After years of dithering and prevarication, Ireland is to get an auto-enrolment retirement saving system to encourage employees to provide for additional retirement income to supplement the State pension. The Government has committed to the scheme by 2022, fully 15 years after the concept was first mooted.
Under the current proposals, which are subject to a public consultation process at present, employee savings in the scheme will be supported by employer and State contributions. It is envisaged the level of contributions will be set at 1 per cent of salary for employees with matching contributions from employers and the Government adding €1 for every €3 contributed by the employee. This will eventually rise to 6 per cent in 2028, with the employer matching the employee contribution and the Government adding a further 2 per cent.
Employees between the age of 23 and 60 will be auto-enrolled. They will have the freedom to opt out should they so choose, however, experience in other countries indicates that once automatically enrolled, workers tend to remain in the system. The hope is this experience will be repeated in Ireland.
The proposal has been given an almost universal welcome. All previous efforts to encourage people to save for their retirement have been dismal failures. Fewer than 36 per cent of private-sector employees have any form of supplementary pension coverage and that level is actually less than it was at the turn of the century.
"Auto-enrolment is something that's been hanging around for a long time," says Bank of Ireland head of pensions Bernard Walsh. "In 2007, the late Séamus Brennan proposed it and it's been pushed out time and again since then. There are still one million people without supplementary coverage and many of those with pension pots will find them inadequate when it comes to retirement. Auto-enrolment is absolutely necessary. The question is how quickly you can bring it in."
David Boylan of Davy says the need for an auto-enrolment scheme is quite obvious, but it does raise a question in relation to the level of Government support. “Two-thirds of private-sector workers do not have an occupational or other supplementary pension,” he says. “The State pension is not sufficient and the Government’s preferred way to address this is through an auto-enrolment scheme, not unlike UK model. The Government top-up at a rate of €1 for every €3 contributed by the employee is good for those on the 20 per cent tax rate, but not so good for those on the 40 per cent marginal rate. There is no clarity in the strawman consultation document as to whether the tax relief at the top marginal rate will remain in force for existing occupational and other personal pension schemes. It would be better to keep this relief.”
Relief should be retained
KPMG tax actuary Joanne Roche agrees that the relief should be retained. "We recommend that the current pension tax relief system is retained for the non auto-enrolment group of savers, whether under occupational schemes or personal pension products," she says.
“With regard to the question of how any financial incentive system and existing marginal relief system may operate in the future, we are of the opinion that two potentially viable options exist. One is a new and distinct ‘financial incentive’ for the new cohort of pension savers enrolled through automatic-enrolment, which could sit side by side with the existing system, which would remain unchanged. The other is to apply a Government contribution of say €1 for every €4 contributed to all pensions at source and permit higher-rate taxpayers to claim additional relief in their tax returns.”
State Street Global Advisors managing director Ann Prendergast is another who believes an auto-enrolment scheme is necessary to address the low level of pensions coverage in Ireland.
“We do a lot of detailed research in the pension market and some of the findings are very telling. Only 15 per cent of Irish pension scheme members are optimistic about their financial situation in retirement. That’s very low by any standard. Among 45-54 year olds, that falls to just 5 per cent. Only 25 per cent are optimistic that they can retire when they plan to.”
Interestingly, there is no sense of people looking to blame the Government or anyone else for their predicament. “The findings in relation to ownership are very interesting,” she says. “This is particular to Ireland, where 74 per cent of respondents said they are responsible for providing for their retirement. People accept responsibility but don’t know what to do about it. That’s where the Government can step in with an auto-enrolment scheme.”
Coverage and adequacy
The proposal is not without its flaws, however. Prendergast points out that coverage and adequacy are the two most important measures by which to judge the scheme and it falls down in relation to the former.
“We want more people saving more money into better investment solutions,” she says. “Only 35 or 36 per cent of private-sector employees are covered by supplementary pensions at present. That leaves 860,000 PAYE workers not covered. We are concerned that the strawman proposals to restrict auto-enrolment to 23 to 60 year olds would only cover 410,000 PAYE taxpayers – they are not even getting to 50 per cent. It is flawed as far as that is concerned.”
The strawman document also envisages a €20,000 income floor below which people wouldn’t be auto-enrolled. “That threshold ignores the fact that there may be lower earners in that cohort who could be in higher-earning families. Lower earners also have the potential to become higher earners. Also, people could have more than one job. This is potentially ignoring a vulnerable group. If people really can’t afford a pension, they can opt out.
“On adequacy, I think they have probably got it right with the 6-6-2 model,” she adds. “It is good that the initial contribution level is set low to get people into the system and used to it. I would be quite happy with the adequacy of the proposed scheme.”
Indeed, the scheme should be more than adequate for people who start early enough, according to Roche. "Looking at an auto-enrolment scenario, an individual starting at age 23 with a starting salary of €30,000 and looking to retire at age 68 would need around 12 per cent in contributions to fund a pension of two thirds of their retiring salary, according to the Pensions Authority calculator. This 12 per cent compares with the mooted 14 per cent under the auto-enrolment strawman from 2028 onward. Whilst funding under auto-enrolment will represent a significant challenge, particularly for the SME sector and those currently without any pension schemes in place, we can be hugely optimistic about the ultimate outcomes for individuals."