Ireland: Building a 21st century pension system
The government is planning sweeping changes to the country’s entire pension system
• Ireland is attempting to update its entire pension system, from occupational rules to the retirement age
• Reforms are aimed at making the system sustainable for an ageing population.
• Consultations have been launched on the state pension and DC master trusts, with more to follow
Across Europe there are themes that appear to be running in parallel in several countries: introducing automatic enrolment, implementing defined contribution (DC) reforms, addressing defined benefit (DB) challenges, raising default retirement ages. In Ireland, the government has decided to do all of these more or less at the same time.
In March, the Taoiseach (prime minister), Leo Varadkar, announced a five-year “roadmap for pensions reform” encompassing the state pension as well as both private sector and public sector provision.
He said the government wanted to “create a fairer and simpler contributory pension system where a person’s pension outcome reflects their social insurance contributions, and in parallel, create a new and necessary culture of personal retirement saving in Ireland”.
Varadkar – who was minister for social protection before becoming prime minister – said Ireland was “facing a number of challenges” from changing demographics and the knock-on effects on government finances and retirement security.
In the next 40 years the ratio of working age people to pensioners was expected to fall from 4.5:1 to 2.3:1, he said.
The six strands of the reforms cover:
• A ‘total contributions’ approach to the state pension, including maintaining its value at 34-35% of average earnings;
• Automatic enrolment to address Ireland’s “significant” pension savings gap;
• Improvements to the sustainability of DB schemes and protections for members;
• Changes to public sector pension rules;
• The implementation of the IORP II directive;
• Flexibility to allow people to work past their default retirement age.
The first elements for consultation were the changes to the state pension. A call for responses went out in May and was set to close on 3 September 2018.
Regina Doherty, minister for employment affairs and social protection, said the plans were aimed at guaranteeing that state provision would “remain the bedrock of the Irish pension system”.
Under the current yearly average method, some people risk losing part of their state pension due to gaps in their contribution records. The new approach is designed to remove this risk, according to the government.
The default retirement age is due to rise to 67 in 2021 for both men and women, and to 68 in 2028.
In July, the Pensions Authority – Ireland’s regulator for occupational pension schemes – released a consultation on the future regulation on multi-employer DC master trusts, in an effort to prepare for the expected introduction of automatic enrolment from 2022.
The authority warned that there were “far too many pension schemes that are delivering poor outcomes for members” and expressed a desire to see “a smaller number of larger schemes to provide for future saving”.
Its reforms are linked to the implementation of IORP II rules, which are due to bring in additional governance requirements for pension schemes and their trustees.
The regulator proposed a range of requirements for master trusts, covering trustee board structures, business plans and capital requirements.
Trustee boards must ensure their schemes are “sufficiently capitalised”, the Pensions Authority said, with access to enough cash for two years of operations without additional injections. The regulator did not specify a figure for this, but said it planned to review each master trust’s financial position annually.
“Given their potential scale and inherent complexity, the authority will consider master trusts to be in the highest risk category for supervision and specific reporting requirements will be in place,” the regulator stated.
A more contentious area is DB protections. As in the UK – which has a very similar system to Ireland – the trend from DB to DC provision has resulted in many DB schemes closing to new members and future accrual.
However, unlike the UK, Ireland has not had a strict rulebook requiring employers to fully fund their schemes. This situation was highlighted in 2016 and 2017 during a dispute between publishing company Independent News & Media (INM) and its employees, after the group announced its decision to stop paying into two DB schemes.
After months of public debate, INM agreed to pay a combined €115m into all its pension arrangements, including the DB schemes, to fulfil a funding plan struck in 2013.
Pressure from opposition politicians led to the publication of proposed reforms in May 2017. However, these were put on hold in order to form part of the wider pensions and welfare-reform drive launched this year.
When questioned by Willie O’Dea of the Fianna Fáil party – a former justice minister – on the status of the proposals in July, Doherty reaffirmed the government’s commitment to increase protection for DB scheme members.
“These proposed provisions will ensure that an employer cannot ‘walk away’ at short notice from the pension scheme it is supporting,” Doherty added. “They seek a middle road between the current position where employers can abandon DB schemes and full and immediate debt on employer provisions.”
Included in the proposals are new powers for the Pensions Authority to step in if trustees and employers cannot agree a funding plan.
However, Doherty said the provisions were “quite technical and complex”, adding that it was “essential that any new measures recognise the current pension landscape in Ireland so that a balanced, proportionate approach is developed and that unintended negative consequences do not arise”.
As of July the proposals – contained within the Social Welfare, Pensions and Civil Registration Bill 2017 – were being “finalised” by Ireland’s Office of the Parliamentary Counsel, which drafts bills on behalf of the government. Doherty said that, once this process was complete, the bill would be sent to the appropriate parliamentary committee for discussion.
A positive funding picture
While the government has been busy attempting to make Ireland’s pension system sustainable, the present state of the country’s occupational schemes appears reasonably healthy.
Data from the Pensions Authority published in June showed that almost 80% of defined benefit (DB) schemes met the regulator’s funding standards.
A year earlier, the figure was 70% – itself a marked improvement from the estimated 20% 10 years ago.
Jerry Moriarty, CEO of the Irish Association of Pension Funds (IAPF), says there had been a “major turnaround” for schemes aided by improving investment returns, favourable interest rates and “a lot of extra funding” from employers.
Meanwhile, sponsors of defined contribution (DC) schemes were found to contribute more than 5% of salary to their pension plans, according to the IAPF. DC schemes have replaced DB schemes in 88% of cases, the association found.
The maximum employer contribution rate exceeded 10% for half of the DC schemes, with 8% of employers contributing more than 15% of salary. In total, the IAPF said, 86% of schemes paid more than the traditional, typical contribution rate of 5%.