Pensions In Ireland: Towards a DC future
A t its first meeting of 2015, the Irish Cabinet discussed the introduction of a “new, universal supplementary pension savings scheme”. The plan was presented by Joan Burton, deputy prime minister and minister for social protection.
Burton unveiled a roadmap and timeline for the introduction of the scheme, the details of which have not been disclosed.
The proposal flows from the Irish government’s commitment to “reform the pension system to progressively achieve universal coverage, with particular focus on lower-paid workers”.
Ireland recorded an average score in Mercer ’s Melbourne index published last year, ranking thirteenth out of 25 countries overall. However, in terms of sustainability, it was ranked twentieth, based on the poor outlook for its state pension and limited coverage.
Lawmakers are concerned with low pension coverage and over-reliance on state pensions – two weaknesses highlighted by a 2012 OECD review of the Irish pension system, commissioned by Burton herself. According to the OECD report, in 2010 only 41.3% of Irish workers were covered by a supplementary pension plan.
In future, the strength of the pension system will depend on whether coverage increases to a satisfactory level. One of the key policy recommendations of the OECD to address this was compulsory membership.
At a Glance
• The Irish Cabinet is discussing plans to introduce a new supplementary savings scheme with auto-enrolment to increase coverage.
• However, with multiple possible DC arrangements between employers and employees, outcomes in terms of costs and benefits vary greatly.
• The pensions regulator has called for higher trustee standards and for a reduction in the number of pension schemes.
However, the core of Burton’s strategy to neutralise the ‘pension time-bomb’ is to introduce automatic enrolment. A policy seen as more politically viable.
However, she has said several times that the Irish economy has to fully recover first. The state of the economy has been blamed for the government’s hesitance to implement the OECD’s policy recommendations.
Nevertheless, the government looks set to start working on its coverage-boosting plan.
The design of the new scheme will be discussed by the universal retirement savings development group, a committee that will bring together representatives of government departments and other state agencies. These include the Revenue Commissioners, the National Treasury Agency, the Irish Central Bank, as well as the Pensions Authority, Ireland’s pension regulator, and international experts.
Before automatic enrolment is introduced, there are a number of unanswered questions in the Irish DC landscape that lawmakers need to prioritise in order to improve overall retirement outcomes for Irish employees.
At the moment, three types of DC plans operate in the country – occupational pension schemes, personal retirement savings accounts (PRSA), and retirement annuity contracts (RAC).
However, because of the number of different options in terms of benefit payouts and tax relief, multiple arrangements can be made between employers and employees, making the choice difficult to say the least.
Jerry Moriarty, CEO of the Irish Association of Pensions Funds (IAPF), says that if the plan is to introduce automatic enrolment, work needs to be done ahead of time to make Ireland’s pension system simpler.
“We have a very complicated pension system, and simplification has to be at the top of any agenda,” says Moriarty. “There are too many different routes that apply in terms of contributions, benefits and tax relief. There needs to be tailoring options for employers, but the same routes for members should apply across all products and, in reality, it should just be a matter of choosing whether one wants to be in a contract-based or in a trust-based scheme.”
John Mercer, principal at Mercer in Dublin, points out that there is an “inequity” between different solutions, particularly concerning taxation, that should be prioritised.
He says: “There is a host of irregularities between the products that are available. This complexity drives a lot of costs within the system, both in terms of investment and advice. Having one simple DC model would reduce costs and remove barriers to entry for people.”
For Patrick Cosgrave, head of DC consulting at Towers Watson in Ireland, there is an immediate need to “get people re-engaged with the savings message”. He adds: “We need to get more contributions in play – it is essential, both from an adequacy and a coverage point of view. If we are in a period of sustained low bond yields and low returns, it’s about driving contributions and driving and costs out.”
However, he explains that there is a need to create a framework that would allow multi-employer funds to operate effectively. “In the Irish context, it is difficult to operate a pure UK-type master trust,” Cosgrave says. “The few that are there tend to be tied to an industry segment. When you try to get unconnected employers into a single vehicle, it becomes impractical, and there is uncertainty around the governance structure that would apply.”
The Pensions Authority has been vocal about Ireland’s DC sector. CEO Brendan Kennedy admits that the current DC framework is “more complicated than it should be”, and says that simplification is part of the Pensions Authority’s ongoing discussion with the government.
But Kennedy has pointed his finger particularly at governance and market structure, arguing that the priorities should be improving trustee standards and reducing the number of pension schemes.
The OECD reported that as of April 2012, the number of DC schemes registered with the authority was 65,770, and the number of active members in DC schemes was 239,150. Only 300 DC schemes covered more than 100 members.
The OECD report found great differences in the cost structures employed. Large occupational DC schemes offer competitive charges, whereas and individual, contract-based arrangements were found to be expensive.
Regarding governance, the report said that it was “a potential source of weakness”, because of an “inherent imbalance” between the information and incentives faced by pension providers and individual members.
In particular, the OCED claimed that employers face little incentive to act in the best interest of members, partly because there is no regulatory requirement for employee representation on trustee boards.
Kennedy’s view is that trustee standards need to be improved, as “there are too many underperforming trustees”. He adds: “Our concern is that the way schemes operate could be better, and that the result of them not operating as well as they could is that members won’t do as well as they could.”
He mentions areas where there is “too much variation” in the quality of trustee work across schemes. These are communication to members, cost control, investment choices and, in particular, default investment strategies.
The issues of governance and the high number of pension schemes are related, Kennedy adds. He believes that raising trusteeship standards, including cost control, might put pressure on the number of schemes, as “not all of the current trustees would be able or willing to achieve the standards that we would like to set”.
Having fewer schemes would make governance and asset management more cost-effective, and make oversight by the Pensions Authority more efficient.
While the potential benefits of consolidation between DC schemes are evident, there is less clarity on how mergers would be implemented. The Pensions Authority does not have a specific plan for transition arrangements as it is discussing possible regulatory changes with the Department of Social Protection.
As part of the Pensions Authority’s dial-
ogue with the government, Kennedy is bidding heavily for an increase of the authority’s oversight powers. But the difficulty lies not only in the number of schemes to be regulated; Kennedy explains that, at the moment, the Pensions Authority only possesses powers that allow it to punish misbehaviour.
Ideally, the authority would want interventionist and preventative powers, such as the power to direct trustees’ behaviour, or “putting an obligation on trustees to satisfy us that they are running schemes to a sufficiently high standard”, as Kennedy puts it.
“We need the power to become involved in understanding how schemes are doing on a day-to-day basis and intervene if we feel that they are falling short,” Kennedy adds.
But Moriarty believes the regulator “could do more to support and assist trustees”, and that Irish trustees are lacking a ‘toolkit’ and an indication of what is good practice by the regulator.
“Telling trustees that they’re not doing a good job is fine, but you need to help them in demonstrating what would be perceived to be a good job,” Moriarty says.
For his part, Kennedy says that the Pensions Authority has “set out its objectives and preferences” to the government, and that to achieve those objectives would require the agreement of the minister and possibly legislative change that would have to go through parliament.
There is, however, widespread agreement that taking steps towards universal coverage by introducing a new supplementary scheme requires fixing the current discrepancies between arrangements as they are and retirement outcomes.
Kennedy concludes: “To talk about automatic enrolment as inherently good or bad is too simplistic. It depends on the design and the details, on how it interacts with the state pension and the existing private pensions. That is the work that needs to be done before any decision can be made by the government.”