It’s time for Ireland to bite the bullet on pensions

I came to Ireland recently at the invitation of Insurance Ireland to discuss KiwiSaver, the work-based personal retirement savings scheme that New Zealand has recently implemented.

I found that Ireland still has a plethora of small workplace schemes, some of dubious quality and many, no doubt, that are not particularly transparent or accountable. But worse, coverage is available to less than half of the workforce and, because women’s participation in the labour force is lower, women are much less likely than men of working age to have a pension scheme. Tax concessions remain an expensive embedded part of the system.

For women, the outcomes of Irish pension policies appear worrying. I was shocked to discover how they are disadvantaged by the complex and confusing rules for the Irish State pension, with only a minority of women qualifying for a full State pension. Sadly, any system that relies on a contributory base puts women at a disadvantage.

New Zealand is one of the few countries in the world that has a credible comprehensive retirement policy that covers virtually all of the population.

There is one simple, taxable, universal, state pension called New Zealand Superannuation (NZ Super), paid at age 65 after 10 years’ residence from general taxation. There is no requirement to retire and there are no complex contributory records required. This is a great equaliser of incomes in retirement, with women’s contribution to unpaid care-giving effectively acknowledged. NZ Super is linked to wage growth, so that, together with high levels of home ownership, there is a very low rate of hardship in old age.

In New Zealand, we also got lucky when all tax concessions for private pensions were removed more than 25 years ago. Those concessions went largely to high-income, career-based men and were highly inequitable. As a result, many employment-based retirement schemes were closed and many defined-benefit (pension) schemes were replaced by defined-contribution (lump-sum) schemes. Public-sector pension schemes were closed to new members in 1992. By the mid-2000s, coverage of the workforce in employment-based retirement schemes had fallen to very low levels.

KiwiSaver

To enable wide access to work-based saving to supplement the state pension, the world’s first national auto-enrolment saving scheme was introduced in 2007. KiwiSaver is not restricted to those in paid work, and more than three-quarters of the working-age population belong to the scheme, with equal rates of male and female membership.

Every member has one account and one provider linked to their Inland Revenue number. This means their KiwiSaver goes with them when they change jobs. The Inland Revenue collects employer and employee contributions (3 per cent of wages each) and makes sure they are sent to the correct provider. Individuals can make lump-sum contributions at any point and there is a lot of flexibility on opt-out provisions and contributions holidays.

KiwiSaver is in its 10th year. It has achieved remarkable acceptance, has low administration costs and is transparent. Overtime, KiwiSaver has grown strongly while other employer-based schemes have further diminished. It is not perfect, of course, but it will evolve. For example, perhaps the rates of contribution need to be higher. Women, on average, have lower balances, and some recognition for unpaid work would help. Another problem is that retirees cannot currently buy an inflation-adjusted income stream with their KiwiSaver lump sums.

In the meantime, Ireland might draw some lessons from New Zealand’s experience. First, a secure and simple first-tier state pension is critical. The contributory and non-contributory Irish State pensions could be joined up into one adequate, comprehensive, wage-linked, individually based, non-contributory State pension. Once that is done, a centrally administered auto-enrolment “IrishSaver” could provide a good supplementary savings vehicle for everyone and begin to replace the current not-fit-for-purpose employer-based schemes.

Susan St John is associate professor and director of the Retirement Policy and Research Centre, University of Auckland, New Zealand