# PRSA Fiasco



## Benny (24 Oct 2003)

I think it's time AAM discussed the PRSA fiasco and came up with some suggestions for those who run this country about what can be done to sort out the mess we're now in.

Probably too late for a Budget 2003 submission but maybe for next year. 

After all the thought and effort of the NPPI process, this is what we came up with to increase pension coverage from 50% to 70% of the working population.  

The target market: employees in non-pensionable employment, part-time and shift workers, stay-at-homes Moms etc. 

Working on a day-to-day basis with these new instruments, I view these entities are nothing but a compete waste of time and money.  No-one is interested. 

Example: I sent out 115 brochures from on one of the best Standard PRSA contracts available two months ago.  Employees were asked to get in touch if they were interested.  To date, I've had two phone calls.  Looks like one member is set to join paying 50 euros per month.  

This is by no means an isolated case.  

We're now coming undder pressure from life offices to start getting members signed up to the emply PRSA schemes set up in advance of the 15th Sept deadline. 

Not a hope.  Without an employer's input, PRSAs will not work.

Surely the older style "benign partnership" model of a group pension arrangement works better - we'll pay in 5% of your salary if you do as least likewise.  Here, there's a significant incentive to contriute - and punters will have some form of pension in old age to supplement the State pension. 

Where do we go from here?  Much talk much making employer contributions compulsory if PRSAs don't work as currently structured. Not so sure that's a runner - a constitional challenge could sort that out. 

Any thoughts?

What about the Hobbesian notion of involving the State in guaranteeing post-retirement incomes?

I've now no doubt that we need a radical overhaul of the extraordinaryily complicated pension set up we are currently operating under.  

Personal Pensions, Directors Pensions, AVCs, PRSAs, ARFs, AMRFs, ..... people's eyes glaze over.  Things are rosy at the higher levels where advice can be paid for.  But it's bonkers for most ordinary Joes - the target of PRSAs.  

If the complexity remains, I can see a career for myself in this industry until I meet my maker.  So great for me - but then we'll have countless hundreds of thousands living on beans on toast in retirement.     

And why aren't we hearig more of this in the media?  There's a conspiracy of sorts to talk up PRSAs - because if they get bad press at the outset, they'll never recover.  

We need to wipe the pensions slate clean and start again from with a blank page. 

Observations and comments from the great and the good of the AAM community would be appreciated. 

Benny


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## Skinflint (24 Oct 2003)

*.*

*Probably too late for a Budget 2003 submission but maybe for next year*

Definitely too late for Budget 2003 which took place on December 4th 2002 but you might still make Budget 2004 on December 3rd (?) 2003.


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## Benny (24 Oct 2003)

*Moved?*

Meethinks this should not have been moved from the Great Financial Debates Section and it goes into far move than just PRSAs & indeed questions the enite pensions industry in Ireland.  

Surprised to see only one reponse to date - 
and a smart-This post will be deleted if not edited to remove bad language one at that.

Maybe yiz are looking forward to the long weekend to contemplate a reasoned and polished reply.  

Benny


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## Skinflint (24 Oct 2003)

*.*

*Surprised to see only one reponse to date - 
and a smart-This post will be deleted if not edited to remove bad language one at that.*

Smartarsed but factual.


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## Snow White (25 Oct 2003)

*RTE Discussion*

The RTE discussion on the Marian finucane show on its archive Friday 17th of october last is worth a listen to, and the Society of Actuaries analysis it refers to is on its website. Politically the timing may not be right as the powers that be aren't ready to admit to the fiasco, so Hobbs et al are early, but Benny you're spot on.


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## Brendan Burgess (25 Oct 2003)

*Re: RTE Discussion*

I agree that it has not been a successs, but why describe it as a fiasco? 

I could never understand why a part-time employee or any employee on a low income would contribute to a PRSA?

Many of the target market are contributing to the much more valuable SSIAs, so why would they contribute to PRSAs?

