants. The means test thresholds for the under 70s are not being increased. They haven’t changed since July 2006, so those who were on the borderline at that time will now find themselves ineligible because of a small pay increase. So it’s not only the over 70s who will be losing their medical card entitlements.
Mail@ColmRapple.com

Colm Rapple
Irish Mail on Sunday, July 20, 2008

Finance Minister Brian Lenihan won’t raid the National Pension Fund to help ease his budgetary problems. So he says. So what? Nobody said that he should.  The word “raid” suggests robbing the fund and frittering away the money. That would be stupid. But there are other options. Mr Lenihan could, for instance, take a contribution holiday. That would save the Exchequer about €2 billion a year – money that could greatly ease the need for cut-backs particularly in areas such a health, social welfare and education.

Of course, the opportunity should still be taken to trim some of the fat from the system. Undoubtedly a lot of fat has accumulated during the recent Celtic Tiger years when the Exchequer was flush with money.

But there are signs that some cuts are biting into the flesh. State services are going to be curtailed and the productive potential of the economy eroded. There was a small but significant indication of what may lie ahead this week with the announcement that third level grants were not to be increased for the coming term while the means-test income thresholds are being increased by only 2.8%, far less than the rate of inflation. That means that fewer students are going to qualify for a grant.

As a sop the special low income threshold under which a student qualifies for a top-up grant of up to €3,270 is being raised from €11,055 to €20,147. But not many students from families with incomes that low ever get to third level.

Grant levels may be increased in the December budget but the thresholds won’t.

If money had to be saved it would have been easier to reform the whole third level grant system which is riddled with inequities and anomalies. In particular the means test favours the wealthy and the self-employed who are able to adjust their incomes to ensure that their offspring qualify. That’s make easier by the fact that assets are ignored in the means-test.

The policy imperative should be to encourage greater participation in third level education. But it’s clear that Education Minister Bart O’Keefe’s objective is solely to save money.

There’s doubtless worse to come and taking a holiday from our national pension fund contributions could help to ease the pain and economic damage.

Alternatively some of the near €20 billion in the fund could be switched out of foreign stock markets and invested instead in developing Irish infrastructural assets that could yield every bit as good a return.

Those were suggestions made in this column some weeks ago when it was reported that the Fund had lost over 10% of its value during the first quarter of the year and that those losses were continuing.

The official figures released this week confirm that prediction. The value of the fund has fallen by 12% over the six months – a drop of about €2.6 billion.

While the investment performance has been dismal, the fund has fared better than the average Irish managed pension fund. Taking the long-term view, that pension fund managers can afford to take, the current downturn may be seen as a somewhat large blip, but blip none-the-less.

The money in the fund is to be used to help finance the State’s pension obligations from 2025 onwards so the investment managers are justified in taking a long term view and investment performance is not the issue at present. But it is still legitimate to question the fundamental investment strategy and, perhaps more urgently, to question the wisdom of actually borrowing to finance the one per cent of national income that the Government is committed to put into the fund each year. Because that’s what is going to happen this year and next and maybe even the year after.

When the fund was established, our politicians rather stupidly agreed that, in each and every year until 2025, the Exchequer would contribute one percent of national income. There is no doubt that the Merrion Street mandarins had a hand in getting the Dáil to sign away it’s discretion in the matter. It can be changed, of course, but not by a simple budgetary decision. It would require a specific vote of the Oireachtas.

In the buoyant Celtic Tiger years there was no great problem about putting one percent of national income aside each year but the State finances were obviously going to fall into deficit at some stage before 2025 when the first pay-outs from the fund will be made. So it was crazy not to give subsequent finance ministers a more easily applied discretion to postpone, reduce or completely cancel contributions to the fund as budgetary conditions required.

But the mandarins, of course, don’t trust the politicians. Not without reasons either. But the politicians are our elected representatives and they are supposed to call the shots. The mandarins have a personal interest in the fund, of course. While it is always stated that the purpose is to help fund social welfare and public sector pensions from 2025 onwards, the fact is that the first call on the fund will be for public sector pensions. Public servants have a contractual right to their pensions while social welfare recipients do not.

