The Pension Levy will now be used to help defined benefit schemes facing financial difficulties
By Business Editor David Murphy
When Governments create new taxes they tend to be reluctant to abolish them.
So it was not surprising when it was announced that the Pensions Levy would continue to harvest capital in 2014 and 2015, even though its abolition had been promised for next year.
Although originally established to fund a jobs creation scheme, Social Protection Minister Joan Burton has now announced that the levy will be used to patch-up defined benefit retirement funds that are bust.
Minister Burton had to do something about this category of pension. They were designed to provide a fixed percentage of an individual’s salary upon retirement but many of them are now grossly underfunded.
Defined benefit schemes differ from defined contribution funds, which operate like an account in an employee’s name – when a worker with one of those retires, they receive whatever is in the fund and there are no guarantees.
In fairness to Joan Burton, she is not proposing that the levy bears the entire shortfall on a defined benefit fund, but instead ensure that pensioners get at least €12,000 per year. In some cases the Pension Levy might also be used to help shore up an underfunded defined benefit scheme where it – and the company that operates it – is insolvent.
There is one thing that needs to be borne in mind about the Pensions Levy – it is not a tax on the gain in a retirement fund but a levy on the capital. So even if an individual’s pension declines in value the Government will still take its pound of flesh.
All this raises a simple question: Is it fair that defined contribution schemes which offer no guarantees are used to fix funds which promised guarantees they could never meet?