I've just been reading some of the promotional blurb for Ireland's latest answer to the pensions crisis (only about 50% of employees in Ireland have pensions, and a majority of those are public servants). I cannot help but notice just what a scam this supposed "solution" is, and how much it exposes employees to risk without doing anything at all to interfere with the employers who have failed to provide pension plans and failed to encourage employees to partake.
I've just been comparing my pension scheme (a plain ordinary defined contribution pension) with the standard PRSA and am shocked.
--there is no compulsion on employers to contribute ANYTHING to a PRSA, whereas under the approved company scheme like mine, employers are compelled to make a "meaningful" contribution (1/6 at least). Given that this is highly tax friendly, it costs employers very little to make small contributions so allowing nothing to be made at all is highly discriminatory towards the most vulnerable workers
--my company pays all the administrative and consultant's charges, leaving me with a .65% management fee to pay - however, the PRSA can charge up to 5% of the contribution in charges. Given that this type of pension is specifically designed for low income earners, this seems very steep considering the small amounts involved
--Apparently one in two companies have not offered their employees PRSA, despite the fact that this is illegal. This would suggest a high level of relunctance on the part of employers to offer anything over the basics to employees. What other benefits are being denied routinely to the same employees?
--The target group for PRSAs is largely low earning private sector workers, yet nobody has considered two issues - the first, that the earner on a minimum wage will receive 57% of their wage from a state pension. An earner on €20,000 per annum retiring tomorrow will receive a pension equivalent to 38% of their wages while the employee earning €25,000 will receive a replacement rate of 31%. This is for somebody contributing nothing over and above the standard rate of PRSI. What incentives are provided to encourage pensions in this group.
--The current tax relief system discriminates against these workers as higher rate earners are granted 42% tax relief - effectively allowing the state to subsidise richer employees with pensions more generously than those on a lower wage. This is because tax relief is granted at whatever rate the taxpayer pays. Those earning beneath the tax ceiling will receive no tax relief at all. This policy is regressive and genrously rewards those who need it less.
--This raises the question of affordability. Take the example of a worker on €24,000 per annum, paying €600 per month in rent and €180 per month on a loan. The worker takes home €1715.34 after tax and so after paying off this will have €935. A telephone will cost approximately €45 per month and a bus/rail commuter ticket about €60. So our worker is left with €830. If we allow the worker just the standard social welfare rate of €580 per month to live on (a modest sum indeed, especially if you have worked for it), this leaves over 250. I'd deduct another €50 for utilities and charges (modest!) - leaving €200. This is the amount that the worker is "supposed" to contribute to a pension in order to maintain living standards - but look at the hardship the worker would have to put herself through in order to afford this - she would be left with little over what the unemployed get. As she pays only 20% tax, the relief she would receive would be quite small.
Compare this to my situation, where my employer will match my contribution up to 6% of base salary. This enables me to make an effective 8% contribution by contributing only 4% - and thats with many of the normal charges paid by the employer. In my view allowing PRSAs to be recognised without compelling employers to contribute was a huge mistake and will discourage the low earner from starting a relatively expensive and risky pension.
This seems to have followed the UK stakeholder pension, which also eliminates the employer from having any responsibility.
1. Raise the PRSI ceiling to force higher paid workers to contribute more into the pensions pot. This would generate a large amount of extra money.
2. Eliminate the disctinction between self-employed, PAYE workers and civil servants and harmonise tax rates for all three so no one group is paying more or less but is also getting exactly the same benefits. Fold the PAYE allowance into the standard tax credit. This would reduce tax marginally for self employed but increase their PRSI payments. It would level the playing field for all.
3. Introduce a pension levy and penalise employers who do not contribute to workers pensions as they are effectively offloading their workers on the state system. I'd recommend putting a 2% levy on the employers PRSI on any company who does not make a contribution to workers pension funds, and those who do by and already being discounted by tax relief (this is a fair deal as these employers are reducing the need for state invervention for those employees at a later stage).
4. Heavily penalise employers who do not introduce pensions, including jail terms and listings on public media.