The investment strategy, of course, is also seriously flawed given that this is a State rather than a private fund. The performance of at least part of the fund should be measured not solely by the market value of the investments but rather by the total benefit conferred on the economy.

Colm Rapple
Irisih Mail on Sunday, 6th July 2008

While the mandarins in one section of the Department of Finance were preparing a list of potential spending cuts for this week’s cabinet meeting,  some colleagues in another section were pushing through increases in civil service expense rates and pension scheme improvements.

The improves mileage and subsistence rates came into effect  from Tuesday last, July 1, while the pension improvements are backdated to April 1, 2004.

They are both legitimate changes and would hardly be worth mentioning if it wasn’t for the fact that they were introduced just days before the revelation that tax revenue this year is expected to fall some €3 billion short of expectations while higher unemployment  is likely to add about €500 million to social welfare expenditure.

A private company faced with such a deteriorating budgetary position wouldn’t be giving the nod to higher mileage rates and improved staff pensions no matter how much they were justified by inflation in the case of the expenses or a desire to improve flexibility in the case of the pension change.

The Government, it seems, has decided to cut spending this year but by no more than is needed to meet the original spending targets set out in the budget. That’s the position at present. It may change on Tuesday when the Cabinet meets, but the current objective, it seems, is to offset the €500m extra social welfare bill by cuts elsewhere.

Mind you, there’s no question of us not paying enough PRSI to meet the extra bill for unemployment benefits. Contributions to the Social Insurance Fund this year were initially expected to exceed spending requirements by €548 million and that should be just about enough to cover the extra bill for unemployment benefit that’s now expected to emerge, even allowing for some fall-off in contributions.

Despite the doom and gloom the number at work this year is expected to rise but by about 13,000 rather than the 23,000 originally forecast. So PRSI contributions will fall a little while the bill for unemployment benefit will rise with the average claiming now put at 210,000 over the year, up from the 170,000 forecast at budget time.

But extra spending is extra spending, no matter where the money comes from. So it makes sense for the Government to try to save the money elsewhere. And the Department of Finance undoubtedly has a little list.  As outline previously in this column the obvious solution is to get the National Pension Fund to take responsibility of some capital investment but, even if that is done,  this is obviously an opportunity to trim a little of the fat that has undoubtedly accumulated in the public service during the Celtic tiger years.

The €500m to be saved this year amounts to only 0.8% of the Government’s total budget of €62 billion. But the saving has to be achieved in six months rather than a full year and out of the two-thirds of spending that doesn’t go on pay. So while small, it’s not insignificant. It could certainly be saved by simply trimming fat but those who benefit from the fat are already circling the wagons.

That’s obvious from those improved mileage rates and pension improvements.
It’s not unusual for mileage and other expense rates to be increased with effect from July 1 in any year. But the change is normally announced after that date.  This year the revision was announced on June 26th.  The increases themselves are nominal enough and can be well justified by inflation. But private sector workers, who often use the civil service rates as a kind of benchmark, may find it hard to negotiate similar increases with their employers in the current economic climate.

If you want to put in a claim the mileage rates have been increased by up to 4.4% while day subsistence rates are up 3.6%. Some of the mileage rates and overnight expense rates are up by far smaller percentages, however.

The point is not the amount of the increases but rather the fact that they seem to have been rushed through before the axe fell this week.

The pension scheme improvement benefits those who get extra allowances on top of their basic pay. Not all such allowances are included in pension calculations, but, where they are, the rule up to now was that, on retirement, the average over the last three years was taken into account.

Now, the pay during the best three consecutive years out of the last ten can be taken into account. So someone easing up on work in the years immediately prior to retirement can have their pensions calculated on the basis of higher past earnings. And those past earnings are adjusted upwards in line with pay increases.

It’s not a major change but it will mean a lot to some civil servants including many who have retired since April 2004. It’s a logical enough improvement but the timing is a tad insensitive.

Private pension schemes are under increasing pressure. Fund values fell by almost 21% over the past year. In the last month alone, the value of group managed funds fell by 7.8% bringing the average annual return for the past ten years to 2.8%. That’s less than the rate of inflation which averaged 3.8% a year over the same period.

