Opening Address by the Minister for Finance Mr Brian Cowen T.D. “Retiring Ireland - the next generation”

Leading Advisor Conference 2006

Wednesday 10 May 2006

Introduction

I would like to thank you for the opportunity to make the opening address to your conference today on the theme of “Retiring Ireland – the Next Generation”.

In common with the developed world, Ireland faces profound challenges in responding to population ageing.  Today’s conference provides an opportunity to better understand the choices which that challenge presents for all of us. 

In my brief remarks this morning I would like to touch on some themes that should inform our consideration of the ageing issue – both today and on an ongoing basis.

Challenge of population ageing

While demographic forecasting can almost be as inexact a science as economic forecasting, we can be certain that the combined impact of increases in longevity and low birth rates will in the course of this century have serious implications both for my business - of planning for the future costs of pensions, health and long-term care - and for yours.

The long-term public expenditure implications of population ageing have been the subject of detailed examination by my Department, as reported in Ireland’s Stability Programme Update published at budget-time last December.  The projections are that public spending on pensions, health and long-term care is set to increase from 11.2% of GDP in 2005 to some 21.3% in 2050. 

There is inevitably a high degree of uncertainty associated with assumptions on, for example, employment and productivity growth that yield projections over such a long time horizon.  However, the underlying picture is clear-cut.  Population ageing presents all of us with very fundamental questions regarding the type of society we belong to, the responsibilities of the State and the individual and the delicate balance to be maintained to ensure both economic and social sustainability. 

In that context, supporting the long-term productive potential of the Irish economy is central to the Government’s strategy of ensuring the long-term sustainability of the public finances to meet long-term public expenditure needs. 

It is essential to reiterate the importance of competitiveness to realise the economy’s long-term growth potential and to provide the resources necessary to maintain living standards and quality of life for those in retirement.  This is not an abstract objective – what it means in practical terms is that unless pay increases in the Irish economy evolve in line with the average of our main trading partners, the potential growth rate of the economy is being eroded.     

Pensions in Ireland

We are fortunate in Ireland, in contrast to many other developed economies, that on account of the delayed onset of our “baby boom” and the current balance between State and voluntary private pension provision we have a little more time and some greater degrees of freedom in identifying the appropriate path to meet the long-term retirement income needs of our society.

That of course is not grounds for complacency.  The Pensions Board’s figures published in the recent National Pensions Review sets out clearly the scale of the financing challenge that we face in the pensions area.  For example, the Board forecasts that annual social welfare pension costs will rise from their current level of 3.0% of GNP to 10.1% of GNP by mid-century with public service pension costs projected to climb from 1.3% of GNP to 3.7% of GNP over the same period. 

Other countries are prepared to make some tough choices for the public good in the pensions area.  We should not shy away from whatever decisions and actions we conclude are required - in full knowledge that there are no off-the-shelf or quick-fix solutions.      

Fundamental Role of the Social Welfare Pension

I would like to emphasise today the role of the social welfare pension which is a cornerstone of our pension system overall.  In essence, it provides:

• a minimum level of income for those with no additional provision; and
• a significant platform to build on for those with supplementary pensions. 

As you are aware, significant improvements have been made in the level of benefits over recent years.   The Government’s priority remains to maintain the role of the social welfare pension in providing a basic retirement income and we have clearly set out the next milestone in that regard.

National Pensions Reserve Fund

In prioritising increases in the level of the State Pension it is incumbent on us to ensure that those increases are sustainable in the long term.  The Government has responded to this essential requirement by the establishment of the National Pension Reserve Fund (NPRF) in order to help secure the State pension system in an environment where the burden of pensions on the taxpayer is set to rise substantially over time.  It is projected that the fund will be equivalent to €140 billion, 40% of GNP, in 2025 - the first year of drawdown. Compared with the alternative of paying down the national debt, the State is estimated to be already better off by €2.1 billion from the establishment of the Fund. 

The NPRF is, I believe, an excellent demonstration of prudent provision and sensible planning for the future based on a balanced assessment of future scenarios. 

Future Direction of Pensions Policy

I previously referred to the recent National Pensions Review which contains many recommendations for enhancing our pension system, which I am sure will provide a fruitful and thought-provoking source of debate for today’s conference.   The Pension Board’s report certainly provides a good base for the consideration of the overall pension situation.  It must, of course, must be examined in a wider context of employment interests, competitiveness and overall economic and social considerations.  It goes without saying that the assessment of all options must be strongly evidence-based and fully informed by proper analysis and costing of options. 

The current state of play in the international debate emphasises that there is no magic solution to the pensions issue; given objectives can be secured in different ways.  We must tailor our national approach to pensions in light of the distinct needs and characteristics of Irish society and of the economy building on what we have already achieved in the pensions area.

Finance Bill Pension Initiative

A focused and targeted approach was adopted in the recent Finance Act to the design of the scheme for incentivising the conversion of SSIAs into pension contribution.  Top-rate taxpayers already benefit from considerable incentives to promote pension savings.  The purpose of the new scheme – the first time any Minister in any Government has taken a step to incentivise pension provision for lower earners – was to focus on improving pension coverage for that group that currently are not saving for retirement.  I am hopeful that significant numbers of these individuals will see that there is a real long-term benefit in continuing the savings habit developed under the SSIA scheme.  This will supplement the significant support provided to almost half the workforce benefiting from tax relief for pension contributions.

Key Role of the Pensions Industry

Irrespective of the shape of our pension system for the future, it is of course incumbent on the pensions industry to ensure transparency and, without over-simplifying, reduce complexity in the personal pension products offered on the market.  The cost of personal pensions – particularly what are termed hidden costs is also a critical issue for the industry.  The availability of attractive, competitive products has a clear potential to make a tangible difference to individuals’ decision-making in the pension arena. 

Developments in financial sector

New savings opportunities should flow from the development and deepening of the financial sector generally.  This will be intensified over time by the creation of a single European financial market and through product innovation and greater research and development in the financial sector.  Increased competition on a cross-border basis which will ensue from greater retail integration of European financial markets will provide consumers with improved choice of competitively-priced pension products tailored to individual preferences and appetite for risk.

Conclusion

In conclusion:

• we need to be pragmatic and practical in mapping out the future direction of public policy in response to population ageing;
• we need to be equipped to respond flexibly and imaginatively to the unexpected and unforeseen changes in our society that the ‘greying’ of Ireland’s population will undoubtedly generate;
• we need to recognise and seek to accommodate appropriately within our policy framework individual decision-making on retirement income planning; and
• finally, we need to remain clearly focused on lower-income households who may be poorly prepared for retirement - building on the initiatives such as that contained in the recent Finance Act - to bridge this savings gap. 

Thank you for your attention - I hope that your proceedings today will help provide some interesting fresh insights and perspectives.

 

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