It's probably been a bit of a disappointment for the providers and for the intermediaries who were expecting to do well out of it. 

For the few people who have contributed to PRSAs, they are a lot better than the much higher charged personal pensions. They wouldn't describe them as fiascos.

Brendan


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## daltonr (28 Oct 2003)

*Re: RTE Discussion*

PRSA's probably should have been launched around the time SSIA's matured, with some incentive to transfer directly.

But, regardless of timing, the bottom line is that people just aren't scared enough about retirement.  

I've also noticed a surprising number of people who are very savy when it comes to money, but who think pensions represent very bad value for money (even if the employer contributes), and who instead prefer to try to buy an investment property, on the grounds that the mortgage will be cleared before they retire, and they'll live on the income.

People understand mortgages and rent, they can see how they could live on the income.  But they don't seem to grasp annuities and AVC's and all the other jargon associated with pensions.  It just seems to be a turn off.

I'd have prefered a pension strategy that started with a clean sheet of paper instead of bolting on PRSA's to the current market.  

-Rd


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## euroDilbert (28 Oct 2003)

*Re: RTE Discussion*

daltonr - I think that a lot of people who think about putting money into pensions are put off by all the restrictions around how the money is used when you retire. This is certainly true in my case. (I should add that I will have a company pension as well, albeit with limited service years).

I know that these restrictions have been lifted to some extent more recently, but I still like the idea of having control over what happens to my money. In the past, I always thought that the compulsory purchase of an annuity was very poor value for money - especially taking into account the fact that if you died after 5 years, there was nothing left to pass-on.

I did consider putting money into AVCs, but instead am looking at alternative types of saving - including property.


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## Ishmael Whale (28 Oct 2003)

*Is there a better way?*

I have a nerve to even try discussing this. I really haven’t a clue about pensions, other than the general concerns about Europe’s aging population meaning there won’t be enough in the pot. 

As I understand it we have various state pension scheme – contributory and non contributory social welfare pension, and some state employee schemes. While some of these schemes collect contributions, they have no dedicated fund except for the recently established pension reserve fund. On the other hand we have various private sector pension schemes, which may be linked to a particular company or may be simply sold to the general public. These funds are contributed to by the prospective pensioners and, possibly, their employers. The fund must be adequate to meet the claims made on it.

AVCs I understand to be a facility where person might have less than full contributions to any of the above might pay extra to get full benefits.

Do I therefore take it that the main issue is people who are solely dependent on the social welfare pension which, being unfunded, cannot be guaranteed to provide a decent income. PRSA’s are essentially an attempt to provide this group with a cheap supplemental private sector pension scheme.

The thing that strikes me about this debate generally is it would seem to me that whatever way we go about trying to store up wealth for the future will inevitably be inadequate. 

Pensions, be they private or public, will be dependent on the ability of the economy to pay them. If people have purchased products based on, say, equities or property (or whatever income generating asset you like) it just means that the focus will shift from the ability of the economy to tax the incomes of the employed to the ability of the economy to pay dividends and rents. In the meantime, the increasing numbers of prospective pensioners will be buying up income producing assets, therefore bidding up their prices to the extent that they may simply be unaffordable. The only solution would be to invest abroad, particularly outside Europe. But this assumes other economies reacting positively in the long run to aul folk in Europe living off their rents, and not subjecting this to, for example, penal tax rates.

I don’t mean to be a gloom and doom merchant, but is there any way of squaring this circle? Surely an inevitable consequence of more pensioners will be less generous pensions, whatever action we take as regards funds. In the circumstances direct investment in property and equities would seem to be the safest option.


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## GCS (28 Oct 2003)

*PRSAs*

Karen Mc has an interesting post on consumer attitude in the UK to saving here    and I wonder if the same results apply in this country?.

