Auto-enrolment is one of the main goals of the Irish government’s pension reform plans
- The government’s auto-enrolment plans are designed to address the lack of private pension cover for 65% of workers
- Concerns include excluding people because of age or employment status and the effective abolition of higher rate tax relief
- Promised debt-on-employer provisions remains in limbo
Ireland’s Department of Employment Affairs and Social Protection (DEASP) has been trawling through the welter of responses to its plans to introduce auto-enrolment into the country’s private pension system, since the consultation closed last November.
The plans aim to substantially improve retirement savings coverage; an estimated 65% of private-sector workers still do not have private pension savings.
The plans were published as strawman proposals, designed not as firm government policy but to generate discussion and improve ideas.
Employees aged between 23 and 60 and earning over €20,000 a year will be automatically enrolled into a defined contribution (DC) scheme, with those outside this age group or earning less given the option to opt in.
Employees will initially contribute 1% of salary, matched by employers. This will escalate by 1% a year for both parties for the first six years, so that by 2028 workers and employers would be saving a combined 12% of salary into a pension.
New members joining after 2022 will pay the same percentage as everyone else.
The state will add a further 2% contribution, making a total of 14% of salary, with a salary cap of €75,000. This state subvention – 2%, compared with 6% from the employee – effectively provides 25% tax relief. Universal social charge (USC) and pay-related social insurance (PRSI) are payable on employee contributions.
While the pensions industry is broadly supportive of auto-enrolment it has raised several concerns.
“We support the proposal in principle,” says Philip Shier, actuarial manager, Society of Actuaries in Ireland (SAI). “The ultimate proposed level of contribution should, with an appropriate investment strategy, provide a reasonable level of retirement income to supplement the state pension.”
However, the SAI has concerns about whether the default investment strategy – likely to be where most savings are invested – should be a low-risk fund as proposed by the government, since the SAI says this is unlikely to provide an adequate income at retirement.
“In our view, the default fund should be diversified, to reduce risk, but also have significant exposure to assets that are expected to deliver a real long-term return,” says Shier. “It should also have regard to environmental, social and governance issues. One appropriate structure would be a lifestyle structure which de-risks as a member approaches retirement.”
Roma Burke, partner and actuary at LCP in Ireland, agrees that the maximum contribution rate of 14% will help provide a reasonable income replacement rate in retirement for members starting early and saving consistently throughout their career.
However, she says: “For those taking breaks from retirement saving – for instance, if they have career breaks or take time off work to raise children – or for those starting to save later in life, this contribution rate may not be sufficient to yield a pot large enough to allow people to maintain their lifestyle post-retirement.”
Both she and Shier have reservations about the proposed tax relief system under the plan, which would effectively abolish the higher rate of 40%.
Burke says: “Savers on the standard rate of tax and those that pay no tax will benefit from the proposed new approach. But higher-rate taxpayers will be significantly worse off under the scheme as they will only get 25% relief, compared with 40% under the current regime. This will affect the average person who, according to the Central Statistics Office, earns a full-time wage of €46,402 a year and is therefore subject to the higher rate of tax.”
Furthermore, she says, tax relief at 25% for standard rate or non-taxpayers will increase the overall cost to the exchequer.
And she adds: “Unlike the UK, which operates several tax relief regimes, net pay and relief at source, to ensure that savers are not worse off as a result of the introduction of auto-enrolment, there are no proposals at the moment to introduce something similar in the Irish context. This, in my view, is the biggest drawback of the scheme in its current format and one that I hope the government will address in the final version of the plan.”
Another point around which there has been some discussion is the proposal to set up a Central Processing Authority (CPA), responsible for contracting and licensing up to four “registered providers” to offer a range of savings products. The CPA will collect contributions and forward them to the providers. The intention is to ensure quality and low charges. Investment management fees will be capped at 0.5%.
While the logic behind it meets broad approval, Jerry Moriarty, chief executive, Irish Association of Pension Funds, suggests that this is a potential sticking-point.
He expresses concern that the development of the CPA will become costly and time-consuming, as well as having the potential to delay the introduction of auto-enrolment. “There is no indication in the consultation document of the likely cost of establishing the CPA, the envisaged ongoing costs or the timetable for getting it established,” he says. “It is difficult, without this, to make a judgment on the overall benefit of it and the likelihood of success.”
Under the current proposals, workers will be required to save for a minimum of six months. After that, there is a window for opting out in month seven or eight. If they opt out, the employer contributions (along with state contributions) will be paid to the CPA “as a contribution to its administrative costs thus lowering overall costs and fees to remaining members”.
Burke says: “Assuming a worker earning the 2017 average full-time wage of €46,402 opts out, this means that the CPA could benefit to the tune of up to €1,856 of foregone employer and state contributions. This seems an excessive amount for the CPA to benefit from if one individual opts out after just six months’ membership.”
And she says that if the number of opt-outs is less than expected, costs could be higher for everyone.
“Perhaps the government should consider leaving this pension saving in the pot for the member’s retirement, rather than using it to fund a new state body,” Burke says.
Government wrestles with member protections in insolvency
When a company is wound up, under existing Irish pensions law there is no obligation on an employer to make contributions to an underfunded defined benefit (DB) pension scheme, although for some schemes, the governing documentation may impose such an obligation.
