Speech
Speech by Minister McGrath at the Irish Association of Pension Funds Annual Dinner
By: Minister for Finance; Michael McGrath
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By: Minister for Finance; Michael McGrath
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Last updated on
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Kevin, thank you for your introduction. Good evening everyone.
I’m delighted to return again to the Irish Association of Pension Funds Annual Dinner. I know it’s been a busy year for everyone in this room as the pace of change continues to accelerate.
As the Association starts its second half century, it goes from strength to strength representing the interests of members and providing ongoing education, training and development opportunities to a wide variety of stakeholders.
On behalf of Government, I want to put on record that we value your advice and input to public policy formulation and we re-affirm our common goal of achieving improved retirement provision in Ireland.
I would like to pay tribute to your Chief Executive Jerry Moriarty and the IAPF Council representatives for their dedicated work on behalf of members and congratulate Jerry on his appointment in November as Chair of Pensions Europe. Jerry, this is a fitting recognition of the work you’ve undertaken over many years to represent Ireland on an international level and we can all take pride in your achievement.
Before speaking about pension matters, I’ll say a few words about the economy and the public finances. The overall message is that – despite all the challenges and headwinds internationally - Ireland is in good shape.
Our economy has demonstrated remarkable resilience in the face of successive shocks in recent years. There is no doubt but that global economic conditions remain challenging. As a small, open economy, we are not immune from the effects of that backdrop.
Conflict around the world, geopolitical tensions, the monetary policy response to inflation – all of these are acting as a drag on the economy.
Despite this, we expect the Irish economy will grow this year, measured by either GDP or Modified Domestic Demand. More people are working than ever before. The Labour Force Survey published last week shows that we have over 2.7 million in employment in Ireland now – up by 90,000 in a year. Not only have we regained the hundreds of thousands of jobs lost during COVID, we actually have 329,000 more people at work today than immediately before the pandemic at the end of 2019.
Inflation is now moderating pretty quickly after hitting a 40 year high in 2022 at almost 10%. In fact the flash estimate published by the CSO today indicates the inflation rate in the 12 months to the end of February had fallen to 2.2%.
This represents a very welcome moderation of inflation pressures and will feed into interest rate decisions over the months ahead.
We are running a general government surplus of around 3% of national income each year, and expect a further surplus of approximately €8 billion this year.
The National Debt report published last week showed we are making good progress. Gross debt has fallen and debt as a share of national income has declined from 166% in 2012 to 76% now. When you consider the €40 billion in cash and other liquid assets and holdings in the Ireland Strategic Investment Fund, our net ratio is under 60%.
Our credit rating has improved steadily and we are now able to borrow at yields comparable to, or even less than, core Eurozone countries such as France, Belgium, Finland and the Netherlands.
Last year, we collected almost €24 billion in corporation tax receipts. While these receipts are extremely welcome, it is a key priority that we do not create permanent fiscal obligations based on revenues that could prove transitory.
Like all of you in the pensions industry, I am all too well aware of the need for strategic planning and to actively prepare for future demographic and fiscal challenges.
Ireland is one of just seven EU countries where life expectancy at birth is above 82. This is the result of significant improvements in our mortality rates for many of the common causes of death over the past decade.
As a result, the population aged 65 and over, is expected to grow significantly faster than the working age population. The ratio of workers to those of pension age will decline to just 2.3 to 1 by 2050. As a result, Exchequer revenues will grow at a slower rate on one side of the ledger, making it harder to fund the increasing demand for age-related public expenditure on the other.
My department has consistently emphasised the exceptional volatility of corporation tax receipts. This was particularly evident last year, when we saw a significant moderation in growth recorded in this tax heading when compared to recent years.
Research undertaken by my department has also shone a light on the extremely concentrated nature of these receipts. We know that approximately €1 in every €8 in total tax collected by the Exchequer is sourced from the corporation tax payments of just 10 firms.
The best way to mitigate the risk of an overreliance on corporation tax is to keep public expenditure growth at sustainable levels, which will be achieved by following the appropriate budgetary strategy ensuring fiscal sustainability.
To complement this, I am establishing two new long savings funds: the Future Ireland Fund and the Infrastructure, Climate and Nature Fund.
The creation of a Future Ireland Fund will help ensure that future expenditure pressures, which are likely to emerge over the next decade or so, including those from demographic change, can in part, be alleviated.
