THE INSTITUTE OF BANKERS IN IRELAND DUBLIN REGION – ANNUAL SEMINAR ANNE MAHER Chief Executive23 February 2004 The Pensions Board PENSIONS – THE ESSENTIAL INVESTMENT

2. WHAT I WILL COVER  Background Issues  Recent Irish developments  Current Irish pension arrangements  Private pension options for the individual  What next?  And finally why ‘essential’.

3. BACKGROUND ISSUES  Demographic changes  Falling birth rate  Longer life expectancy  Increasing old-age dependency  Pressure on public finances  Pension cost increasing as % GDP  Increase in other age-related costs  IMF, ECB and OECD calls for reform  Pension system sustainability in EU  Some have private funded pensions  Enlarged EU  Threat to monetary union

4. BACKGROUND ISSUES Public pension expenditure as % of GDP Source: Economic Policy Committee (2001)

5. RECENT IRISH DEVELOPMENTS  A national pensions consultation and research process from 1996 to 1998 called the National Pensions Policy Initiative (NPPI)  NPPI culminated in a report by the Board to Government in 1998 recommending a pension reform package (Securing Retirement Income report)  NPPI recommendations now implemented through the National Pensions Reserve Fund Act, 2000 and the Pensions (Amendment) Act, 2002  Major changes are:  Substantial increase in basic Social Welfare pension  Establishment of explicit mechanism to partially fund Social Welfare pensions and public service pensions  Wide range of changes to the voluntary private pension system including introduction of new pensions vehicle called Personal Retirement Savings Account (PRSA)

6. PRESENT IRISH PENSION ARRANGEMENTS  Social Welfare (First Pillar) pension providing either:  Old age contributory pensions for those satisfying certain contribution conditions, or  Old age non-contributory pension subject to a means test for those not qualifying for contributory pension.  Social Welfare pension arrangement funded on a pay-as-you-go basis supported by National Pensions Reserve Fund  Public Service pension scheme which faces greatly increased costs (also supported by National Pensions Reserve Fund)  Private pensions for over 50% of the workforce arising from funded occupational pension schemes and personal pensions

7. PRIVATE PENSION OPTIONS  Company pension plans  Personal pensions  Retirement Annuity Contracts (RACs)  Personal Retirement Savings Accounts (PRSAs)  Substantial Tax Reliefs Available  Used for saving and financial planning  50.7% of workforce have private pensions

8. PRIVATE PENSION OPTIONS  2 types  Defined Benefit (DB)  Defined Contribution (DC)  Private sector  49% DB membership  51% DC membership  Tax Relief on employer and member contributions and investments  Benefit at normal retirement age is  Pension up to 2 / 3 rd salary or  Tax free lump sum up to 1 ½ times salary plus reduced pension  Maximum benefit limits Company Pension Plans

9. PRIVATE PENSION OPTIONS  Funding issues for Defined Benefit (DB)  Adequacy Issues for Defined Contribution (DC)  Shift from DB to DC  DB investment profiles  Typically 65% - 75% equities  Asset/liability matching problems  Increased focus on risk  Regulatory requirements  DC investment  Usually in Managed Funds  May include member investment choice  Pension investment is long-term Company Pension Plan Issues and Investment

10. PRIVATE PENSION OPTIONS Average Managed Fund Returns Source: Mercer Human Resource Consulting

11. PRIVATE PENSION OPTIONS  Personal pensions  Must be Insurance Contracts  Available to self-employed or people in non-pensionable employment  Tax Relief on personal contributions and investments  No benefit limits  Benefits can be taken between  Benefit can be  Tax free lump sum up to 25%  Annuity  Transfer to ARF or AMRF or taxable lump sum – subject to income condition Retirement Annuity Contracts (RACs)

12. PRIVATE PENSION OPTIONS  New type of personal pension  Individual investment account – contract between individual and authorised PRSA provider  2 types  Standard  Non-standard  Available to employed, self-employed, unemployed, etc.  PRSA Provider is  Investment firm  Insurance company  Credit institution with approved PRSA product(s).  Mandatory employer access Personal Retirement Savings Accounts (PRSAs)

13. PRIVATE PENSION OPTIONS  Product approval jointly by Pensions Board and Revenue Commissioners  Regular information  Charges  not in cash terms  % of contributions and/or assets  Maximum charges for Standard PRSAs  No charge/penalty on transfers from another PRSA provider/pension arrangement  No charge on termination of contributions or suspension/recommencement of contributions  Tax Relief on member contributions and investment  Benefit is normally between 60 and 75 and can be  Tax free lump sum up to 25%  Annuity  Transfer to ARF or AMRF or taxable lump sum – subject to income condition PRSA Key Features

14. PRIVATE PENSION OPTIONS  Standard PRSAs can only invest in pooled funds  Greater range of fund and manager choice for Non– standard PRSAs  Default Investment Strategy (DIS) for each product  Automatic unless contributor indicates otherwise  Complies with specified requirements linked to general good practice for retirement investment  Certified by PRSA actuary PRSA Investment

15. WHAT NEXT?  EU Pensions Directive to be implemented  Pan European pension plans?  Pension opportunities for Ireland Inc. from EU single market? At National Level  Regular monitoring of Irish pension coverage progress  Progress Report to Oireachtas in Autumn 2006  2006 Progress Report likely to trigger debate on our pension strategy  Mandatory private pensions could be a possibility At EU Level

16. PENSION PROVISION ESSENTIAL  People are living longer  More old people/less young people  Increase in dependency ratio could lead to  Poorer pensioners  Higher retirement ages  Taxes increasing  State only able to provide basic pension  So everyone must consider their own future needs in time  Tax encouragements make pension investment very attractive and  Pension Investment delivers. Because

17. THE MESSAGE IS THINK ABOUT TOMORROW – TODAY!