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IAPF offers tacit endorsement of compulsory saving, collective DC

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The Irish Association of Pension Funds (IAPF) has tacitly endorsed a mandatory pension system as the least complex and costly reform option if the current government wishes to boost participation rates.

The industry body also suggested that a shift towards an auto-enrolment or a compulsory pension savings system could warrant the launch of collective defined contribution (CDC) funds, and said government should let the private sector operate any scheme unless it felt the need for a provider of last resort.

In its response to the Universal Retirement Savings Group (URSG), which launched an informal consultation with stakeholder groups following its launch in February, the IAPF did not explicitly endorse a mandatory system and said it accepted the “political reality” that auto-enrolment may be easier to deliver.

Despite this admission, the IAPF said complexities arising from an auto-enrolment approach would easily fall away if the government chose compulsion, suggesting there were “clear advantages” to a mandatory system.

“Overall, it should be less complex and costly to administer, there is less need for compliance checking and establishing who should be included and when.”

The IAPF’s words echoed those chosen by the OECD when it reviewed Ireland’s pension system in 2013.

The think tank’s report backed compulsory saving and suggested auto-enrolment was a second-rate policy, with the former a “less costly and more effective” means of increasing coverage.

In a letter to the URSG, IAPF chief executive Jerry Moriarty said the association had “some difficulty” in answering the consultation, as it did not set out a clear objective for the proposed Universal Retirement Savings Scheme (URSS).

“We believe that if this had been done and the population of likely participants established it would be much easier to look at issues such as operation and investment,” Moriarty said.

The response said the Irish government should play no role in operating the URSS outside of regulation, noting the importance of establishing a trusted system, and contrasting this with the government’s 0.6% pensions levy and the use of the National Pensions Reserve Fund to support struggling banks during the financial crisis.

“That said, there may be a need for a provider of last resort that would be able to take on low contributions on an uncommercial basis,” the consultation said, in a likely reference to the UK’s launch of the National Employment Savings Trust.

The consultation also suggested the reform could see the launch of CDC funds, as these could be more appropriate than individual accounts. “If a collective DC arrangement was established it could provide more equity across generations and therefore more certainty of achieving the desired goals.”

The IAPF alos said any investment strategy would need to take an appropriate amount of risk to meet agreed objectives, in an absence of a pre-determined replacement ratio for the URSS.

It also argued that there should only be limited investment choice, with a default fund a necessity.

Asked about the timeline for its introduction, the IAPF said it preferred a “big bang” approach, allowing for the system to establish scale “sooner, rather than over generations”.

The URSG has previously said that it would look to table its proposals by the end of the year, but minister for social protection Joan Burton has not given any indication of when the system would be in place, insisting there would be a “very gradual” rollout once economic factors allowed for the launch.

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