Fr Sean Healy, the knows-enough-to-be-dangerous-but-not-enough-to-talk-sense spokesman for Conference of Religious of Ireland Social Justice Ireland, has claimed that €1.4bn could be saved by reducing the pension income tax relief to 20pc.  But as usual he has the numbers wrong.

Would employees be taxed (as a BIK – Benefit in Kind) on the value of company contributions to pension scheme on their behalf?  If not, then I can see that as being a major source of leakage which would depress the tax yield from the proposal.

But if private sector employees are to be taxed on employer contributions, then surely state employees should be taxed on the imputed value of the state’s contribution to their pensions?  Now that would be interesting.

In a paper presented to the recent Dublin Economic Workshop, a leading pensions expert said the only way to get savings of €1bn by cutting the pension tax relief to 20pc was to also tax the value of the contributions made to pensions by employers. This would hit public servants hardest, he said.  The value of an index-linked pension is massive.  I could see a public servant earning €50,000 having to pay an extra €4,000 or so in BIK.  Would that breach the Croke Park Agreement?

Fr Healy also fails to understand that employee pension contributions do not benefit from a permanent tax saving;  on the contrary, they are put into a fund and are later taxed when the employee retires and draws them down as a pension.  By and large, the tax is just deferred.

So if I only get 20% tax relief when I put the money into the scheme, but am taxed at up to 41% when I withdraw it, then why on earth would I continue to make such contributions?

The real impact of Healy’s proposal would be to make it even harder for the State to persuade private sector workers to fund an adequate pension for when they retire.  And ultimately such under-funded workers would fall back on the State’s coffers for assistance.

Another example of the law of unintended consequences.

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I recall that an actuary once calculated that the capital value of the extremely generous pension benefits that Bertie Ahern was entitled to was €7 million.  The figure was particularly relevant at the time because the Government has just introduced a cap of €5 million for the private sector as the maximum value that could be funded out of tax-relieved contributions.  So that’s one law for the super-rich Bertie, a different law for the merely adequately rich private sector punter.

People who work in the public sector don’t seem to understand the huge capital value attaching to an index-linked defined-benefit pension, and the impact on that capital value of moving retirement age down even a few years.  I suspect this ignorance was a factor in the Richie Boucher pension fiasco recently: Finance Minister Lenihan signed off on a deal allowing Boucher to retire at 55, never dreaming that the real financial impact of this was €1.5 million.  Our leader (sic) Brian Cowen compounded matters by trying to deceive the Dáil and the public about what was really happening in the Boucher pension saga.

Same with the Roddy Molloy pension enhancement.  Molloy resigned from Fás after Tánaiste Mary Coughlan sweetened the exit package by adding five years to his pensionable service, and this outrageous gift was rubber stamped by Finance Minister Brian Lenihan.  All hell broke loose (and rightly so) when it transpired that the value of this gift to the disgraced Molloy was €1.4 million.  

Politicians just don’t seem to understand what the real cost of public sector pensions is.  But not only politicians; almost all public sector employees are blissfully unaware of what a pot of gold awaits them. 

I suggest that every public servant should be given an annual statement showing (a) the projected actuarial value of his/her accrued pension at normal retirement date, as a capital sum, together with (b) a statement of the effective contribution rate needed to generate that capital sum, as a percentage of salary.  This would show just how valuable their pension benefits really are compared to the modest contribution they are asked to make, and might help get their thinking straight.

I would go further: all politicians’ pensions should be put onto a defined contribution basis immediately, with (say) a contribution of no more than 10% of salary made annually.  Maybe then they would have a bit more empathy with private sector workers, and would be more careful in signing off on pension increments to rich bankers and dodgy semi-state directors.

Typical of many attempts to influence Government tax (or other) policy is a statement which is reported today, in which Mike Kemp, Chief Executive of the Irish Insurance Federation is quoted as saying :

“Up to 2,000 jobs in the life and pensions industry may be lost due to the Government’s planned changes to pension tax relief and the implementation of levies. Obviously, the threat of job losses is never good and should be avoided at all costs. And in the current climate I find it astonishing that the Government is willing to put these jobs at risk while also severely damaging the Irish pensions industry”.

Mr Kemp would have been better advised to argue his case on its merits, rather than relying on any alleged effect on jobs in his sector of a change in tax treatment of pension contributions.  His case is a reasonable one, but he damages it by his approach.

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Jill Kirby made a sensible suggestion in the Irish edition of the Sunday Times (29 November).  Since many public sector employees, or their representatives, are bemoaning the fact that they now have to contribute a material amount to their guaranteed, index-linked pensions, why not let them opt out for a period, or permanently, and avoid that allegedly burdensome imposition? 

Better still (and Jill Kirby didn’t go this far), why not offer anybody who opts out an employer (ie Government) contribution of say 10% of salary, on a defined contribution basis?  This would in fact be better than most private sector employers offer.  We might then see just how valuable the state pension is, for nobody in their right mind would opt out and accept this.

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