Colm Rapple
Irish Mail on Sunday, 21st June, 2008

Over €2 billion was written off the value of the National Pension Fund during the first three months of the year and further severe losses will be revealed next month by the National Treasury Agency which is responsible for managing this national nest egg.

It’s our money, so we are all sharing in the losses, and those losses have been substantial. The loss up to March works out at about €500 per head of population. I don’t want to make you feel any poorer than you are. There’s enough doom and gloom around already and it is adding to our economic woes by dampening consumer confidence and thereby demand.

So, let me stress that while these losses are very real, they only exist on paper for the moment and it will be years before they hit anyone in the pocket. But there is a need to question the whole rational behind the National Pension Fund and consider whether we should continue to put 1% of national income into it each year and not touch it until 2025.

That was how Charlie McCreevy set it up in 2001. The Dáil agreed. The legislation was passed and it will take another vote to change it. This maybe the time to do just that.

Between this year and next some €4.5 billion is due to be put into the Pension Fund. With tax revenue falling far short of expectations, that money could be better used to maintain spending on the National Development Plan and on social programmes.

If the money is put into the Pension Fund it will have to be borrowed and that doesn’t make a lot of sense. The fact that the fund has been incurring losses simply underlines the case for at least taking a short holiday for these pension fund contributions just as any individual would do during a cash flow crisis.

Many individuals are, of course, facing sharp downturns in their own pension fund values but at least they’ll have had the initial benefit of tax relief on their contributions. That doesn’t reduce the losses but at least they may still be showing a reasonable return on their net contributions.

The return on the National Pension Fund has been abysmal.

The Government has poured over €18 billion of our money into the fund since 2001. But the fund managers, who have been getting very well paid to look after it, have been falling down on the job. All they have produced is an average annual return of a little over 4%. That could have been achieved by simply putting the money on deposit.

The National Treasury Agency is taking a long term view and would argue that, despite short-term volatility, stock market investment tends to yield a good return in the longer term. That’s true but good fund managers should be able to smooth out some of the volatility by selling when markets are turning down and buying on the upswing.

Only the lucky, of course, manage to sell at the top and buy at the absolute bottom but it’s hard to understand how only 3.9% of the fund was held in cash at the beginning of the year. That had increased to 6.4% by March but it still represents only a very small proportion of the fund.

Stock markets have plummeted over the past six or nine months. The Dow Stoxx600 index of European share values is down about 17% this year while US markets are down about 15% since last October. Other markets are similarly affected.

Of course, they will come back up again and the return on the fund will improve. But it’s not unfair to take the return over the past seven years and describe it as abysmal. There has been a fair mix of boom and bad years during that period.

The whole scheme was flawed from the beginning as Charlie McCreevy’s brain-childs often were. He foresaw the mounting exchequer surpluses and wanted to ensure that his successor wouldn’t be tempted to overspend. Mr McCreevy believes in curtailing government spending as far as possible. That’s why he got the Dáil to agree that the fund could not be touched until 2025

This is another flaw in the overall concept of the scheme. While we are all contributing to the fund through our tax euros, the first, and maybe only, claimants will be public servants whose pension entitlements are, quite rightly, copper fastened by work contracts. Social welfare pensioners, who get their annual increases simply by grace and favour, will be at the back of the queue.

It was initially proposed to have two separate funds but undoubtedly the civil service advisers who were promoting it, recognised that a single fund was better since they’d have first call on it, in any case.

But perhaps the most telling criticism that can be made of the whole Pension Fund concept is that the money is invested on the basis of strictly commercial criteria. Most of the money is invested abroad. There’s no doubt that it would yield a far better return if invested in social and economic infrastructure here at home. That’s what the Government could do if it took a moratorium on contributions for at least a couple of years.

Colm Rapple
Irish Mail on Sunday 11th May 2008

The Revenue Commissioners this week secured major additional powers in their fight against tax evasion. As he was clearing out his desk in the Department of Finance, Taoiseach elect, Brian Cowen, gave the nod to new regulations that require deposit takers to provide the Revenue with details of the interest paid on deposit accounts.

