The Irish Old Age Security System in 2020

By Elaine Dewhurst, University of Manchester¹

The evolution of pension provision in Ireland has followed a rather traditional trajectory with original provision of minimum assistance being supplemented over the years by standard state pension provision and finally the promotion and regulation of top-up private pension arrangements. Beginning in 1908, the Old Age Pension Act provided for a means-tested non-contributory state pension aimed at securing basic income for those who could not otherwise afford to provide for their needs. This scheme of minimum assistance has been widened considerably over time. More standard forms of pension provision began to emerge in the 1930s and the Social Welfare Act 1952 finally laid the foundation stone for the existing coordinated scheme of social insurance. The foundations of the contributory state pension as we know it today can be identified in the system of employee and employer contributions established during this time which was given legal status in the Social Welfare (Amendment) Act 1960. While occupational pension schemes (in both the public and private sectors) existed for many years, it was not until the Pensions Act 1990 that provision was made for their regulation. However, fears related to low pension provision in the private sector led to the establishment of the ‘Personal Retirement Savings Account’ (PRSA) scheme, a form of private pension top-up. While anyone can take out a PRSA, there is a mandatory obligation on employers who do not provide a private sector occupational pension scheme to offer a PRSA scheme to their employees, which employees can voluntarily join. In general, a PRSA is usually a top-up only for those that are covered by other forms of standard protection in old age. ‘Retirement Annuity Contract’ (RAC) schemes are also available as private top-ups to persons who have or have had some form of relevant earnings. The Irish system of pension provision now comprises ‘standard protection’ mainly in the form of State Pension (Contributory) and occupational pension schemes in the public and private sector. Benefits can be ‘topped up’ via private pension schemes. Social welfare provision, which also includes the State Pension (Non-Contributory), aims to provide ‘minimum’ assistance to those that require it.

Standard Protection in Old Age

Standard pension provision in Ireland comprises State Pension (Contributory) and public and private sector occupational pensions. The entire workforce is mandatorily insured by the State Pension (Contributory) which is a pay-as-you-go (PAYG) insurance scheme with benefits linked to the number of Pay Related Social Insurance (PRSI) contributions paid during a person’s working life. In principle, the State Pension (Contributory) is available to anyone who reaches State Pension age and has made sufficient PRSI contributions. The scheme has two unusual features: it is a flat-rate benefit, the rate of which is determined by reference to the number of PRSI contributions (as opposed to the size of those contributions) that have been made throughout their working life, i.e. from the age of 16 to the State Pension age. An individual will need ten years’ worth of contributions to be eligible for the State Pension. Calculations to determine the level of benefit can be carried out using two alternative methods, the most beneficial calculation being applied in favour of the recipient: (a) an average rule which looks at the number of contributions and the length of time since the date of first entry into the PRSI system with an average of 48 PRSI contributions per year entitling the recipient to a full State Pension or (b) a total contributions rule which calculates the pension benefit by reference to the total contributions made with 40 years of employment entitling a person to a full State Pension. The flat rate is proportionately reduced depending on average or total contributions. Gaps in contributions can be filled through voluntary contributions or through the Home Caring Period Scheme which was introduced to ensure that persons who left work to care for children are not disadvantaged by contribution calculations.

Specific public sector occupational pension schemes exist for public sector and civil service employees. These are mandatory occupational pension schemes and are financed in a PAYG manner. All public servants are members of either the ‘Single Public Service Pension Scheme’ if they joined the public service after 1 January 2013 or a pre-existing sector-specific occupational pension scheme (e.g. teachers’ scheme), if they joined the public service prior to 2013. The main difference between the newer and older schemes is that the defined benefit in the single scheme is calculated by reference to a career average model whereas the sector schemes have retained a final salary model. A public or civil servant can claim both State Pension (Contributory) and pension benefits under their sector-specific occupational pension schemes. Other private sector occupational pension schemes also exist as standard protection for those in employment. These pension schemes are made available to employees by employers on a voluntary basis and are funded out of member contributions. Private sector occupational pension schemes can be defined benefit, defined contribution or hybrid schemes. Such schemes may be included in collective agreements within the workplace but this is something which would have to be negotiated by the employer and the trade union.

Top-Ups

The main top-up pensions arise from personal private pension schemes namely, PRSAs or RACs. Unlike private sector occupational pension schemes which are linked to economic activity, anyone can pay into a personal pension scheme provided they meet the eligibility criteria. RACs are similar to more traditional personal pensions which are operated like voluntary insurance contracts allowing individuals to claim tax relief on contributions (this means that in order to access an RAC a person must have or have had some form of relevant earnings). PRSAs were introduced in 2002 in an attempt to fill a pension gap with an increasing number of people reaching retirement age with limited or no pension provision. A PRSA is effectively another type of voluntary personal pension plan which operates in a manner similar to an investment account allowing the contributor to save for retirement flexibly. Tax relief is available on contributions. Private employers who do not provide a private sector occupational pension scheme or who have employees who are excluded from the scheme (even temporarily) must offer all employees access to at least one standard PRSA product.

Minimum

In order to guarantee a basic income for persons over the retirement age in Ireland, the State Pension (Non-Contributory) is available. This is a means-tested social assistance payment financed from general taxation. The means test includes an assessment of both cash income and capital (excluding the personal home). A person cannot claim a State Pension (Non-Contributory) in addition to a State Pension (Contributory). Some individuals with limited contributions may decide to take a State Pension (Non-Contributory) where it is more financially lucrative to do so. In addition, to the State Pension (Non-Contributory) or a low-rate State Pension (Contributory) certain social assistance payments are also available which are generally means-tested. This so-called Basic Income Support in Old Age includes payments such as Rent Supplement, Living Alone Increase, Household Benefits Package, Free Travel Pass, Fuel Allowance, Island Increase and Centenarian’s Payment.

¹ Special thanks to Mr. Peter Dewhurst, tax and pension expert, Ireland, for expert comments.