Pension firms back automatic scheme for all workers

Pension firms have welcomed government moves to introduce a new auto-enrolment scheme for all workers.

It comes after Social Protection Minister Regina Doherty said there will be no discrimination in the new pension scheme proposed by Taoiseach Leo Varadkar.

While the full details of the scheme will not be announced until later in the year as part of a wider national pensions plan, it is understood contributions will be split in three, with the employer likely to contribute one third, workers paying one third, and the State putting in the balance.

While employees would automatically be signed up to the scheme they would have the opportunity to opt out if they wish.

Questioned about the plans, Ms Doherty said: “What I would like is for it to be all pay brackets, you can’t discriminate somebody that’s earning 20 grand to somebody that’s earning 40 grand. But it’s always going to be based on the percentage, so whatever percentage you put in, the employer will put in a percentage and the State will put in a percentage, and we have to work out the details as to what that percentage will be.”

Ms Doherty is drafting a memo for Cabinet to seek approval to begin public consultation around a new pension scheme.

“Of all of the people working in Ireland at the moment only a third of them pay voluntarily into pension savings for themselves. We want to address that to ensure that everybody has some sort of savings over and above the minimum State pension when they reach 66.”

The Irish Association of Pension Funds (IAPF) yesterday welcomed the proposals, saying his group had been calling for such a measure for some time.

IAPF chairman, Peter Fahy, said: “The concept of a universal retirement savings system is something that we have been pushing for as coverage is going down.”

However, he said for workers to have a comfortable pension level on retirement, the combined contribution would have to be around 15% of their salary: “There is obviously a balance to be struck, but our research would show that contribution rates have to be reasonably high to secure income in retirement. There is no suggestion that anywhere near those rates would be implemented in an auto-enrolment scheme.”

Earlier this week Mr Varadkar said all workers would be under the auto- enrolment scheme in just over three years. Speaking at an Ibec event, Mr Varadkar said two thirds of private sector workers have no pension and this ticking timebomb must be defused.

“This issue has been long-fingered for too long, and now that the economy is recovering strongly we must act decisively, and we will publish a five-year roadmap for pension reform before the end of the year.

“This will include the introduction of an auto- enrolment pension scheme for private sector workers, two-thirds of whom currently have no occupational pension to supplement their state pension. I anticipate the first payments being made into those new individually held funds by 2021.”

The Taoiseach’s proposals have been backed by the Citizens’ Assembly which recently recommended that the Government introduce a mandatory pension scheme to supplement the state pension.

This recommendation was supported by 87% of the members of the Citizens’ Assembly who have also been tasked with discussing and making recommendations around the Eighth Amendment; fixed-term parliaments; and climate change.

Key points

What is proposed?

The Government wants all private sector workers to be signed up to an auto-enrolment pension scheme, instead of the current voluntary pension system.

Why the change?

With only one in three private sector workers signed up to some kind of pension scheme combined with an ageing population, the State is facing a pensions’ ticking timebomb. CSO figures show, at the end of 2015, 47% of all workers aged between 20 and 69 years had a pension. This is a marked drop from the 54% at the beginning of 2008, a trend that is likely to continue without intervention.

How will it work?

All workers would be automatically signed up to the new pension scheme, but would have the opportunity to opt out. However, the Government believes that once workers are enrolled in a scheme they are likely to stay in it.

While the full details of the universal scheme will not be announced until the end of the year, it is understood contributions would be split in three. The exact ratio has yet to be decided upon but it is likely that employers could contribute one-third, workers would put in another third and the State putting in the balance.

Contributions would be based on a percentage of a person’s wage but, again, the exact percentage will also have to be agreed upon.