Fed into the Revenue’s already extensive data base, this new mass of information will undoubtedly help in the identification of tax evaders, but it also creates a worry for many totally innocent individuals and for many more who indiscretions are of a relatively minor nature.

Among those who could be hit are people on means-tested social welfare benefit who may not have declared all of their savings. Some means tests are reasonable but others are so inequitable as to positively invite evasion. For instance the spouse of someone entitled to a contributory pension will only qualify for a full depenant’s payment if he or she has savings of less than €30,000.

So a stay-at-home housewife, as many current pensioners were in the past, of necessity if not design, can be precluded from sharing in a husbands contributory pension entitlement if she has saved a little over the years from her housekeeping money or perhaps received a small inheritance.

These are not the sort of people that these new Revenue regulations are primarily designed to target but they could well be identified by combining social welfare records with this new information on deposit accounts.

Mind you the Revenue should also be able to identify people who are entitled to a refund of DIRT because they are over 65 and outside the tax net. Hopefully, identifying people who are paying too much tax will be as big a priority as catching those paying too little.

By definition there’ll be no extra tax due on the deposit interest reported to the Revenue. The DIRT already stopped satisfies all tax liability. What the Revenue hope to identify are deposits built up from money that was itself never declared for tax.

Effectively these new regulations will give the Revenue details of all deposits held by individuals in the State. Under an EU Savings Directive it already gets details of interest paid in most EU countries. Instead of providing information to other countries Austria, Belgium and Luxembourg opted to apply a withholding tax which is to rise to 33% by 2011.

In the past it would have taken a court order to get the information on domestic deposits and heaven knows what to get information from abroad. But the Big Brother society has become a reality and modern computing power makes it simple to compile and co-relate information from a wide variety of sources.

The Revenue Commissioners already have a wealth of information on individuals, businesses and transactions. From stamp duty returns they have the definitive data base on property values. Income tax provides them with detailed information on all incomes and personal circumstances including health spending. Other tax returns provide facts and figures on business activity. In recent years they have been able to supplement their data base with social welfare files.

So there was plenty of information but it was not always possible to bring that information together. Newly appointed chairman of the Revenue Commissioners, Josephine Feehily, recently referred to an old internal sayings “if only the Revenue knew what Revenue knows” while outlining the growing sophistication of its Big Brother computer programme Risk Evaluation Analysis and Profiling System – REAP for short.

By enabling the automatic collation of all data held on individual taxpayers this system enabled inconsistencies to be identified. The details of interest payments, that are now to be fed in, will greatly add to its effectiveness.

So what information is the Revenue to get under this new regulation.

Initially it applies to interest payments made by banks, building societies and the Post Office Savings Bank during 2005 and 2006 from which DIRT was stopped. So it won’t apply to An Post Savings Certs or Bonds where the return is not liable for DIRT.

By September 15 next the relevant financial institutions have to make a return to the Revenue of interest payments in excess of €635 a year providing the name, address, and date of birth of the account holder and the gross interest paid or credited to the account..

That minimum interest payment represents a return of 3% of a deposit of about €21,000. So deposits of less than about €20,000 won’t be reported but it depends on the interest being earned.

Initially the Revenue won’t have a tax number to help match up the deposit information with their existing data base but the financial institutions are required to provide tax reference numbers for all accounts opened after January 1 next or else highlight the fact that no tax number was given by the depositor.

Returns for 2007 have to be in by October 31 next – only a few weeks later than the 2005 and 2006 returns – while returns for 2008 have to be with Revenue by March 31 next.

Credit Unions don’t have to make returns for 2005, 2006 or 2007 but will have to make returns for 2008 in respect of interest payments. From 2009 a return will also be required in respect of dividend payments.

Most people have nothing to worry about but the net is closing ever tighter on the tax evaders, big and small. The Revenue won’t have the resources to zone in on them all but hopefully they will get their priorities right.

Colm Rapple
Irish Mail on Sunday, 27th April 2008

Brian Cowen is expected to offer the trade unions a cut in PRSI rates as part of a package to encourage the acceptance of moderate pay increases in the current round of national agreement talks that got under way this week. The cuts would be structured in such a way that the greater gain would go to those earning less than €50,000 a year while very high earners, on more than about €100,000, would end up paying more.