I don't think that Intermediaries were expecting to do well out of PRSAs but any awareness campaign on pension provision will not do them any harm. The most positive outcome of PRSAs has been the acceptance by intermediaries that the max 5% & 1% charges will now become the norm in the market so that the 50% initial & 4% renewal commisions will or should become obsolete. 

The demonising, by IFSRA, of non-standard PRSAs, in my opinion, was a mistake. There are some excellent offerings out there that fall into this category and should the charges ever exceed the 5% & 1% the provider/product can be switched. 

As an employer it is hard to stomach paying 10.75% prsi for an employee and then coming up with a PRSA contribution also. Perhaps there could be some trade-off from prsi to PRSAs?

There has to be a 'carrot' to tempt both 'er and 'ee to commence a PRSA. The 20% tax  and 6% prsi relief are obviously not enough for the employee. If employees agreed to siphon off their next pay increase to PRSAs and employers agreed to match that contribution to a certain % then this might get the ball rolling. Although, the employers would probably want to see some reduction in 'ee contribution rates. This would probably confuse the market some more though!


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## Ishmael Whale (30 Oct 2003)

*Trying to make it simple*

Sorry, again for the slow learners among us. Does this mean that the essential benefit of a PRSA is that the punter gets 26% tax/PRSI relief, and should more than cover the management charges of 5% initially and 1% in subsequent years. Or, in other words, if I am putting money aside for pension purposes if I put that money into a PRSA my contribution will effectively be 20% higher in year 1 and 25% higher in subsequent years as a DIY approach will not get that tax relief ?

That’s at least some reason for putting money in – all things being equal, the PRSA return would have to be 25% lower than you could manage yourself before you lose on the arrangement. The only outstanding issues would seem to be flexibility (presumably the PRSA scheme has some block or disincentive on early withdrawal) and what happens at the end of the process. As I understand it, on maturity you can either take the money as a lump sum or buy an annuity. The issue is, really, can the punter be assured that the increasing value of the PRSA fund will keep pace with the cost of income producing assets at the end of the period. i.e. if I bought a second house with my money originally I can be assured that over the next twenty five years it will keep pace with whatever changes occur in the cost of housing. At the end of the process I can be assured of getting whatever the rent is, with the additional benefit of capital appreciation on the value of the property. 

If, on the other hand, I get a cash lump sum out of my PRSA, and decide I want to buy a second house and live off the rent (think of this as a proxy for an annuity – the same principle applies) will my PRSA saving necessarily have increased by enough to do this – particularly as I can expect loads of other wrinklies to be turning up with PRSA proceeds in their pockets also looking for income yielding assets? I just think there is more to this issue that our propensity to save.


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## gwenny (30 Oct 2003)

*Inequity when claiming Tax Relief*

Hi,
I'd like to open a new debate - inequity of taxpayers when claiming tax relief.  For instance, those in the 20% tax band would receive only 20% tax relief, while others in the 42% tax band receive 42% for the following:
- Medical Expenses
- Annual Travel Pass
- Pension Contributions

E.g. the 20% taxpayer, working part-time and earning 200euros (after tax) per week, applies for a Travel Pass worth 1000 euros and receives only 200 euros tax relief, while the 42% taxpayer, earning 1000+ p.wk, would receive 420 euros tax relief!!   

I strongly feel that the Tax Relief System should be overhauled, eliminating discrimination against low-wage earners/20% taxpapers.

gwenny


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## Ishmael Whale (3 Nov 2003)

*Pensions Time Bomb*

For those interested in the general picture, there is an interesting contribution from Homer in another thread.


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## d53 (7 Nov 2003)

The reason that PRSAs have failed to sell in large numbers is a combination of the ignorance and wariness in the general population; lack of an economic incentive to intermediaries to sell them; and a series of minor but ridiculous regulatory delays and restrictions.  But the 70% target was only ever thought to be possible by those who knew nothing about the subjet.  There is no country in the world that has achieved 70% pension coverage voluntarily, and there is nothing to suggest that Ireland will be any different.

