Best pension scheme future may lie with auto-enrolment

An auto-enrolment pension scheme for all employees may be the most effective way of ensuring that there are adequate provisions in place for low and middle income workers upon retirement, according to a comprehensive report commissioned by the Department of Social Welfare and Protection.

The contents and recommendations of the report will be reviewed today by the Oireachtas Joint Committee on Education and Social Protection.

“The main aim of automatically enrolling people into a pension scheme is that it increases occupational pension coverage and overcomes the problem of inertia.

“An auto-enrolment scheme would be designed to provide an adequate income in retirement [when combined with the State pension] aimed primarily at low and middle income earners.

“As was detailed within the report, international experience has shown that this type of scheme is extremely successful in providing a simplified and lower cost charging structure and a consistent application across employers.”

The report found a low level of transparency in terms of charges and fees and a low level of consistency between different pension products.

“It is clear that there are major challenges to be addressed in the two main areas of transparency and costs.”

A defined contribution scheme with a monthly contribution of €500, including employer contribution, over a 30-year period and assuming a growth rate of 5% each year, will have a projected final value of €443,479. However, identified disclosed and implicit costs will reduce this fund by anything between €52,577 (11.9%) and €77,138 (17.4%).

There are big discrepancies between large and small pension funds and whether it is a defined benefit or defined contribution. Generally, PRSA type pensions are the best regulated.

The report makes a number of recommendations, including improving awareness among all stakeholders of the regulatory and disclosure requirements for the pensions industry.