On the verge of reform?
Is Ireland finally addressing its low pension coverage and demographic issues?
Evidence suggests it might be, as the social affairs minister and deputy prime minister Joan Burton has announced a working group that will design a universal supplementary scheme. However, previous announcements have seldom been followed by action, and the details of Burton’s plan were still unclear at the time of writing.
The main goal of pension reform in Ireland is to increase coverage of second-pillar pensions, which is now around 50%, thus reducing reliance on the deteriorating state pensions.
Equality should be firmly in sight for Irish decision makers, since pension provision is currently a lottery that depends on your employment situation. Charges, for instance, are significantly higher for participants in smaller DC schemes.
If Ireland is indeed approaching reform, there are a few questions to be asked.
Politicians have delayed action because of the state of the economy, so a first question would be whether this is an appropriate course of action. If you are a governing politician, the answer is probably yes. But if you are a worker looking to build a secure retirement, even a few years of higher contributions or better tax relief make a difference to your pension pot, so a sense of urgency is desirable.
Another fundamental question is which of the policy recommendations offered by the influential 2012 OECD report should be followed.
As the report warned – and common sense tells us – there is no blueprint for pension reform. Indeed, while the better policy option according to the OECD and the Irish Society of Actuaries would be compulsory enrolment, for political reasons Burton favours automatic enrolment.
But there should be a common understanding of the optimal solution. While politicians worry that compulsory enrolment could be misinterpreted as taxation, it is a way to redistribute the collective cost of financing pensions more efficiently. It guarantees increased (if not universal) coverage; whereas there is evidence that automatic enrolment can fall short as a solution to the problem. Italy is an example – having implemented automatic enrolment it is still failing to increase coverage to a satisfactory level because of the structure of its economy.
The final, most urgent, question is whether the introduction of an auto-enrolment scheme will go concurrently with a comprehensive review of the existing DC framework, including tax policy, governance standards and costs. If the answer is no, then by introducing a new scheme Ireland’s policy makers will only add a further unnecessary layer of complexity to an already disproportionately labyrinthine system.