Pension System Ireland
Jenette Bregantini
Compared to other liberal democracies, Ireland's pension policies have average coverage, which includes 78 percent of the workforce as of 2014,[1] and it offers different types of pensions for employees to choose from. The Irish pension system is designed as a pay-as-you-go program and is based on both public and private pension programs.
The Pensions Authority regulates occupational pension schemes, trust RACs, Personal Retirement Savings Accounts (PRSAs), employers and Registered Administrators (RAs). It is a statutory body set up under the Pensions Act, 1990.[2]
The OECD's Reviews of Pension Systems: Ireland,[3] explains the structures of both the public and private pension systems. "The public pension system has two sets of flat-rate benefits: 1) a basic flat-rate benefit to all retirees that meet the contribution conditions, the State pension (contributory) or SPC and the State pension (transition) or SPT; and 2) a means-tested benefit to those that have not contributed or have not contributed enough, the State pension (non-contributory) or SPNC.
The contribution base rate is currently 14.75 percent, with 10.75 percent paid by employers and 4 percent by employees (except for employees who earn less than EUR 352 per week for whom only employer contributions are payable). The SPNC is financed through general taxation and is paid according to need. As for private pension programs, there three main types; 1) occupational pension schemes that are set up by employers; 2) Personal Retirement Savings Account (PRSAs) that are personal pension saving plans and contributions are made by individuals; and 3) Retirement Annuity Contracts (RACs) that are also a personal pension saving plan but are excluded from those who are already enrolled in a company pension plan".[3]
When looking at the coverage of public and private pension programs, SPC and SPNC cover 46 percent of the workforce, and SPT and occupational or private pension covers 37 percent of the workforce, which is a result from striking differences in industries and occupations.[4] Raab and Gannon point out how "occupational pensions are generally not mandatory, except in the public sector, and that 55 percent of professionals are able to expect a firm's pension but the corresponding share for sales people is 23 percent".[4] The Irish pension policies are designed to offer incentives for labor participation but are still reforming to the changes in the economy.
The Irish state pension is designed to give a basic retirement income.[5] There are two forms of State Pensions in Ireland: The Contributory State Pension and The Non-Contributory State pension.[6]
The Contributory State Pension is a social insurance program that constructs pensions from a contribution-based payment system (a pay as you go system).[7] Because workers contribute to the pension themselves it is not a means tested system.[7] It is allotted to those over the age of 66 who have fulfilled the following qualifications:[8]
The Non-Contributory State Pension is for those over the age of 66 who are unable to qualify for a Contributory State Pension.[6] To qualify for the Non-Contributory State Pension one must be a habitual resident of Ireland and pass means test. The means test evaluates a citizens cash income, capital (excluding their home), and income derived from personally used property.[6]
The Social Welfare and Pensions Act of 2011 made changes to the qualifications needed for both the Contributory and Non-Contributory State Pensions.[6][8] The act rose the qualifying age from 66 in a stepwise manner. Those born after 1 January 1955, but before 1 January 1961 are now are eligible to collect their state pension at 67. All those born after 1 January 1961 will be eligible to collect their pensions at 68.[6][8] Raising the pension eligibility age of pensions is a contentious issue, but a slim majority of 53% acknowledge the fiscal need to raise the eligibility age.[9]
More changes to the qualifications for the Contributory State Pension are expected to be rolled out in 2022. These changes are being implemented to shift more future pensioners over to Contributory State Pensions in an attempt to reduce the fiscal impact of the pension system.[9] Currently 19% of pensioners are on Non-Contributory State Pensions and spending on these pensions makes up 16 % of the budget.[9] These changes will not affect those currently on Non Contributory Pensions.[6]
In July 2024, the Automatic Enrolment Retirement Savings System Bill 2024 was passed through the Dil by minister Heather Humphreys with Tata Consultancy Services being named as the preferred bidder to run the system.[10]
Where there is income from employment or an occupational pension, taxation under the pay as you earn (PAYE) system applies. As a PAYE taxpayer, tax credits and the range of tax rates are reduced to take account of tax payable on social security pensions. This means that the amount of tax payable on a Social Security pension is deducted from other income.
Under this new model people will continue to be able to retire and draw their pension at 66 exactly as they can today. In addition, for the first time, people will now be given the choice to continue working beyond 66 in order to receive a higher pension payment.
Given the sacrifice that carers make and the contribution they make to society, I believe it is only appropriate that we should enable them to access the State pension and I am very pleased to get government support for this proposal.
Please note these figures are for illustrative purposes only and are based on current pension rates. They do not take account of any budgetary changes prior to the introduction of the flexible pension system in January 2024.
The Pensions Commission was established in November 2020 to examine the sustainability of the State Pension system and the Social Insurance Fund. The Pensions Commission comprised 11 members and was chaired by Ms. Josephine Feehily. Membership of the Commission included representation of workers, employers, civil society, academics, and those with technical and policy expertise.
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The OECD Pension Reviews use the OECD international best practices for the design and regulation of pension systems. The analysis is based on both OECD flagship pension publications, Pensions at a Glance and Pensions Outlook, the OECD Roadmap for the Good Design of Defined Contribution Pension Plans, the OECD Core Principles of Private Pension Regulation, various other OECD work in the area of pensions, and country-specific sources and research. These reviews provide countries with policy options that will help them improve the functioning of their overall pension system. Tailored policy options are proposed based on the specificities of the national pension system, and on international best practices regarding reforms, design and regulation of pension systems.
While the government recently announced that the State Pension age will remain at 66, it also announced some additional reforms to the State Pension system. These include introducing rights for employees to remain in employment until their State Pension age, and a new system of flexible retirement, whereby employees can opt to defer payment of the State Pension up to age 70 in return for a higher pension. The government also intends to address the long-term sustainability of the State Pension system through incremental increases in social insurance rates over time. The potential impact of this policy approach on the long-term sustainability of the system is not yet known.
As more employers globally have stepped away from defined benefit (DB) pension plans towards defined contribution (DC) plans, the study also investigates the challenges and opportunities of DC plans where individuals bear increased financial responsibility.
The pace at which employers have moved from DB to DC schemes has been steady over the past few years. The average annual rate of shift from DB to DC has been around 4 per cent since 2014, according to Pensions Authority data. This trend is expected to continue and may even be accelerated by the new IORP II regulatory regime, which has introduced a range of stringent governance and risk management requirements. Employers now have to consider not just the ongoing financial risks associated with funding DB benefits, but also the increasing regulatory compliance risks that scheme trustees face.
As employers continue to step away from the financial security which has been offered in DB plans, individuals bear the risks and opportunities before and after retirement within DC plans. Unlike DB plans where an individual will receive a regular retirement income for their lifetime based on a salary and service-related formula determined in advance, in a DC plan the amount of any fixed income option available at retirement is more uncertain and will depend on the size of the fund at retirement.
The result is that many individuals will no longer be able to rely on significant financial support from their previous employers and/or government during their retirement years. Therefore, it is essential individuals make the best financial decisions at retirement to maximize the value of their available DC pension assets. Just as diversification is a key part to any investment scheme, individuals may also seek to diversify their retirement savings between regular income, appropriate protection and access to capital, as well as different sources of financial support including government, private pensions and individual savings.
The MCGPI benchmarks retirement income systems around the world, highlighting some shortcomings in each system, and suggests possible areas of reform that would provide more adequate and sustainable retirement benefits.