It had been expected that provisions to protect members would be contained in the Social Welfare, Pensions and Civil Registration Bill 2018, enacted on 24 December 2018. These provisions were outlined in a General Scheme of the Bill approved by government in May 2017.
In July 2017, the Bill was introduced but most of these provisions were missing. The minister indicated that additional provisions would be included in the Bill at committee stage but this has not yet happened.
In November 2018, Finian McGrath, minister of state, told the Dail: “The provisions of the 2017 Bill will introduce a new regime into the Pensions Act 1990 that will ensure an employer cannot walk away at short notice from the pension scheme it is supporting by providing a 12-month notification, and will enable the Pensions Authority to make a funding obligation direction specifying payments to be made by a sponsoring employer to the pension scheme where no agreement is reached, within a specified time period, to resolve a funding deficit.”
This would have the effect of creating a debt on the employer (DOE) for a DB scheme winding up in deficit.
McGrath went on to explain that the technical nature of the DB provisions and the existence of complex policy issues had made it necessary to consult and obtain legal advice from the Office of the Attorney General. However, the bill was passed without including any such provisions.
Shier says: “We are supportive of greater protection for members on wind-up, so we welcome the proposal that companies should be required to give notice of termination of the scheme (even where this is not required in the trust deed) and that there should be consultation involving trustees and members”.
However, he considers it unlikely the government will move to introduce a statutory debt on employers: “If this were proposed, there would need to be consideration given to the level of benefits to be protected, as the statutory funding standard may not be appropriate for this purpose,” he says.
Burke says: “The introduction of DOE legislation would help to protect member benefits. However, it could also introduce a misconception amongst non-retired DB members that their pension expectations at retirement are fully protected.
“In reality, it is more likely that the DOE legislation would only protect non-retired members up to their statutory transfer value, which, for many, would fall far short of the level of assets required to secure their pension expectation on a guaranteed basis.”
The government’s intention is to have the scheme up and running by 2022, although industry opinion is that this seems ambitious, given the fundamental issues that need to be ironed out.
Meanwhile, the 13 January 2018 deadline for incorporating IORP II into Irish legislation has not been met. The transposition was being managed by DEASP, supported by the Pensions Authority.
“Regulations regarding the transposition of the directive are being drafted and are at an advanced stage. The department is working towards transposing the directive as early as possible”
Department of Employment Affairs and Social Protection
The DEASP said: “Regulations regarding the transposition of the directive are being drafted and are at an advanced stage. The department is working towards transposing the directive as early as possible.”
Michael Madden, partner at Mercer Ireland, says: “Governance and regulation are a good thing but we have yet to see the regulations. Hopefully they will be practical and reasonable.”
And he says there is uncertainty over whether smaller schemes will be exempt. The Pensions Authority’s view seems to be that they should not.
Madden warns: “Overall, IORP II is threatening smaller schemes because it is making them less viable, less attractive to employers, or candidates for consolidation. It looks as if it will increase the regulatory burden on pension fund trustees, because it adds more to the obligation to consult and administer pension funds, using external resources.
Perspectives on auto-enrolment
Danny Mansergh, head of member communications, Mercer Ireland
Auto-enrolment is overall to be welcomed. Without it, given the ageing population, future generations of retirees will not be adequately provided for. The proposals pitch the level of contributions at a level that should, along with the state pension, provide for adequate levels of retirement income.
However, it is proposed by government that large numbers of people should be excluded, including those under 23 or over 60, the self-employed and those earning below €20,000 a year. We have suggested that there should be essentially no exclusions where people are earning.
We also think the proposal that all retirement accounts should by default be invested in a low-risk manner will not serve members well, given that low risk Implies low growth.
Trades unions are saying employees should not necessarily have to pay in to pension plans, but employers should. Employers’ groups are saying they should not have to contribute beyond a certain period. Attempts from any quarter to reduce the level of contributions should be resisted by government.
Small employers, who may often not have good internet connectivity, will need an administration system that they can work with.
Ann Prendergast, head of State Street Global Advisors Ireland
The CPA is a good mechanism as it allows the pot to follow the member and it eases the operational burden for employers, particularly smaller employers who will constitute a large portion of those impacted. We also think the automatic escalation of contributions looks sensible.
However, 35% of the working population are currently not covered by private pensions and these proposals will only address 410,000 of a potential pool of 860,000 employees and would still exclude some groups such as the self-employed.
The age at which individuals can enrol (23 years) is too high. Furthermore, the salary minimum is €20,000, which would exclude many part-time workers, predominantly women, those with multiple jobs and those just entering the workforce.
The proposals appear to suggest that default investments should be conservative but, in the long run, savers need to take risk to achieve returns which will give them enough to live on when they retire.
James Kavanagh, managing director, Trustee Decisions, an independent trustee company service provider in Ireland
Ireland is currently one of only two OECD countries without a mandatory earnings-related element to retirement. The government has promised to implement auto-enrolment by 2022 (that is, a quasi-mandatory retirement savings system).
While it is clear that there is a positive agenda to have a high-quality organisational framework to encourage workers who do not have pension provision and to save for their future, it is taking quite some time to get this actioned.
What we still await, though, is a pensions dashboard, which would allow individuals to see a summary of all their various pension pots – including their entitlement to state pension – on one platform. This should be rolled out at the same as the auto- enrolment pension.