Pensions: Is the timing right for auto-enrolment?

With people living longer and pension coverage inadequate, the time has never been better to introduce auto-enrolment (AE). With the cost-of-living crisis, it has also never been worse.

But Central Statistics Office figures show just 56 per cent of employees have an active pension. In the private sector, that drops to 35 per cent.

AE is set to change that. This month (October) the Government approved the draft heads of a Bill to introduce mandatory workplace pensions. This will now be referred to the joint Oireachtas committee for assessment.

According to the Department of Social Protection which is driving it, AE will be a new savings and investment scheme for employees where financial returns are paid out to participants on retirement, in addition to the State pension.

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“Auto-enrolment aims to increase pension coverage for employees across Ireland, minimise the administrative burden on employers in providing pension coverage for employees and ultimately simplify the pension decision for these employees. One-third of workers in Ireland have no pension cover, and auto-enrolment will help an additional 750,000 people save for retirement,” explains Shane O’Farrell, director of products at Irish Life Corporate Business.

Savings scheme

The most significant barrier for workers today in not choosing to join a workplace pension is inertia, he says.

“A recent survey showed that 35% of workers claim not to have a pension because they haven’t gotten around to setting one up. And almost nine in 10 Irish adults claim they would support a plan where all employed people over the age of 18 were automatically enrolled in a pension scheme with an opt-out option,” says O’Farrell.

The introduction of AE in Ireland will aim to remove the decision-making process for workers, by automatically opting them into a pension savings scheme, which they can also choose to opt-out of if they want to.

It has been talked about for years but, as with personal pensions, one of the reasons progress has been slow is that retirement always seems so far away.

“The nature of pensions and retirement savings is that they are a very long-term problem and often not an immediate crisis,” says Alistair Byrne, head of retirement strategy at State Street Global Advisors.

On top of that, until now a significant portion of people had defined benefit schemes, and State pensions were relatively generous, “and things probably seemed okay”, he adds.

But looking forward, the current level of State pension is not sustainable and the ratio of workers to those in retirement will shrink.

The cost-of-living crisis makes it more difficult to make a case for AE to citizens but, he points out, “I’m not sure there is ever a perfect time, but you have to start”, says Byrne, who says the key to its acceptance “is to ensure it starts gradually”.

The plan is for AE to be phased in over a decade, starting in 2024, with both employer and employee contributions starting at 1.5 per cent of gross salary, and auto-escalating every three years until reaching the maximum contribution rate of 6 per cent from year 10 on.

AE is a way of helping to ensure people are “nudged along” the retirement savings route, he says. The fact that people can opt out is important too, including for more immediate financial priorities, such as paying down credit cards or other debt.

“If this isn’t the best use of your scarce income right now, you can opt out. But equally crucial is that if someone does drop out, that it is made easy for them to opt back in again later,” he says.

Ireland’s system will also benefit from the lessons learned in other countries.

Pensions coverage

In the UK less than 20 per cent opted out, but the vast majority of those who did opt out subsequently came back in and stayed, he points out.

When the UK introduced it in 2012 pensions coverage was below 50 per cent, including public sector workers. Coverage now stands at 80 per cent.

“Irish Life strongly supports auto-enrolment as a socially progressive and forward-thinking option for Ireland,” says O’Farrell.

In 2018 the government ran a public consultation process to introduce an automatic enrolment retirement savings system for Ireland.

It put forward a so-called “straw-man” proposal at the time. “This paper was published to set out how an auto-enrolment pension scheme might work in Ireland and was designed to generate discussion and debate. But the Government have since deviated from some of the key tenets of the original plan,” says O’Farrell.

“The Irish Government plans to build new technology systems and administrative structures for auto-enrolment which international evidence suggests will be significantly more onerous and expensive and will take much longer to complete than one which uses existing pension systems,” he says.

The 2024 timeline may be optimistic, especially after Covid delays.

“Auto-enrolment has delivered fantastic results in increasing pension coverage in countries like the UK and New Zealand and we welcome it as a positive move towards cultural change which will help an extra 750,000 people to save for retirement,” says O’Farrell.

“The introduction of an automatic-enrolment retirement savings system in Ireland will aim to remove the decision-making process for workers, by automatically opting them into a pension savings scheme, which they can also choose to opt out of if they want to,” he explains.

But O’Farrell says that the Government’s latest plans limit AE to people earning more than €20,000, which will disproportionately exclude women, removes flexibility for women or their employers to increase payments or make lump-sum contributions to cover any periods of unpaid leave or career gaps, and lacks clarity in what occurs with pensions contributions during maternity leave. “This is patently unfair to women,” he points out.

Despite the cost-of-living crisis, he believes that the low contribution rates mean, “the initial impact should be modest”.

However, “a key challenge is the lack of any tax relief provided on contributions made, so it is far more costly in terms of take-home pay than the existing pension system where tax relief provides immediate cushioning of the cost”.