The government has confirmed to The Business Observer that insurance products are going to be considered suitable as third pillar pension products.
By doing so, it has bitten the bullet and accepted what it has been told by the industry for some time: it was never going to worth providers’ while to invest in new products – especially annuity-based ones – given the expected low number of investors.
And it was going to be even less worth their while if the investors were already their clients for long-term insurance products.
Ergo, why not just attach the fiscal incentives to existing ones – and just tack on a few eligibility criteria to make them sound like pension products? For example, that payouts will not be made before the beneficiary is 50...
The government itself has stressed the long-term nature of pension products, saying that over a 25-year span, this represented tax credits of €7,500 but much more importantly an investment into one’s retirement of €50,000.
If you assume (very, very optimistically) that 20,000 people would take up these products, it would mean €150 million in tax credits over the 25 years (assuming all remains the same), but savings of €1 billion. That means the government would have to miss out on €6 million a year in tax revenue and deferred consumption – but comforted by the knowledge that those 20,000 will have put aside €40 million each year, fermenting slowly, which will give them a slightly better lifestyle in retirement and be a slightly lower burden on the government.
Why did the government do this, at last? So far, no third pillar products have been launched, several months after the fiscal benefits were announced. How embarrassing for the government – and how irritating, after having been chased by providers for years, to now have them go all coy.
For insurance companies this is a win. They will merely need to endorse existing policies and tweak products – getting €150 from the government to pass on to their customers, for doing exactly what they were doing before.
For customers this is also a win. Those wise enough to already be putting money into long-term insurance products will be rewarded by a bonus of €150 a year (in the guise of a tax credit). For those who have not yet started saving, perhaps (perhaps) it will be enough of a reminder that they should be doing so.
For the government it is also a win. They were going to give the tax credit anyway and whether you call it a third pillar pension or an insurance product or a retirement annuity, the aim is the same: to encourage people to save now so that they will have a more adequate pension in the future.
All good? For sure. Except if this makes sense now, it also made sense 10 years ago. The White Paper on Adequate and Sustainable Pensions suggested third pillar pensions should be introduced on a voluntary basis in January 2006. We have effectively wasted 10 years. By now there would already be €400 million in that third pillar pot, growing according to the magical rules of compound interest.
By now we might have been talking about second pillar occupational pensions, not putting them off yet again for review in five years time. That is the real shame.
The government can make all the excuses it wants about economic recovery and financial crises. Would it really have been so impossible to do this 10 years ago given that the answer was so pragmatic after all?