For each year from 2024 to 2035, 0.8 per cent of GDP will be invested in the Fund. It is my intention that the Future Ireland Fund will be maintained over the longer term generating an income stream used to support government expenditure, thereby benefiting future generations.
From the beginning of the 2040s, the State will draw down from this investment income stream to help cover some of the day-to-day expenditure of the State.
By only using these returns, it will ensure that the capital invested in the Fund is maintained, and that its benefits and legacy is spread across generations.
The Fund will have a long term investment focus and will be primarily invested overseas. One of the primary sources of underperformance in sovereign wealth funds is to have domestic focus. However we will continue to invest heavily in the domestic economy through other vehicles, specifically the Ireland Strategic Investment Fund and the Exchequer Capital programme.
In this regard the second fund I am setting up, the Infrastructure, Climate and Nature Fund is particularly important. It will ensure that we never again have a ‘boom, bust’ approach to public capital investment.
In practical terms, it means that the next time we encounter an economic shock or experience a downturn, we will have the resources to maintain a high level of public capital investment, and over €3 billion out of a fund size of €14 billion will be specifically available for projects that help meet our climate targets.
I intend to be bring the legislation to underpin these Funds to cabinet next month and introduce it in the Oireachtas in the weeks after that. This is the type of long-term planning in the management of our finances that will help to secure the future for all.
Turning to matters that directly impact on your sector, it is clear that the IORP II Directive has presented challenges for the pensions industry.
I for one welcome the significant steps taken by the industry to respond to this by improving governance and communication standards.
Ultimately this forward-looking, risk-based regulation by the Pensions Authority strengthens risk mitigation and increases confidence in our pension system.
There has been rapid consolidation underway across the Irish pension landscape with fewer new schemes being established and existing schemes increasingly moving into Master Trust and Personal Retirement Saving Products. This aligns with the Roadmap for Pensions Reform and the objective of Government to simplify and harmonise the pensions landscape.
I am struck that the number of PRSA contracts established in 2023 doubled as compared to 2022, and there is now €12 billion in assets invested through PRSAs.
Also, there are now 440,000 members of Master Trusts in Ireland and the 17 Master Trusts in the Irish market collectively have €22 billion in assets under management. These represent pension schemes of a scale which we have never seen here previously.
With these changes comes the opportunity to create a system that drives innovation in technology, investment and member engagement. Over time, this scale will allow our pension schemes to access new markets and investment opportunities, ultimately delivering better outcomes for beneficiaries.
I recognise the key role your Association plays with its strong insight on pension developments; education; networking; and development opportunities. Tonight I’m in the company of the people who deliver the highest quality stewardship for our pension system and I commend you for that.
Of course at the centre of this system are pension scheme members and the government joins you in working towards ensuring the best outcomes not just for the members of today, but those of the future.
Kevin mentioned Automatic Enrolment. It is government policy to ensure that every employee will have access to a system that will enable them to build retirement savings in order to sustain their standard of living after their long years working in paid employment.
I note from a CSO survey published earlier this week that nearly six in ten workers with no pension coverage cited the State Pension as their expected main source of income on retirement, while more than one quarter had not yet decided on this issue. As such, the Auto enrolment initiative is essential to help overcome issues such as inertia in accessing a pension.
My colleague Minister Heather Humphreys has prioritised bringing forward this Programme for Government commitment.
There is a dedicated project team in the Department of Social Protection implementing multiple work streams being progressed in parallel such as:
A number of major milestones are planned for the coming months, including the publication of the AE Bill by the Department of Social Protection.
You may have noticed that awareness raising activities have also kicked off, with the roll-out of a multichannel communications strategy. The intensity of communications activities will increase considerably over the coming months as Automatic Enrolment gets closer to implementation.
As a government, we continue to bring forward initiatives to improve governance, regulation and simplification of the private pensions space.
The Interdepartmental Pensions Reform and Taxation Group published its report in November 2020. I am pleased to note that in each of the subsequent Finance Acts, my department has steadily enacted recommendations from the report.
Most recently Finance Act 2023, in addition to providing for the cessation of Retirement Annuity Contracts, removed the age limit for PRSAs. This allows PRSAs to become whole-of-life products for the first time, removing the requirement for pension savers to switch to a different product and incur costs. These measures go a long way in helping to simplify pension products for our citizens.
The Group continues its work considering the recommendations with a view to introducing further reform measures.
Thank you Kevin and the IAPF for your input into the consultation for the Standard Fund Threshold Review.