The idea is attractive from Mr Cowen’s point of view because the cost of PRSI cuts could effectively be postponed. Unlike income tax cuts they needn’t show up in the budget arithmetic for some years.

That ability to make the cuts appear cost-free is also appealing to those many trade union leaders who, despite the hard-line rhetoric, would much prefer to have a national agreement than a return to the tough grind of local pay bargaining. Brian Cowen’s proposal has the added advantage of seeming to favour middle and lower income groups at the expense of the fat-cats.

The trouble is that cuts in PRSI rates are not cost free. They will be financed out of the Social Insurance Fund which, while currently in surplus, is expected to be running at a deficit by 2010. Any cuts in PRSI will have to be made up in some other way.

The proposals aren’t new. They were part of the Fianna Fáil pre-election manifesto confirmed in the programme for Government that was agreed with the Greens. So they are already on the agenda of budgetary measures to be introduced as the finances allow.

The promise is to cut the current 4% rate of PRSI to 2% and to abolish the ceiling which is set at €50,700 this year. Private sector workers actually pay 6% of their income up to that ceiling level. But that includes a 2% health levy. The PRSI element is actually 4%.

The health levy continues on all income and the idea is that the new 2% rate of PRSI would also apply to all income. The maximum saving would be gained by someone on €50,700 a year. The PRSI would be 2% of that rather than 4% – a saving of €1,014 a year. That would be the maximum saving. Those earning up to €101,400 would still be paying less than they are now but the higher the earnings, the smaller the gain and on incomes above €101,400, the impact of the abolished ceiling would more than offset the gain from the lower rate.

There is also a promise to cut the self-employed rate of PRSI – already charged on all income – from 3% to 2%.

It’s obviously not a self-financing change.

PRSI is more of an insurance premium than a tax. While collected by the Revenue Commissioners it is paid into the Social Insurance Fund and used to finance social insurance benefits. It used to need an annual top-up from general tax revenue but for many years now it has been running a surplus.

This year the surplus is expected to amount to about €550 million with contributions and investment income amounting to €8.4 billion and benefits costing €7.85 billion. By end year the accumulated surplus will amount to €4.1 billion.

Back in 2002, when the Government’s financial position tightened a little, the then Finance Minister, Charlie McCreevy, couldn’t resist the temptation. He raided the social insurance fund taking €635 million to help balance his general budget. It was a reasonable option since the alternative was undoubtedly a cut-back in State services. Mr McCreevy would never have countenanced any tax hikes.

It was a once-off raid on the fund justified by a short-term need. The current proposal, however, represents a first, and seemingly irrevocable move, towards the abolition of social insurance as we have known it for decades. And it’s completely at odds with the current exhortation to workers to save more for their retirement.

The Social Insurance Fund contains the savings of workers and most of it is earmarked to pay social welfare pensions. Any reduction in PRSI contributions obviously reduces the amount of money available to pay benefits and, while the fund is currently well in surplus, an actuarial report published last year, estimated that the outflow of funds would start exceeding the inflow by 2010 and that the current surplus would be totally exhausted by 2016.

A core projection is that contributions need to be 78% higher over the next 50 years to adequately fund benefits. The actual shortfall is lower in the early years but it rises with time. But that report lay unpublished in the Department of Social and Family Affairs prior to the election when it might have informed the debate on the Fianna Fáil tax and PRSI proposals. It’s doubtful, indeed, if it even entered into the deliberations on the programme for Government. It was officially signed off by the authors on June 8 last – four days before the programme was finalised.

It didn’t get much publicity at the time but it should be read now by any trade unionist thinking of accepting a reduction in PRSI contributions as a quid pro quo for moderate pay increases. While a cut in PRSI rates could be hidden in the short term
by using up the existing surplus in the Social Insurance Fund the money would eventually have to be recovered through higher taxes. The concept of social insurance would have been destroyed and workers would effectively have been supplementing their income by dipping into their pension fund.

Brian Cowen should think again.