Auto-enrolment heralds a better, fairer pension — but with some issues still to iron out 

Ireland's retirement landscape will change significantly once around 750,000 people are auto-enrolled into pensions, as financial advice experts explain to Rita de Brún

The Irish Small & Medium Enterprises Association (ISME) warns that the Government's planned 6% employer contributions — once the pensions auto-enrolment scheme matures — is twice the employer contribution rate in the UK and will create competition issues, particularly close to the border with Northern Ireland. Pictured are Elaine Dunne, secretary, ISME, Marc O'Dwyer, chair, ISME, and Neil McDonnell, CEO, ISME.

Auto-enrolment (AE) is coming to Ireland next year. When it does, the new occupational pensions regime will introduce mandatory retirement savings for the first time, creating an estimated 750,000 new pension savers in the process.

That’s good news for sure, but AE is expected to do more. It’s expected to create a pension system in Ireland that is better and fairer for all.

That’s a big ask, given how slow the message has been in infiltrating the masses. The extent of unawareness about the scheme was confirmed in a recent Standard Life study which found that 70% of those polled didn't know of the Government plans for AE.

Perhaps ominously, of those with zero pension cover currently, a substantial 46% were unaware as to what’s ahead.

Irish optimism about the benefits of AE were nevertheless apparent, with 79% already planning on staying in the AE scheme, after the six-month compulsory period.

Optimism is a great thing. Without hope, we are lost. Still, the nitty gritty of AE and what it might bring is something about which most people clearly want to know more.

ESRI statistics show that the pension gender gap in Ireland stands at 35%. While more than half of men receive a private pension, less than one in three women receive the same benefit.

Central Statistics Office figures are equally harrowing. They show that only 33% of retired women have worked more than 30 years, compared with 93% of retired men.

How then, will AE likely impact the gender pay gap in Ireland when it is implemented? In considering, it’s helpful to consider what happened in the UK, after AE was first introduced in 2012.

There — according to a recent report by the Department for Work and Pensions —  women reach the age of 55 with a third less saved into private pensions than men. Tellingly perhaps, while the UK’s gender pension gap is 35%, it’s only slightly smaller —  at 32% — among those who were auto-enrolled into work schemes.

On the topic of how women in Ireland can expect to fare when AE comes in, Claire Keane senior research officer at the ESRI believes pension auto-enrolment is unlikely to reduce the gender pay gap: “The forthcoming pension auto-enrolment will affect male workers more,” she says.

“This is because women are, on average, less likely to be in employment and less likely to earn above the €20,000 pension auto-enrolment threshold when they do work. They are also more likely to be employed in the public sector, which already has high supplementary pension coverage rates.” 

Mairéad O’Mahony, head of wealth solutions, with Aon Ireland, says the 35% gender pay in Ireland will reduce, but it won’t disappear.

Mairead O’Mahony, head of wealth solutions at AON Ireland says the gender pay gap today stands at 35% in Ireland. That gap will reduce when AE is introduced,” she says, “but it won’t disappear." 

Acknowledging that the gap is driven by many factors, she lists some of those. That today, less than one in three Irish women has a private pension, while the same figure for men is one in two. That men, on average, earn more than women. Also, that there’s a greater propensity for women to work part-time and take career breaks, often to care for family.

“Once AE is introduced, all earners will be automatically enrolled to save for retirement, with contributions coming from both employee and employer,” she says. “We know from more mature countries where AE has been in place for some time, that opt-out rates tend to be low. So, over time we should expect the percentage of Irish men and women with a private pension to rise.” 

As for how women can be better supported financially she says: “A further way in which the Government could help to level the playing field would be to include enhanced pension contributions, under the auto-enrolment system, for savers who take unpaid leave for specified reasons such as caregiving, given they are much more likely to be female than male.” 

While ISME is disappointed that the start-up date for auto-enrolment has been postponed, chief executive, Neil McDonnell, says it’s delighted the Government is committed to commencement in 2024.