As you will be aware, the SFT sets a lifetime maximum for tax relieved pension contributions. When originally introduced in 2005 it was set at €5 million and then reduced to €2 million in 2014 and has remained at that level since.
I acknowledge that, in the intervening period, there have been significant changes across a range of economic factors, most obviously in the area of wage and consumer price inflation. I decided late last year that a review was needed.
The work being led by Dr Donal de Buitleir is now well underway, the formal consultation process has concluded and a comprehensive report will be furnished to me this summer.
I do agree with you Kevin on the principle of equity. I look forward to considering the report and making the decisions this year I believe are appropriate and necessary to underpin our pensions system into the future.
On the question of pension saving more generally, I think it is important that you continue to make your voice heard and ensure the general public understand the importance of the system of tax relief we have. In parliament, I face regular calls from opposition parties to restrict pension tax relief.
They say, in Government, they would limit relief and save hundreds of millions of euro but of course this has no regard to the consequences at a time when we need to use every lever to encourage people to provide for their future. The proposals that feature every year in certain pre-budget political submissions would come at a real cost in take home for tens of thousands of employees and the self-employed in the country.
I want to make clear that I am committed to ensuring a supportive taxation regime for pension saving and specifically to marginal rate tax relief and maintaining the system of age-related contributions limits.
Income tax taxpayers are now seeing the benefit of a €1.3 billion income tax package and the first reduction in USC rates in 5 years.
I recognise the importance of having a competitive income tax system and as I told the Irish Tax Institute here on Friday I’m committed to introducing a further substantial income tax package in the autumn budget.
Turning to the Review of the investment funds industry in Ireland, which I announced in April of last year, many of you will have already heard me speak about this.
The Review looks ahead to 2030. It seeks to ensure that Ireland’s funds sector is resilient; that our frameworks are future-proofed; that they are supportive of macro-prudential stability and; that they continue to meet international best-practice standards.
And of course, it includes ensuring that your industry can continue to meet the needs of pension savers. The Review is now well advanced. The Review Team has studied over 190 submissions that were received in response to the public consultation and my officials are progressing their assessment of the proposals raised.
I’m looking forward to the Review Team presenting me with the final report this summer, in line with the Terms of Reference including looking at the taxation regime for funds, life assurance policies and other related investment products. I will consider the recommendations in time for Budget 2025.
Recently, I hosted an event in my department, to seek the views of all stakeholders to feed into our very first national financial literacy strategy which is currently under development. This is an area that is of particular importance in relation to pensions, both in relation to saving for a pension and accessing it.
The OECD will soon publish its research on the levels of financial literacy at international level. It is clear that Ireland still has a road to travel, but Ireland’s national financial literacy strategy aims to be in line with the best international examples and I know IAPF will be key partner in continuing to advance financial literacy in Ireland.
On the issue of pension traceability, it’s in all of our interests to ensure that the pension scheme members receive their full entitlements. I think we have work to do collectively on this issue. There are too many unclaimed pensions, with many people unaware of different pots they have contributed to over their working life.
In that regard, I welcome the new requirement for providers to issue pension benefit statement to deferred members. However, I believe Ireland should consider moving to develop a more user-friendly pensions tracing system, including in the form of a digital portal.
This is something that would require input from a wide range of stakeholders but I know making progress on this is something that would be welcomed by trustees and investment providers.
As we know much of what happens in relation to financial services in Ireland has its origins in developments at EU level.
Ireland is a strong supporter of the Capital Markets Union and is actively involved in progressing its associated EU legislative measures, such as the European Commission’s Retail Investment Strategy.
The Retail Investment Strategy aims to ensure that the legal frameworks for retail investments are adapted to the needs of consumers, leading to improved outcomes and increased consumer participation in capital markets.
The overall aim of the proposal is to empower retail investors to make investment decisions that are aligned with their needs and preferences, while ensuring they are treated fairly and duly protected.
This will ultimately enhance retail investors’ trust and confidence to safely invest in their future and take full advantage of the Capital Markets Union.
In conclusion, I want to acknowledge again that while change can be difficult there cannot be progress without change. So while I acknowledge these are challenging times, I’m looking forward to our citizens have savings that allow them to live the way they want to in retirement. Where the work we do today ensures they are living in a vibrant economy well into the future.
To finish, I would again like to thank the Irish Association of Pension Funds – Kevin Cruise O’Shea (Chairperson) and Jerry Moriarty (CEO) for the invitation to speak to you this evening.
And now all that remains is for me to wish you all an enjoyable evening.
Thank you.