Ireland

On March 3, 2010 the Irish government released the National Pensions Framework, which sets out its intentions for the future direction of the Irish pension system. The framework addresses a number of issues that threaten the fiscal sustainability of the pension system by 2050, including a tripling of the number of persons older than age 65, an increase in public spending on pensions (from 5.5% of gross domestic product to almost 15%), and a decline in the number of workers supporting each pensioner (from nearly 6 to less than 2). The framework aims to increase private pension coverage, especially for low- and middle-income groups, and maintain state support for pensions.

Key elements of the framework include:

  • Gradual increase in the retirement age.The age to qualify for a contributory state pension would rise from 66 to 67 in 2021, to age 68 in 2028. The existing state transition pension, payable from age 65 to 66 for individuals not in paid employment, will be abolished in 2014.
  • Replacement rate for the state pension.The contributory state pension would remain the core of the pension system, maintaining a level equal to 35% of average earnings.
  • Automatic enrollment in the new supplemental pension plan.Employees aged 22 or older would automatically be enrolled in a new national defined contribution (DC) pension plan, which is designed to supplement the state pension. Employees could opt out of the plan after 3 months, but would be reenrolled after 2 years. Although opting out would be possible thereafter, the government would give a one-time bonus to those who contribute to the new plan for more than 5 years without a break. Contribution rates (as a percentage of employee earnings) under the new plan would equal 4% from employees, 2% from the state (equaling 33% in employee tax relief), and 2% from employers. Employers providing DC plans with higher contribution levels or a defined benefit (DB) retirement plan would not be obligated to enroll their employees in the new system.
  • Occupational pensions. Tax relief for employee contributions to existing retirement pensions (currently ranging from 20% to 41%) would change to 33% for both DC and DB occupational pension plans. From 2011, DC plans would have more streamlined and standardized provisions for the drawdown of funds at retirement.
  • Public service pensions.A new retirement system was introduced for all new hires, providing a pension based on career average earnings rather than the existing calculation based on final salary. This includes a new minimum pension age of 66, which will be linked to the state pension age, and a maximum retirement age of 70.

Later, on December 15, 2010 the Irish parliament approved an 85 billion euro (approximately US$ 113.4 billion) bailout package with the European Union and the International Monetary Fund, including a 10 billion euro (approximately US$ 13.3 billion) contribution from the National Pension Reserve Fund (NPRF). The bailout requires Ireland to deal with losses incurred by the Irish banking system and to restore prospects for growth following the recent financial crisis.

To comply with the bailout package requirements, a law was passed that allows the government to skip annual contributions to the NPRF (previously 1.5% of gross national product) and transfers power to direct NPRF investments (24.4 billion euros, or approximately US$ 32.6 billion, at the end of 2010) from a separate commission to the Ministry of Finance. In addition, separate laws introduced major changes in the tax treatment of retirement savings including:

  • Employer contributions to both public and private pensions are no longer fully tax deductible for the employer and are treated as taxable income to the employee.
  • The exemption from contributing to the public pension system for employees earning less than 352 euros (approximately US$ 470) per week was eliminated. All employees are now required to contribute to the public pension system.
  • Tax relief for employee contributions paid to private pension plans is reduced. Previously, employee contributions to approved private pension plans were fully tax deductible up to the individual’s income tax rate. While employee contributions will still receive tax relief, the maximum allowable rate will be gradually reduced—from 41% to 34% in 2012, to 27% in 2013, and to 20% in 2014 and subsequent years.
  • The maximum annual earnings on which employee contributions to private pensions are permitted tax relief is reduced from 150,000 euros (approximately US$ 200,216) to 115,000 euros (approximately US$ 153,499) for contributions made after December 31, 2010. In addition, the lifetime upper limit on tax-favored retirement savings is reduced from some 5.4 million euros (approximately US$ 7.2 million) to 2.3 million euros (approximately US$ 3.1 million).
  • The limit on tax-free, lump-sum withdrawals was reduced to 200,000 euros (approximately US$ 266,954). Lump-sum withdrawals of 200,000 euros to 575,000 euros (approximately US$ 767,493) are taxed at the rate of 20% in 2011, while lump sums in excess of 575,000 euros are taxed at the highest marginal tax rate of 41%.

 

 
Article with courtesy of Social Security Online
 
Sources: National Pensions Framework, Ireland Department of Social and Family Affairs, 2010; "New Auto-Enrollment Pension Scheme to be Introduced from 2014," Ireland Department of Social and Family Affairs, March 3, 2010; "Full Text Analysis of the National Pensions Framework Paper," Mercer, March 4, 2010, "Opposition Condemns Use of Pension Fund in €85 Billion Bailout," Irish Times, November 29, 2010; Global Benefits Legislative Update, Mercer, December 2010; "Irish Parliament Approves Bailout and IMF Ratifies the Program," Roubini Global Economics, December 16, 2010; "New Law Allows a Halt to NPF Contributions," Global Pensions, December 17, 2010; "Significant Changes in the Tax Treatment of Pensions and Share Schemes Due to Take Effect in 2011," IBIS eVisor, December 29, 2010.

 

 
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