It's been a long time in coming but is a private pension for all ever actually going to get here?
First mooted back in 2006, auto-enrolment, where employees are automatically enrolled into a pension scheme and receive contributions from both the Government and their employer to help them save, finally looked to be on its way following much discussion and the publication of a specific proposal by the Department of Employment Affairs and Social Protection last summer.
With fewer than half (47 per cent) of all workers having a workplace or private pension, and concerns over the future viability of the State pension, the need for a supplementary savings is seen as essential.
It's an approach that has worked well in other countries, with Australia, New Zealand and the United Kingdom just some of those to adopt some form of auto-enrolment.
Now however, following a bruising consultation process, an implementation date of 2022 has to look somewhat uncertain. As Minister for Employment Affairs and Social Protection Regina Doherty has said herself, much of the Government's proposals were "ripped apart" in a process that attracted more than 100 submissions and finished last November.
Brokers Ireland want the whole approach "redesigned", while the Small Firms' Association (SFA) says it has "serious concerns" on some of the key design issues, and Cork Chamber says "much more engagement" with business will be needed before the scheme can be finalised.
Early Childhood Ireland says the whole approach "needs to be reconsidered and anchored on evidence-based proposals".
Ms Doherty says the feedback will now be “used to inform the preferred operational structure” of auto-enrolment. But what exactly were the objections?
Start it earlier
The Government has indicated that employees should be 23 or over when they enter the scheme. Respondents say this is too late. The Irish Congress of Trade Unions (Ictu), for example, wants the age trigger aligned with the PRSI minimum age threshold of 16 years.
“A person could have seven wasted years between ages 16 and 23, when they have started their working lives but are not saving towards a more financially secure retirement,” it argues.
Irish Life wants it to start at 18, warning that if people are working for five years and then start paying into a pension, they'll "see a drop in their earnings and most likely seek to opt-out of the system".
Start at lower earnings
The proposals also suggest that you will only be enrolled in the scheme once your earnings hit €20,000 per annum. Critics say this is too high. Ictu says there should be no lower-income threshold, as this would ensure that the large share of workers working part time, with multiple low-paid jobs, and on non-standard contracts will be automatically enrolled “which would have the added benefit of narrowing the gender pensions gap”.
Irish Life also says there is a case for setting the earnings threshold lower – somewhere between €15,000 and €20,000 – “perhaps €17,600”, while Early Childhood Ireland notes that a limit of €20,000 would exclude many employees working in the childcare sector, where average earnings would be less than this, and “these vulnerable workers need to be considered when designing sustainable pension schemes”.
The SFA, on the other hand, only wants people automatically enrolled when their income exceeds €25,000, though it adds “employees outside these thresholds should be able to opt into the system”.
Another issue could arise with people who suddenly enter the scheme. Consider someone earning €19,500, or €1,528 a month, who gets a pay rise to €20,000. Now they’re earning an extra €24 or so a month; but they’re giving up €120 because they’ve entered auto-enrolment.
“This will create significant additional pressure on payroll costs of employers and result in refusal of promotion (eg for a part-time worker),” warns the Chartered Institute of Personnel and Development (CIPD).
Let those aged 60+ join
The current proposal does not envisage auto-enrolment for those aged over 60. But doing this, as well as excluding those aged under 23 and those earning less than €20,000, will keep about 450,000 people out of auto-enrolment – more than it will include. There have been calls to include older workers.
Age Action says “consideration should be given to encouraging those without pension coverage and over the proposed maximum age of 60 years to register”, while the CIPD also believes that 60 is too young to stop making contributions, if people aren’t going to retire until later, although notes that it might make sense to only allow people join the scheme up until the age of 60.
Standardise tax relief
One of the key sticking points is the method of tax relief proposed under auto-enrolment, which will give rise to two different tax incentive systems for private pension savings. On the one hand, there is the current system, where you get tax relief of 20 per cent on your pension contributions if you earn less than €35,300, and 40 per cent if you earn more than this and pay tax at the higher rate.
On the other, there is auto-enrolment with its proposed SSIA-type approach. This offers a Government incentive of €1 for every €3 you save, equal to tax relief at a rate of 25 per cent.
Many respondents say that there is no room for both, and that Government should stick with the current regime – no doubt spurred by fears that introducing a third rate of tax relief could suggest that the Government’s intention is to standardise all tax relief at this level in the longer term.
Irish Life says this approach “would not appear optimal”, adding that it would cause “needless tax arbitrage and confusion within the market”.
“This would go very much against the principle of simplicity in the wider pensions landscape,” the life and pensions group says.
Industry association Insurance Ireland is of a similar view, arguing that the two systems should operate in a “consistent, complementary fashion”.
“There should be no potential to arbitrage as between one and the other,” it says, adding it “cannot agree with a State incentive system which is inconsistent with the existing system of tax relief”.
But financial adviser Tony Gilhawley of Technical Guidance, who authored a report on pension tax relief with Roma Burke last year, argues that this view might be overdone. The figures show that just 30 per cent of those claiming pension tax relief do so at the standard rate; so the numbers who might be tempted to move to claim relief at 25 per cent is a "relatively small group".
