Pension Schemes & Borrowing

Pension Schemes & Borrowing

The nanny state has returned.
Charlie McCreevy is only settling into his new seat in Brussels and already the Coalition(!) is seeking to row back on his Pensions legislation.
In last years Finance Act Charlie introduced a facility whereby Pension Schemes could borrow to buy assets as part of their investment strategy. Probably inevitably, most of this has been directed as buying property assets. Now The Social Welfare and Pensions Bill seeks to prohibit Pension schemes from borrowing. Anne Maher (CE of the Pensions Board) says in yesterday's Tribune that " some investors were gambling with their pensions on highly-leveraged deals that could leave them penniless in retirement". She went on to say that "the higher the level of gearing, the greater the level of risk".
So:
1. It is o.k. for individuals to "gear" to buy property in a personal capacity (not banned yet), but not acceptable to do so as part of a balanced investment strategy within one's pension fund.
2. If borrowing is so frowned upon, is it not a logical conclusion that Pension Schemes should not be allowed to buy Equities, shares in companies that might have borrowing on their Balance Sheets.
3. Are we to eliminate "risk" from the investment of pension scheme monies.

So now that Charlie has gone the nanny state has resurfaced.

The above concepts may be repugnant to Civil Service types, who after-all dont have to worry about their index-linked pension arrangements (which would be unaffordable in the private sector).
So Revenue introduce the flexibility in 2004 and now Social Welfare do an about-turn in 2005. This hardly assists sensible planning, in an area that the Government claim is a critical part of long term financial planning. After all, the gearing facility simply allows individuals to potentially accumulate a greater fund by retirement (albeit with a higher level of risk) which thus proves greater security in retirement and also produces a greater tax take for the Government (since pensions are taxed in payment in retirement).
The facility to gear the pension investment is no tax loophole. The tax breaks on pension contributions are merely tax-deferral, as the payments will be taxed in retirement. Why is the Dept. of Social Welfare concerned with the issue of investment risk in pension funds, particularly in the case of individual arrangements where the decision maker is also the beneficiary?
Come back Charlie, all is forgiven!

Hi Conan,

There's a few other things that Anne Maher said that you failed to mention.

She said geared pensions were leading to an undesirable concentration on property. As you pointed out equities are not without risk. But betting your pension on a broadly invested equity fund is far less risky that betting everything on a single property with a big dollop of debt on top.

She said geared pensions were bringing the whole system of pension tax reliefs into discredit. That's arguably true. We've crossed the line between prudent retirement saving and tax-free wealth accumulation by the lucky few who can afford to push the limits to the maximum.

For most of us pensions are about tax deferral, not tax forgiven. But if you've got enough money, it's all about tax forgiven because you need never touch the money stashed away in an ARF.

It's ironic that, while PRSA have flopped among the masses, pensions look like a victim of their own success for the better off. I'm not sure the ban on borrowing is desirable. But it certainly caused a property frenzy, some of which had little to do with saving for retirement.

According to the Irish Independent, the ban on borrowing might not last too long:



Brennan told to rethink pension curbs
Monday February 21st 2005

SOCIAL Welfare Minister Seamus Brennan has been lobbied by vested interests to seek a derogation of the EU Directive (2003/41/EC), which prohibits borrowing within pension funds, to prevent an outflow of money to the UK.

A rapidly-formed group of stockbrokers, investment intermediaries and pension fund managers has argued that funds earmarked for pension funds in Ireland could instead be invested in the UK where a derogation exists.

Minister Brennan published the Social Welfare and Pensions Bill on February 11 without any consultation with the pension investment sector.

Section 36, which is to be introduced by September 22, 2005, seeks to prevent pension funds or trustees from borrowing monies for the purposes of their pension funds. It also prevents pension funds and trustees from pledging assets of the fund for borrowing purposes. While the EU Directive allows member states to choose not to apply the directive for pension schemes which have less than 100 members, the Pensions Board has not recommended this.

As already reported, the Bill marks a u-turn in Government policy under former Finance Minister Charlie McCreevy who introduced borrowing within pension funds in the 2004 Finance Act.

Prior to this, Mr McCreevy had advocated pensions reform by allowing pensioners greater freedom over their Approved Retirement Funds after retirement.

"For years we have been trying to persuade people to invest in pension funds, rather than buying property to cover their retirement planning," a leading industry source explained. "The 2004 Finance Act allowed trustees to borrow funds for investment purposes, and now the Directive is telling them they must invest in the UK if they want property," he added.

The lobby group has argued that, since 85pc of all pension schemes are for a single individual in so-called 'one-man schemes', restrictions aimed at large pension schemes should not apply.

They argue that the Directive unfairly restricts self-administered pension schemes to investing only in regulated markets. This would seem to rule out the purchase of stocks on the Alternative Investment Market, commodities, utilities and private equity.

"Ireland has been very innovative in the area of pensions legislation and this has been noticed by international investors coming here," said an industry source.

"Implementing this Directive in full would reroute that investment to the UK," he explained.

Jim Aughney



© Irish Independent
& [broken link removed]

That should keep some happy....

Press Release



Following representations by a Working Party of the Pensions Industry in Ireland, comprising 15 representatives from all sectors, including Life Assurance Companies, Stockbrokers, Intermediaries, Pension Trustees, and Pension Fund Managers, the Minister for Social and Family Affairs will be introducing an amendment at the report stage of the Social Welfare and Pensions Bill 2005 next Tuesday in the house.



The effect of this amendment will be to rescind Sections 33 and 36 of the Bill which prohibited pension schemes from borrowing. A spokesman for the group welcomed the Ministers decision as a positive one for retirement savers, and consistent with Ireland’s leading role in Financial Services. “We welcome the broad ranging consultative process which the Minister proposes to hold in the period leading up to the EU Directive in September.” Availing of the exemption for schemes with less than 100 members is in line with the U.K. Pensions Industry, and averts the danger of pension funds moving their assets abroad.

Re: That should keep some happy....

It looks like sanity has prevailed. Seamus Brennan has gone up in my estimation.