Ireland: Auto-enrolment with a punch
With reforms for ailing DB schemes viewed as more urgent and in parts easier to implement than the sweeping reforms suggested for the DC sector, Ireland seems set to forget its pledge that auto-enrolment was the way forward, writes Jonathan Williams
If you assessed the health of defined contribution schemes in Ireland purely by numbers, then you would only gain a partial picture: There are over 65 times more DC schemes than there are defined benefit schemes in the country, despite an almost 10% drop in open DC schemes between 2008 and 2009. However, likely due to their age and well-established roots in paternal employers, there are over three times as many employees enrolled in DB counterparts as there are in DC.
This leaves a question: with the decline of DB continuing and the Irish government yet to implement its reforms to shore up the ailing system, what can DC do for the sector?
Recent proposals seem to indicate that a strengthening of the DC sector was at hand, following announcements that Ireland would introduce an auto-enrolment system where workers would be entered into a scheme, as long as it proposed contribution rates lower than those on offer from a company scheme.
However, The National Pensions Framework, published by the government in March last year following several years of consultation, did allow for some room to manoeuvre, as the introduction would only take place if deemed prudent "given the economic conditions prevailing at the time".
Under the initial proposals, workers over 22 would be auto-enrolled, but given the option to opt out. However, they would be re-enrolled if inactive for longer than two years, while those who already have their own DC scheme would be given the option to transfer existing savings into the new scheme.
Even prior to the NPF, there was growing demand for a modified DC product.
Emma Watkins, head of relationship management at MetLife Assurance, commented: "As we, as a society, move inexorably to DC approaches to prepare for our later years, there will be an emerging need to both save substantially more than most current DC schemes or the current tax regime encourage and to have structures which allow individuals to easily hedge away the down-side risk of investment choices through minimum balance guarantees and minimum income guarantees."
Other issues include the tightrope act of fund design in a scheme where participants are expected to make informed decisions in a field they may know little to nothing about, an area Jerry Moriarty, director of policy at the Irish Association of Pension Funds (IAPF), singles out.
He argues that in the past, the notion of giving members more control by maximising the number of fund products they can choose between has backfired. Research conducted in the UK in conjunction with the country's own auto-enrolment scheme, the National Employment Savings Trust, indicates that limiting the fund options to a few clearly labelled and distinctive options may be preferable to dozens, if not hundreds, of fund options, as savers in the Swedish Premium Pension System were initially confronted with.
"Trustees need to take more in hand on the investment side and make sure they have the right investment strategy for members," Moriarty believes.
"In particular making sure they get their default fund right," is important he says, with the area of investment as a whole only just receiving the attention it deserves.
He cites a model under discussion whereby members, when first enrolled, would be placed in a fund that would guarantee returns for the first two years. He says this will allow people "get comfortable with the idea of investing, rather than putting people in a fund they don't necessarily want to be in, then telling them it's lost 7% at the end of the year".
Martin Haugh, partner at LCP in Ireland, singles out the education of DC members as key as well, also highlighting the issues of minimum contribution. He adds that any changes to scheme design would likely bleed into the implementation of auto-enrolment, focusing on better member communication, guaranteeing employees do not opt out and are willing to pay above the minimum mandatory contribution.
That is, if auto-enrolment launches according to plan. Only three years away from the 2014 implementation deadline, little has been publicly discussed, with the government indicating that they may use the economic circumstances as a reason to delay it.
"To be honest, I'm not even sure there's been much structural work done that would need to be done to make 2014 happen anyway, because it was always going to be a challenge," says Moriarty.
He believes there is potential to learn from the successes and mistakes of the Personal Accounts Delivery Authority, which was tasked with developing a viable system in the UK.
"I think that if we are looking at a date and it's sometime after the introduction of the UK system, then it would make sense to take any lessons that would have been learned there."
Other issues that need addressing, and which are being discussed in the lead-up to the election, surround tax relief, specifically changes announced in the wake of the bailout as part of the three-year recovery plan.
While proposals initially suggested that DC contributions would attract pay-related social insurance (PRSI) and health levy relief, this has now been abandoned and the health levy replaced with a new tax entitled the universal social charge (USC). Despite only being announced in early December, the changes came into effect in January in an effort to increase the Treasury's tax income.
As both these taxes have to be paid prior to pension contributions being made, it removes the original incentive to make pension saving more attractive across the board, with no relief offered on USC and the PRSI incentives slashed in half.
Additionally, the annual tax threshold for pension contributions has been adjusted downwards, so that workers will now be liable to pay for any contributions made over €115,000 a year, a reduction of €35,000. The measures again echo changes introduced by the UK government.
Moriarty believes that due to the current economic climate, any reforms for now will focus on tangible, immediate changes. "I think at the moment, because there are so many short-term issues, people are concentrating on those rather than the longer-term issues. What the political parties have put out on pension policy is based around tax relief and the amounts that people can contribute to the funds, rather than the structure per se."
Other suggestions have included allowing early access to pension savings, which is already commonplace in other retirement systems, such as American 401(k) plans. "There is some evidence, I think, that even having that as an option encourages people to save in pensions, whether they use it or not ultimately," says Moriarty.
However, he warns: "I can absolutely understand it from a behavioural aspect, but of course the danger of that is you're diluting what you will eventually have in retirement."
Whatever reforms may be implemented in Ireland, they appear a long way off, with matters relating to its ailing economy taking precedent and politicians likely to use their influence to introduce changes that the electorate can benefit from immediately.