He says that the optimum situation is to keep auto-enrolment relief at 25 per cent, and also keep the current system of relief in place. “That has the best chance of success and claims of massive disruption etc by running dual systems of tax relief is way off the mark in my view,” he says.
Make employees pay less
Another frequently expressed concern is the affordability of the scheme for employees; after all 6 per cent from gross income every year is a not insignificant sum. Particularly if you’re on a lower wage. It would mean that someone earning €20,000 would have to give up €1,200 of their gross income a year, or €100 a month.
Early Childhood Ireland says it “struggles to comprehend how an individual earning this salary could afford these pension contributions”.
To combat this issue of affordability, the SFA suggested the contribution rate would be set at 1 per cent for the first three years, 2 per cent in year four and 3 per cent in year five. “The maximum contribution of 3 per cent after five years should be followed by a review,” it says.
The Irish Association of Pension Funds (IAPF) is of a similar view, and it suggested that it might be wiser to set maximum employee contributions at 4 per cent or 5 per cent of net salary.
Make employers pay less
It’s not just employees who will have to contribute what some consider to be too much; some employers say they too are being asked for too much.
Under the current proposals, employers will contribute 6 per cent of salary once the introductory period ends. Many say this isn’t feasible. In its submission, Early Childhood Ireland says it was concerned that the scheme “could worsen the staffing crisis in the sector and impede the professionalisation of the sector”.
It fears that employers won’t be able to afford to cover the costs of the scheme – with some unfortunate consequences. “We are concerned that early years providers would be forced to enrol staff on short-term contracts, working part-time hours to avoid paying pensions contributions for staff so that they can keep their setting open,” it says.
Some contributors also want the upper threshold on earnings for the purpose of employer contributions for those eligible for the scheme lowered from the €75,000 currently envisaged, as this would keep higher earning employees outside the scope of the scheme, thus costing employers less.
“At 6 per cent, an employee on €75,000 will cost an extra €4,500 per year, a significant burden especially for small employers,” the CIPD says, arguing that to address this, a parallel tax reduction should be explored, especially for small employers.
The SFA argues for a lower limit of €50,000, and says employers should match employee contribution rates only during the five-year introductory phase. But not everyone thinks like this, and others want a much higher cap.
Irish Life says there is no “logical rationale” to apply a differing cap within auto-enrolment to that applying in existing occupational pensions.
“Therefore the cap on qualifying earnings should be €115,000 rather than €75,000 in order to ensure equality of treatment of members across the different systems.”
Let fund managers charge more
Respondents to the consultation have also expressed concern about capping fees that fund managers can charge. In the consultation document, the Government proposed capping the maximum annual management and investment charges at 0.5 per cent of assets under management. This is significantly less than that allowed with personal retirement savings account products, whereby pension fund managers can take 5 per cent of the contributions paid, as well as charging up to 1 per cent a year on the fund’s value. Pension fund managers want to be able to charge more.
“We see a cap on charges as an inappropriate intervention in a fast-moving market, stifling competition and innovation,” Insurance Ireland says.
Brokers Ireland called the 0.5 per cent charge “low and unrealistic”, as it doesn’t include advice, and hides the “substantial distribution and contribution collection charges”. It also wants to see provision for advisers to be paid from the member’s pension account where the consumer wants and needs advice, and says “flexibility” is the best route, as a “ low charge fund is not necessarily always the best fund for a contributor in the long term”.
“In particular we believe that scope should be allowed for actively managed funds to be allowed to charge more than passively managed, indexed funds, or low risk cash funds,” it says.
Ictu, however, says that the 0.5 per cent charge is already “excessive”.
Let homemakers and the self-employed opt in
Under the proposals, those who are self-employed won’t be automatically enrolled, but will be able to opt in, and there is broad consensus about this.
“Self-employed people should be able to opt into the system,” the SFA says. “Where they [self-employed] are not earning a salary, there could be a maximum monetary amount that they can pay which would also benefit from the State contribution. The UK auto-enrolment system facilitates non-earners contributing,” says the IAPF.
If the self-employed are kept out of auto-enrolment, some fear employers could look to hire people on such a basis to avoid having to make pension contributions. As Ictu notes, it could “further increase the financial incentive for unscrupulous employers to use bogus self-employment arrangements”.
There were also calls to allow people outside the workforce, such as carers and homemakers, to opt in to the scheme so that they can avail of the State contribution.
Auto-enrolment: the proposals
– Employees aged between 23-60 will be enrolled into pension scheme if they’re not already in one.
– They must earn between €20,000 -€75,000 a year to qualify.
– Employees will contribute 1 per cent rising annually to an eventual 6 per cent.
– Employers will contribute 1 per cent rising annually to an eventual 6 per cent.
– The State will offer an incentive of €1 for every €3 saved.
– Employees will be able to opt out after seven or eight months.
– Charges will be capped at 0.5 per cent of individual’s fund.