THE INSTITUTE OF BANKERS IN IRELAND DUBLIN REGION – ANNUAL SEMINAR

1. PENSIONS – THE ESSENTIAL INVESTMENT THE INSTITUTE OF BANKERS IN IRELAND DUBLIN REGION – ANNUAL SEMINAR ANNE MAHER Chief Executive 23 February 2004 The Pensions Board

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 Company Pension Plans • 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 2/3rd salary or • Tax free lump sum up to 1 ½ times salary plus reduced pension • Maximum benefit limits

9. PRIVATE PENSION OPTIONS Company Pension Plan Issues and Investment • 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

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

11. PRIVATE PENSION OPTIONS Retirement Annuity Contracts (RACs) • 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 60-75 • Benefit can be • Tax free lump sum up to 25% • Annuity • Transfer to ARF or AMRF or taxable lump sum – subject to income condition

12. PRIVATE PENSION OPTIONS Personal Retirement Savings Accounts (PRSAs) • 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

13. PRIVATE PENSION OPTIONS PRSA Key Features • 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

14. PRIVATE PENSION OPTIONS PRSA Investment • 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

15. WHAT NEXT? At EU Level • 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

16. PENSION PROVISION ESSENTIAL Because • 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.

17. THE MESSAGE IS THINK ABOUT TOMORROW – TODAY!