Making pensions mandatory will compound the problem, not solve it, writes David Went
As Minister for Social and Family Affairs, Séamus Brennan deserves significant credit for the seriousness with which he is addressing the pensions issue in Ireland. There can be no question about his commitment to moving the issue to the centre of the political agenda - or his success in this regard in recent months.
However, his apparent bias in favour of the introduction of a mandatory system is seriously devaluing his work in this area. Indeed, it is no exaggeration to say that the Minister's focus on a mandatory system is now posing a very real threat to the prospects for important reforms to the current system, and could yet see this country lose the best prospect in a generation of encouraging a step change in public attitudes to long-term saving.
Apart from the obvious issue of cost (addressed so emphatically by the Department of Finance last week), there are a number of problems with mandatory systems.
The so-called "soft" mandatory schemes in New Zealand and the United Kingdom, for example, have not yet been introduced. And in the UK, there are now serious issues being raised about the practicality of the proposals.
A mandatory scheme does exist in Australia, but the experience there has thrown up some interesting issues. The Australian public has identified the compulsory pension contribution as little more than an additional tax on employment.
There is anecdotal evidence that this has increased the size of the black economy in that country (in the same way that the high employment tax economy in Ireland until the mid-1990s fuelled the black economy here).
It is also clear that employers have reduced their commitment to pensions as a result of the mandatory requirements there and, even more seriously, there is a sense among people who are making their minimum contribution via the compulsory pension that they've now done "the pension thing".
There is little evidence of additional pension savings beyond the compulsory level, which suggests that compulsion actually discourages people from making sufficient provision for their retirement.
In Ireland, we would have to acknowledge that these issues are just as likely to occur here as on the other side of the world.
In addition, we'd have to deal with the negative impact which a higher payroll cost would have on employment - particularly in SMEs - and on the level of foreign direct investment into the country.
We'd also have to address the question of how to construct the most appropriate investment model for people who will be tempted to assume that because they've done "the pension thing", that they don't have to worry about issues such as investment choices.
From my perspective, making pensions compulsory would be an admission of failure; failure by Government, by the financial services industry and, of course, by consumers themselves.
I don't underestimate the challenges we face trying to increase pension coverage. But I'm not prepared to admit failure yet. Rather, I would urge the Minister to look closer at the proposals of the Pension Board for reform of the current system which were published earlier this year. These proposals - quite rightly - were heavily influenced by the extraordinary success of the SSIA scheme and sought to see how the popularity of that scheme could be used to encourage savers to continue the habit long after their accounts matured.
Key elements in the success of that scheme were, (1) the transparency of the Government incentive - much more transparent than the tax benefits associated with pensions and, (2) the relatively short investment time-frame for SSIAs.
Earlier this year, Irish Life commissioned independent research to assess how the public appetite for pensions might be impacted if we introduced these SSIA-type features. The results were dramatic.
According to the research, as things stand just 9 per cent of people with no pension provisions indicated that they were extremely likely to start a pension this year.
However, when we suggested that the Government move from the current tax arrangement to an SSIA- style Government payment - with the Government contributing €1 for every €1 contributed by the individual - the figure shot up to 36 per cent; that's a four-fold increase in people who would describe themselves as "extremely likely" to start a pension this year."
The idea of giving people access to a portion of their savings in the short-term would also stimulate increased demand, as younger people are now reluctant to tie up savings until retirement.
I'm conscious that as an industry practitioner, some people will say that I am biased towards industry-friendly solutions. But I accept that the industry can't provide a solution to this problem for every sector of the population.
All the more reason then for the State to focus on assisting people who are least able to assist themselves by increasing the State pension for example or by targeting incentives at the less well paid.
What the State should not be doing is trying to create a "one-size fits-all" solution for the entire population, generally undermining the importance of people funding the vast bulk of their retirement costs themselves, and effectively discouraging those who could afford to help themselves from doing so. A mandatory scheme will do exactly this.
Fundamentally, our research demonstrates that while the current tax regime is very favourably disposed towards pensions, people simply don't understand it. What people want is a clear, simple and transparent way of rewarding those who save for their retirement.
The SSIA model fits perfectly and it needn't cost the Exchequer any more that the current system. If the Government makes this relatively painless change, it will transform the outlook for pension provision.
If, however, the Minister continues his single-minded pursuit of a mandatory system, the chance to capitalise on the new attitude to saving which was fostered by the SSIA project will be lost. Pensions will become inextricably linked with taxation. The black economy will prosper and problems caused by people making inadequate provision for their retirement will increase. It would be a shame if a Minister who is clearly committed to the idea of reform were to leave this as his pensions legacy.
David Went is Group Chief Executive of Irish Life & Permanent plc. He is a member of The Irish Times Trust and of the board of The Irish Times Ltd