“It is important that the administration of the scheme is water-tight on commencement, so that employees can be assured their pension savings are in safe hands,” he says.

Asserting that ISME has long campaigned for auto-enrolment as the only way to bridge the pensions shortfall among private sector workers, McDonnell continues: “We note that the Government plans employer contributions of 6% when the scheme matures. This is twice the employer contribution rate in the UK, and will create competitiveness issues for services businesses, especially those close to the border.

“Businesses must budget the initial 1.5% employer contribution into their 2024 financial plans,” he says. “Also, Government must understand that goods and services prices will be impacted by this and the planned 12.4% increase in the National Minimum Wage next year.” 

ICTU social policy officer, Dr Laura Bambrick, says the fact that the self-employed will not be covered by the AE scheme is a cause for concern for trade unions.

Of the sole traders with no employees she says: “They are least likely to have pension provision, via private pension savings. Or, the type of business that they can sell on when they retire, so as to buttress their retirement income and post-retirement living standards.” She has no gripe with the Department of Social Protection about this. 

Laura Bambrick, ICTU, says the importance of auto-enrolment will grow in the decades ahead.

“To be fair to the Department,” she says, “it is extremely difficult to incorporate these workers into an auto-enrolment scheme. No country to date has successfully done so. Because their income fluctuates and because of the time lag between when they earn and when they are paid, how, she asks, do you calculate their auto-enrolment contribution in real-time?"  

This question of hers is followed quickly by two others: “Should sole traders be liable to pay both the worker and employer contribution? Would this make it unaffordable for them?

“Without the (6%) matching employer AE contribution,” she concludes,  "the sole trader’s/ self-employed worker’s AE pension pot is likely to be inadequate for a secure retirement.” 

There’s much to consider. She points to the fact that “the Department has committed to looking again at how to open up auto-enrolment to the self-employed when the scheme is up and running.”

 Doubtless, this commitment is greatly welcomed by all concerned.

Dr Bambrick makes good points on the topic of bad bosses: “Apart from the low pension coverage among self-employed workers, introducing a compulsory 6% employer pension contribution, will further increase the financial incentive for bad bosses to misclassify their employees as self-employed,” she says. “This will push up incidents of bogus self-employment, at huge cost to the Social Insurance Fund (i.e. loss of employee PRSI contributions) and the individual worker’s rights and protections.” 

As for the AE age parameters, she says: “ICTU strongly opposes restricting auto-enrolment coverage to workers aged over 23. The lower age threshold is outright classism. It is an inbuilt bias in the new scheme, one that assumes young people will go through three or four years of college, spend some time travelling abroad before settling into full-time employment.

“While this is the route into work taken by most young people, many still go directly into work from school. And, it is Government policy to increase their number, with plans to raise apprentice enrolments to 10,000 a year by 2025.

“Such young workers will have up to seven wasted years, between ages 16 and 23, not saving and getting employer and State contributions towards a more financially secure retirement.

“ICTU wants to see the auto-enrolment age trigger aligned with the PRSI minimum age threshold of 16 years for full-time workers (i.e. those earning over €20,000 a year).” 

As for what pleases ICTU about the auto-enrolment scheme, Dr Bambrick says: “Ireland is the only OECD country not to operate auto-enrolment or a similar pension savings scheme for its workforce.

Once auto-enrolment is introduced, all earners will be automatically enrolled to save for retirement, with contributions coming from both employee and employer. 

“ICTU has long argued that our voluntary approach to occupational pensions has failed, as can be seen by the fact that little over half (56%) of all workers have a workplace or private pension to supplement their state pension.

“Because the contributory state pension is not earnings-related and is instead paid at a low flat rate of €265 a week, workers without a supplementary pension are exposed to a significant drop in their normal living standards in retirement.

“Auto-enrolment will increase income adequacy for workers in retirement and put a legal requirement on employers to contribute to securing their employees’ living standards in old age. Pension savings also reduce the risk of a fall in consumer demand. Over the coming decades, the importance of pension income to the wider economy will grow as the population ages.”