Minister for Social Protection Leo Varadkar is on a mission to get Ireland saving for retirement. Last week, the Minister announced his plans to introduce a universal "SSIA-style" retirement savings plan by 2021, designed to increase the level of pension coverage in the private sector from the current 35 per cent.
Auto-enrolment (where employees are automatically enrolled in pension savings plans on entering the labour force) has been on the Government agenda for some time, and progress in this direction is to be welcomed. All the global evidence suggests auto-enrolment leads to significant improvements in both the number of employees saving for retirement and in the total level of private pension savings, both of which are urgently needed in this country.
While the details of the Minister’s plan have yet to be seen, the most important question remains: how will the nuts and bolts of this new system work?
Will the SSIA-style incentive be more or less favourable than existing tax-relief arrangements for pension contributions? While simplicity and ease of understanding are key to improving participation and engagement levels, the potential risk of inconsistency with the existing tax-relief system needs to be carefully managed. A 25 per cent government top-up on any pension contributions would be worth significantly less than the tax relief received by a top-rate taxpayer.
Other pressing questions include: what level of contributions will workers be expected to make at the outset and in the future, and what type of investment strategy should be sought? In seeking to answer these questions we should look to the UK, where auto-enrolment was rolled out a number of years ago.
The approach taken was to start with low contribution levels, rising over time, coupled with a conservative investment strategy in the first few years. The logic here was to gently ease the workforce into participating in the new world of retirement savings by minimising the level of disruption and upfront cost. As a result there are now about six million additional retirement savers in the UK. In Ireland, initial contribution rates could be linked to a reduction in USC/PRSI to minimise the immediate impact on workers’ pockets.
Finally, what about the savings vehicles themselves – how can we ensure value for money and appropriate governance and oversight?
One approach would be to launch a variant of the existing personal retirement savings account (PRSA) contract. Using this type of approach employers would select an insurer or other PRSA provider and set up the contracts on behalf of employees, with employees contracting directly with the PRSA provider from that point onwards. Under this model, responsibility for all aspects of the savings vehicle – overseeing the PRSA provider’s performance, ensuring access to appropriate investment funds and value for money – rests with the individual employee.
A much better approach would be to leverage the existing trust model already widely in use across the private retirement savings landscape.
At the core of a trust-based system is a reliance on plan trustees to ensure the pension plans they govern are the very best they can be – a feature conspicuously absent in insurance-based contracts.
Trustees have played a hugely valuable role in developing and maintaining good practice in Irish pension plans over the last 50 years. Through their relentless pursuit of best possible outcomes for their members, the quality of investment options available has improved dramatically, as has the level of support and guidance now offered as a matter of course to pension plan members.
Traditionally, responsibility for trusteeship has rested with the management and employees of the sponsoring employer. This is unlikely to be practical for vast numbers of smaller employers, nor is it to be encouraged.
The solution lies in the use of a multi-employer trust, or “master trust”, with inbuilt professional trusteeship. Many different employers can participate in the single master trust, each with its own distinct set of contribution rates and benefits. All participants can leverage the administration and investment arrangements established for the trust as a whole, thus creating economies of scale and better value for money for individual retirement savers, at no additional cost to the employer.
The master trust approach is in the early stages of adoption in Ireland, but is already hugely popular in more mature retirement savings markets such as the UK and Australia.
So, while the Minister’s grasping of the private pension savings nettle is to be welcomed, and his outline plan for this SSIA-style savings plan is interesting, the devil, as always, will be in the detail. To truly achieve our goal of financial security in retirement for Irish employees, we need to ensure the savings vehicles provided for them are well-governed, constantly evolving and at all times represent good value for money. Master trusts appear to offer a ready-made solution to address this challenge.
Mairead O’Mahony is head of Mercer’s defined contribution pension practice in Ireland