Pensions in Ireland are in a state of flux

John Lucey, Director of Invesco, outlines the many moving parts in Irish pension schemes that people should be aware of

Many retirees are facing a significant reduction in living standards when they retire due to state pensions pressure.

There’s a lot going on in the world of pensions at the moment in Ireland, enough to create quite a bit of uncertainty and to keep retirement savers and advisers on their toes.

Leaving aside the volatility we continue to see in markets in 2022 and the rather gloomy economic forecasts, there are some specific Irish challenges that need to be navigated to ensure that individuals can optimise their retirement outcomes. In this article, we’re going to consider three areas of uncertainty that are creating challenges today in the pensions market.

The sustainability of the state pension schemes 

Back in early 2021, the Central Statistics Office (CSO) calculated that government-managed future pension scheme liabilities totalled €508.8bn. 

Within this figure, state pension schemes amounted to €359.2bn, with public service defined benefit schemes making up the balance of €149.6bn. To put the total figure in context, it is more than double Ireland’s national debt which currently stands at €238bn. 

The big issue with this liability is that there is no pot of money put aside to pay these pensions either today or in the future — instead they are paid for out of current tax/ social insurance revenues… 

At Invesco, John works with "a number of clients who are simply treading water, waiting for a solution to be found" regarding their pensions.            

This creates an enormous challenge for the government, particularly as the demographics of Ireland are likely to change so much over the next few decades. While there are currently between four and five people working (and paying into the social insurance fund) in proportion to the number of pensioners who are receiving pensions, this figure is anticipated to fall to two working people for every pensioner by 2050. 

Our population is aging and there will be less contributors to meet the pension needs of the older generation.

To tackle this, before the last general election it was proposed that the state pension age would be pushed out to 68. However, following a political backlash, this proposal was scrapped. The current proposal is that people will be able to delay their retirement in return for a higher level of pension. 

However, this won’t achieve the savings needed to address the demographic challenge. Something will have to give in the next decade so watch this space. In the meantime, the issue is just being pushed onto future generations to deal with.

One-person company funded pension schemes are currently closed 

In April 2021, an EU Directive called IORP II was transposed into Irish Law. The purpose of this legislation was to introduce better risk standards and governance of occupational pension schemes. One-person scheme holders that had their scheme set up before April 2021 don’t have to worry — yet. They have a derogation from the new standards until 2026.

However, in June 2022, the Pensions Authority expressed concern about new one-member arrangements established since April 2021 and new schemes to be established since then, and the need for them to comply fully with the new standards. The result of this was the immediate withdrawal of all one-person arrangements in the Irish market by the providers — mainly insurance companies.

This leaves business owners and others seeking to establish new one-person arrangements in a very difficult position. They want to make provision for their retirement and in doing so, they also want to avail of the advantages of funding their pension through their company. However, they currently don’t have a suitable pension vehicle to do so.

At Invesco, we have a number of clients now who are simply treading water, waiting for a solution to be found that will be acceptable to all parties — the Pensions Authority, the providers and ultimately the clients themselves. Everyone must hope that a solution can be found quickly before a tax window closes with the ensuing loss of tax relief for that period.

Auto-enrolment is on the way — but when?

The final challenge that is occupying many minds in the pensions world is in relation to the future introduction of auto-enrolment into pension schemes.

According to figures from the Central Statistics Office, the rate of supplementary pension coverage above and beyond the state pension is around 56% of the working population. However, it is estimated that this figure drops to approx. 35% when the private sector is considered on its own. This is another significant challenge for government, who face the prospect of large numbers of people relying solely on the state pension — and all the issues associated with that as outlined earlier. Many retirees are facing a significant reduction in living standards when they retire.

To address this problem, it is proposed that all employees (within certain qualifying conditions largely related to age and salary levels) will be automatically enrolled into a pension scheme that will be funded by a combination of contributions from themselves, their employer and by a state top-up amount. 

Contribution levels to the scheme will start at a relatively low level but will increase to a total of 6% of salary from each of the employer and the employee after 10 years, with the state contribution on top. Employees will have the right to opt out of the scheme at certain points, however the default position is that all workers will be included.

Several iterations of the scheme have been announced in recent years – the latest being in March this year. It was outlined that the scheme will start in 2024, a deadline that looks extremely challenging to many people in the pensions industry. We will watch this space with interest.

So, there are a lot of moving parts within the world of pensions in Ireland currently. To assist both employers and individuals understand the implications for both themselves and their employees, expert and impartial advice should always be sought. 

At Invesco, we look forward to helping you understand and then optimise your retirement planning opportunities.

Find out more at www.invesco.ie.