Gerry Hughes: In 2007 employer contributions to occupational pension schemes on behalf of employees amounted to €1.4 billion and the estimated cost of tax relief and the exemption from benefit in kind taxation were €150 million and €540 million respectively. The tax reliefs were concentrated on the top 20 per cent of earners. As neither the pensions industry or the pension regulator publish any information on the distribution of pension contributions or pensions in payment we know very little about who benefits from employer contributions or how the pension entitlements of high earners compare with those of other employees. However, publicly quoted companies are obliged to publish in their annual accounts information about the pension arrangements for each of their executive directors. Using information for 2009 for 147 executive directors in 48, mainly publicly quoted, companies in conjunction with national data on pension arrangements for other employees makes it possible to compare (see here) how pension arrangements for executive directors differ from those of other employees. The comparison shows that:
• The average annual employer pension contribution in 2009 for executive directors in large publicly quoted Irish companies is nearly 36 times more than for other covered employees (€100,000 versus €2,700).
• The average employer pension contribution rate for executive directors is almost 26 per cent of salary whereas the average employer rate for other private sector employees is around 7 per cent;
• On average an executive director would have been entitled to a pension of almost €200,000 if he or she had retired in 2009, or nearly 17 times more than the State pension on which the great majority of pensioners are dependent for most of their income in retirement;
• The average value of an executive director’s pension fund amounts to €4.1 million or 34 times more than the average value of the pension fund of €120,000 for other employees:
Pension inequality is much greater in the private sector than in the public sector. Research by Jim Stewart (see here, behind paywall) shows that top civil servants received an average pension of €125,000 in 2009 or about six times more than the average pension payment for retired civil servants.
The best way of creating greater pension equality between high, middle and low earners would be to give the tax relief at the standard rate of tax as is now done in the case of mortgage interest relief and health insurance relief. While the EU-IMF programme contains a commitment to standardise pension tax reliefs the pensions industry is opposed to this and the Fine Gael/Labour government prefers to continue giving the tax relief at the marginal rate of tax. In these circumstances an alternative which could raise as much revenue as standard rating would be to reduce the earnings cap on pension contributions and the lifetime size of pension funds.
In Budget 2011 the government reduced the cap on the annual earnings contribution eligible for pension tax relief from €150,000 to €115,000 and it reduced the lifetime cap on the size of an individual pension fund from €5.418 million to €2.3 million. While these reductions create greater equity in the pension system, neither of the caps is consistent with recommendations by the TCD Pension Policy Research Group, TASC, Social Justice Ireland, the OECD and other commentators that tax relief on pensions should be concentrated on middle and lower income earners. Much greater equity in the pension system could be achieved by targeting pension tax reliefs at these earners. This could be done by reducing the annual earnings limit for pension contributions from €115,000 to €75,000 and by reducing the cap on the size of a pension fund for an individual from €2.3 million to around €0.6 million.