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Pensions Council rejects proposal to load auto-enrolment with shares

Analysis showed proposal by retired actuary could more than double income for workers in retirement

A proposal by Colm Fagan, a retired actuary, for the investment of compulsory pensions that could provide greater income in retirement has been rejected by the Pensions Council. Photograph: Michael M. Santiago/Getty Images

Joe Brennan
Wed Apr 3 2024 - 05:00

An alternative to the Government’s auto-enrolment pension scheme that could more than double the size of pension pots for workers should not be adopted, the Pensions Council has recommended.

The landmark auto-enrolment (AE) scheme, aimed capturing about 750,000 workers in the State without occupational or private pension plans, is currently due to be launched next January – almost two decades after it was first mooted.

Minister for Social Protection Heather Humphreys asked the council last year to assess an alternative auto-enrolment plan proposed by Colm Fagan, a retired actuary and former president of the Society of Actuaries in Ireland, which advocated contributions into the scheme be 100 per cent invested in shares in listed companies, which tend to outperform other asset classes over time.

The current auto-enrolment plan aims to replicate typical defined-contribution pension plans, where individuals’ funds are moved progressively from riskier assets like equities into income-generating bonds as they approach retirement. On retirement, they would have the option of buying an annuity from a pensions firm that guarantees a fixed monthly amount or putting the money into a so-called approved retirement fund (ARF).

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Mr Fagan, however, has called for pension contributions to be pooled together and that retirees remain invested in the scheme and receive a retirement income based on a formula – known as smoothed values – that average the return of equities over time. This may differ from market values at any given time, but offer some protection from market volatility.

An analysis by a firm called Paragon Research, hired by the Department of Social Protection to consider Mr Fagan’s alternative, said his plan “would likely produce pensions more than double the size of those projected under the current AE proposal”, according to a copy the council’s report, which Mr Fagan has received and provided to The Irish Times.

However, the council – set up by the Minister to advise on matters relating to policy on pensions – concluded the alternative approach raised a number of issues. These include: “insufficient evidence to provide assurance of consistent future outperformance” of equities; its reliance on “intergenerational solidarity” if the smoothed values formula is to protect retirees from periods of stock market underperformance; and the likelihood that a new approach would jeopardise existing auto-enrolment timelines.

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The council also said it did not find precedents elsewhere for the alternative investment approach advocated.

“The council acknowledges the positive aspects of Mr Fagan’s proposal but ultimately does not recommend it as the structural basis for the approved AE system,” the council, led by chairperson Roma Burke, said.

“The technical feasibility, evaluated by Paragon, indicated that while the proposal is technically feasible, there are risk-management concerns to overcome.”

Ms Humphreys secured Cabinet approval last Wednesday for draft legislation that would pave the way for the auto-enrolment pensions scheme – even though the launch date has drifted to the start of 2025.

Pension industry observers remain sceptical about the prospect of auto-enrolment being up and running by the start of next year. The approach was first proposed in 2006 by then government minister Séamus Brennan.

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Aside from pushing through enabling legislation, the department has yet to appoint a company to build and run the auto-enrolment system, set up a National Automatic Enrolment Retirement Savings Authority to manage it, or start the official process of finding investment firms to be responsible for the underlying investments.

“I am disappointed that the Pensions Council has rejected my proposal. I am pleased, however, that the independent expert agrees that my proposal delivers more than double the value for money compared with the scheme proposed by the department, mainly by allowing retired members to enjoy high investment returns and low charges all through retirement,” said Mr Fagan. “The department’s proposals will force retired workers to buy expensive individual products.”

Efforts to secure comment from the council and department were unsuccessful.

Joe Brennan

Joe Brennan

Joe Brennan is Markets Correspondent of The Irish Times

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