Ireland’s insurance industry has urged its government to learn from New Zealand and Australia when introducing auto-enrolment and backed contributions rising to 10% within five years.
In a wide-ranging report, published as the Universal Retirement Savings Group continues to deliberate on the design of any future supplementary pension scheme, Insurance Ireland called on the government to push ahead with the auto-enrolment reform.
Kevin Thompson, the industry group’s chief executive, said the report’s proposals could increase pension coverage dramatically – with estimates that approximately 600,000 Irish workers could end up saving as a result of soft compulsion.
“Given our demographics and coverage rates, we urgently need a policy approach that maximises participation, achieves simplification of offering and reduces costs,” Thompson said.
Insurance Ireland set out a relatively ambitious timescale for launching the reform, suggesting employers begin by contributing 1% of salary – a payment matched by workers – with each group’s contribution rising by one percentage point a year until contributions total 10%.
The five-year timeline is more aggressive than in the UK, where minimum contributions will not rise to 8% until 2019, nearly seven years after auto-enrolment was introduced.
Australia’s minimum contribution rate only rose to 9.5% in 2014, 20 years after pension saving was made compulsory.
However, both union and employer umbrella groups have previously urged the government to forego planned tax cuts and instead divert the money to the proposed pension system, allowing for its introduction to take place without workers seeing a significant decrease in after-tax pay.
The report, which set out a replacement rate of at least 50% when combined with the state pension, also called for a focus on “value for money” rather than low cost at the expense of innovative investment.
“Excessive pressure on fees and charges may work against the long-term objective of the universal pension to build adequate savings,” the report noted.
It added that a simple pension system would be needed to avoid “unnecessary” costs and achieve “cost containment”.
In line with the model employed by New Zealand, where new KiwiSaver accounts are assigned to a panel of providers by the revenue office, the report also backed such a ‘carousel’ option.
It called on the industry to ensure the administration of the new system is as simple as possible by funding the development of an administration hub, which could help allow pension savings to follow workers to their new employer, removing the risk of stranded savings.
It noted that New Zealand and the UK had decided against such a hub approach and suggested the decision had led to increased costs in the long term.
“The Hub could also be used by small employers that do not have a pension provider to collect contributions and transmit them to an investment fund chosen by an employee – or allocated by ‘Carousel’ method,” it said.
An additional benefit of the ‘carousel’ option would be removing the need for a provider of last resort – in the UK the National Employment Savings Trust (NEST) – which the report said had been launched by the UK government at “considerable” cost.
The recommendations come as Ireland’s minority government, in power since February’s election, pledged to push ahead with pension reform.
The Irish regulator, the Pensions Authority, is working on reform proposals in parallel to the work undertaken by the URSG, and is set to discuss its ideas at an industry forum attended by minister Leo Varadkar later this week.