Financing pension spending will fall to a diminishing share of the population as the ratio of people of working age to every person of pensionable age will reduce from its current rate of 4.5 to 1, to just 2.3 to 1 over the next 40 years.
It is good to see that there is Government commitment to this, and they have proposed an auto enrolment approach, where all employees automatically make pension contributions. It is vital that everyone has their say so that any approach is viable, equitable and affordable for employees and employers.
What the Government has confirmed
- An auto enrolment retirement savings system will begin by 2022.
- This will supplement, not replace, the State pension and complement existing private pension provision.
- The auto enrolment scheme will be an earnings related workplace savings system where employees will retain the freedom to opt out if they choose.
- Auto enrolment will based on a Defined Contribution model with personal accounts. This means benefits would be directly related to the size of the fund that results from contributions and investment return.
- Employees will have the option to choose from a range of retirement savings products.
- Employees, employers and the State will each make a contribution to the member’s account.
The elements of auto enrolment on which the Government is now consulting:
- The details of the operational structure and governance of the system.
- Whether the structure should let employees choose their scheme from:
- all providers who satisfy specified standards.
- a small number of ‘Registered Providers’ selected by tender process.
- How enrolled members who do not select a scheme will be allocated to a default fund.
- The target membership, that is, exactly who will be automatically enrolled. The current proposal is employees aged between 23 and 60, earning over €20,000 a year.
- The level of contributions that should be required from employees and employers. The current proposal is 1% of employee’s pay from the system’s launch in 2022, increasing annually by 1% up to 6% from the beginning of year 6, 2028. Employers will match the employee’s contribution, 1% in year 1, and increasing at 1% a year to an eventual maximum of 6% of the employee’s earnings, to a ceiling of €75,000.
- The financial incentives that may be provided by the State. The illustrative approach suggests a contribution equivalent to €1 for every €3 saved by the employee. For example this would equate to €667 in year one for a person earning €20,000.
- The range of savings products/investment options and providers available to members.
- Conditions relating to member opt-out, re-enrolment and 'Saving Suspension' periods.
- Options available at the income draw-down/pay-out phase.
The current proposals would incorporate a starting population of about 410,000 employees.
The Government has not made any proposal to connect increasing employee contributions to pay increases, or to supports to enable struggling small enterprises to engage in the scheme.
The overall proposals will not improve the situation for many women who continuously work less hours than men, earn less pay and hence are more likely to be excluded from the scheme (income less than €20,000 per annum), and benefit less from lower pay-related contributions.
There is mention of the lower ‘replacement rate’ for those on low income (the income to replace pay in retirement) but this does not present an acceptable rationale for a vulnerable group.
The option of capping the State contribution for those on higher incomes or who have built funds to a certain size, and increasing the support for those on lower income are options to be considered.
The consultation document calls out the need for low costs, simplicity and ease of administration from pension providers. This is critical and will be central to success, acceptability and return rate, especially vital for those on lower incomes. We look forward to the pensions industry engaging positively with this initiative.
CIPD Ireland will be carrying out a consultation process, and please email your views to info@cipd.ie.