PRSAs are nonetheless a good thing - more transparent products, more client information, more availability. They will be useful when we finally face reality and move to compulsory pensions.

d


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## darag (8 Nov 2003)

gwenny, what do you suggest? surely you can't give people
back more than they pay.  or are you suggesting cutting
relief for those earning over 28K?


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## Skinflint (10 Nov 2003)

*.*

Even allowing for the fact it's early days and that many employers will have alternative pension arrangements in place, a reported 30% take up/registration rate by employers with PRSA providers and a take up rate of only a few thousand contracts by employees (Irish Times, Friday) can hardly be judged to be a resounding success. I would agree with the poster above that PRSAs have the advantage of being a lot more transparent to employees than other pension vehicles and that, for one reason or another, many people don't see any payback/benefit in taking out any sort of pension cover - possibly unless they are obliged to. Maybe that will happen sooner rather than later? The challenges of providing for retirement income and facing up to the implications of demographic changes will not go away because many of us ignore them...


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## tedd (10 Nov 2003)

*Re: gwen's point*

I thought that the tax credit system addressed Gwen's point. Am I mistaken?


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## Protocol (10 Nov 2003)

*still 42% relief*

Yes, Tedd, correct, you are mistaken.

Some former tax-free allowances were converted into standard-rated reliefs, e.g. mortgage interest.

But other didn't.  So higher income earners do get more tax relief on pension (and PHI) payments.

Protocol


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## Ishmael Whale (11 Nov 2003)

I am still left, maybe wrongly, with the feeling that PRSAs are a concept that does not really address the core issue. Retirement depends on pensioners being a small fraction of the population. If that ratio changes radically then, whatever amount of saving is done, the idea that a large chunk of the population can take to the beach and still have a high standard of living has to change too. 
Another thought is that PRSAs still seem to depend on the idea that some fund manager will take your money and magic it into a fortune. People are too aware of high profile cases of funds not performing to trust in this. 
Where does that leave us? In property and equities, even without tax relief.


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## tedd (12 Nov 2003)

Thanks, protocol, that's a relief. There have to be some advantages to being hit with the 42%!


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## confused d4 (13 Nov 2003)

*reasons for the failure of PRSAs*

Dear intermediaries and insurance companies,


I am not directly involved in the financial services business, but I do some independent consultancy work for a number of life & pension types. A few of them are decent sods, the majority aren’t.

You can blame all the factors in the world for the failure of PRSAs to take off. The reality is that people don’t trust you. Your industry is a pretty unpleasant morass. Despite IFSRAs futile and wasted efforts and your own wailing and moaning about compliance, the industry is miles away from transparency, much less value for money. 

I have an MA in Statistics, so I have a reasonable grasp of numbers. By any yardstick, the financial services industry in this country offers damn bad value. Poor products, poor advice, excessive charges and damn all responsibility.

In the past I have encouraged younger friends and associates to get going on pensions as early as possible. I avoided giving them specific advice about which product to buy, instead directing them to the professionals .. members of PIBA and the IBA. I kept track of the advice they were given, and the products they were sold. If there were any relevant trading standards in the country many of you would be hung from mis-selling in one form or another.

I’m not here to grind any axes, or upset or insult anybody. Simply to say to you, the industry, to look in a mirror if you are looking for the cause of PRSAs failing to take off.

I couldn’t be arsed going into detail, and fully expect to be threatened with stranguled with my IP address. But I would urge you to reflect. There is space in the market for quality products, that are professionally managed, that are tailored by professional intermediaries, that have fair charges and that offer decent returns.  Then, you will see a take up, and not before.


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## Simon Aces Trumper (13 Nov 2003)

*Confused Post*

You should probably look in the mirror yourself and ask why you continue to do work for the financial services industry.

By quality products,I presume you are referring to BCPs latest offering? 

If you do not have an axe to grind then why are you so piss*d off with your decision to invest in F15? Did you not know that values can go down and down and down?


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