The National Pensions Framework has laid the ground work for the introduction of automatic pension scheme enrolment in Ireland. The aim of the proposal is to address Ireland’s looming pensions crisis, where the number of pensioners is expected to treble by 2050 with a resultant rise in the cost of State pensions from 5.5 per cent to 15.5 per cent of GDP.
Auto-enrolment is based on behavioural economics and relies on people’s inertia; it is aimed at solving the problem of people who do not enrol in a pension scheme because they ‘haven’t got around to it’. It has already seen some success in New Zealand which was the first country to introduce such a scheme with their “KiwiSaver” programme. The following are the main points of the Irish auto-enrolment scheme:
All employees over 22 years of age will be enrolled automatically into the new scheme unless they are a member of their employer’s occupational pension scheme which must be:
- a defined benefit scheme; or
- a defined contribution occupational pension scheme with a contribution rate equal to or greater than the minimum paid under the new scheme.
Employees will be permitted to opt out of the scheme after a period of three months. They can opt in again at anytime but, in any event, they will be automatically re-enrolled every two years.
Contribution levels and other incentives
The total contribution to the scheme will be 8 per cent, broken down in the following manner: 4 per cent is contributed by the employee; 2 per cent by the employer and 2 per cent by the State. This State contribution is equal to tax relief at 33% and will replace the current system of marginal tax relief for pension contributions. Employee contributions to the scheme will also attract PRSI and Health Levy relief. An as yet undisclosed once-off bonus payment will be paid to people who stay in the scheme for five years without a break in contributions.
Accessing funds and contribution holidays
The scheme allows for a contribution holiday to meet other savings needs such as a home deposit. Once a person remains in the scheme for six months, their contributions will be held in a pension account and no withdrawals will be allowed until the employee reaches retirement age. Currently there is no provision in the scheme to allow for early withdrawals, however these may be introduced as the scheme implementation progresses. The procedures for accessing funds from the scheme at retirement will be developed during the implementation phase.
An individual will have a range of different investment choices reflecting different levels of risk. It is envisaged that the different types of funds available under the scheme will be provided by the private sector and will be required to have lifestyling built in. Individuals will have the option of choosing between these approved funds. Alternatively, they will be enrolled in a low risk default option.
Criticisms of the auto-enrolment model
A number of criticisms have been directed towards the auto-enrolment model. Academic articles have questioned how much new saving it will actually produce and how much of the contributions will actually be diverted from other savings.
In addition, a number of commentators have expressed the belief that many employers may sacrifice employee’s salaries, particularly any future wage rises, to generate pension contributions, especially in difficult economic circumstances.
Concern has also been expressed as to the adequacy of the required contribution levels to the scheme, with some commentators expressing the view that members are likely to treat the required contribution level as sufficient to produce an adequate pension in retirement despite the fact that for the majority of people this is unlikely to be the case.
Is auto-enrolment the solution to Ireland’s pensions time bomb?
The announcement of the introduction of an auto-enrolment scheme in the National Pensions Framework published in March 2010 had largely been expected. The details contained in the Framework however are relatively vague and a number of issues and criticisms will have to be addressed before the proposed scheme can become a reality.
Chief among these is the effect the new scheme is likely to have on employers. With a backdrop of arguably the worst financial crisis in history, it is difficult to envisage how financially stretched employers will be able to meet the cost of the new scheme. A connected fear is that in order to control costs, many companies who currently offer more generous pension schemes will be tempted to treat the auto-enrolment scheme as a cost saving opportunity and phase out their schemes in favour of the statutory plan.
It is also questionable whether the State will be financially able to introduce this scheme in the foreseeable future at a time when our GDP deficit is the highest in the European Union and the national balance sheet is already laden with the weight of NAMA’s toxic debts. It is notable that the New Zealand Government has begun offering additional incentives to keep participation at a high level in their scheme and although the re-enrolment feature of the proposed Irish scheme should address this issue to some extent, it remains quite possible that the State will have to offer further incentives so as to ensure the success of the scheme, with resultant additional cost.
On a more positive note the proposed scheme deserves praise as being the first proper step towards dealing with Ireland’s predicted pensions crisis. Provided that some teething issues can be addressed, the auto-enrolment scheme may well go a long way towards securing the financial futures of the large number of people in Ireland who at present have made no provision for their retirement.