Auto-enrolment heralds a new era for pensions in Ireland
Carers, part-time and low-income earners, who are predominantly women, may not meet the €20,000 income threshold for auto-enrolment schemes. Other countries have set at a much lower level with the specific aim of reducing the gender gap.
Business Editor on the concerns and issues raised by the pensions industry as auto-enrolment rapidly comes into being
For decades and longer the pensions industry in Ireland and worldwide has advised, encouraged and warned individuals of the need to prepare for their retirement by taking out and contributing to a pension.
The efforts have met with mixed results. A report from the Central Statistics Office in 2023 found some positives with 68% of workers having pension coverage outside the state pension. Of those with a pension, 20% had occupational and personal pensions.
However, that same survey shows the stubborn nature of many within the population with one in three workers not holding a pension. The main reason or almost half of these individuals is that they never got around to organising it with 43% saying they could not afford a pension.
The State Pension was cited as the expected main source of income on retirement for almost six in ten workers with no pension coverage, an increase of the CSO survey from the previous year.
Survey results like these, tied to the fact that Ireland’s population is rapidly ageing have meant Auto Enrolment (AE) will come into effect next year. It has the potential to make significant changes to the existing pension industry bringing issues such as pension charges and fees, parallel schemes, regulation and administration into focus.
The CSO found that of respondents who are eligible for the scheme, just one in five were aware of it, and of these, over seven in ten (72%) said they would stay in the scheme if automatically enrolled in it, up seven percentage points on the same period in 2022.
The pensions industry is supportive of AE but have legitimate concerns as to how an extra 800,000 members can be accommodated within the current system and concerns over the timelines for implementation. There are also industry fears that if AE is not implemented, rolled out and communicated effectively there is the potential to damage the wider industry.
There does seem to be a willingness to engage the general public. According to the CSO, more than eight in ten (81%) workers who were aware of AE and are eligible for it would stay in the scheme if auto-enrolled in it, had said that the reason for their not having occupational cover from their current employment was that their employer did not offer an occupational pension scheme.
As well as this, amongst workers to whom the scheme does not apply, almost one-third said that they would opt-in to the scheme highlighting a willingness amongst the public to prepare for the financial future.
The Irish Association of Pension Funds (IAPF) said it is disappointing that the rollout of AE has been consistently delayed with very few of the milestones set out being met.
They point to a number of outstanding issues such as the signing of contracts with an administrator to run the system, and the engagement that will be needed with payroll providers to allow them to implement changes to payroll software.
Insurance Ireland said further clarity is needed for AE to ensure strong consumer protection regulation is applied and that a level-playing field between occupational pension schemes will exist.
The state has said the auto-enrolment scheme has been designed to run in parallel with the existing pensions industry and people who are already enrolled in an occupational pension scheme or equivalent personal pension scheme will not be automatically enrolled into the new system.
However, the industry is concerned over the lack of detail on how the two systems will co-exist in terms of transfers and how the ‘pot follows member’ approach will work outside of the AE ecosystem.
Auto-enrolment will be overseen by a new body, the National Automatic Enrolment Retirement Savings Authority (NAERSA) which will become an independent, statutory body.
There also remain concerns that the gender pension gap will not be truly resolved through auto-enrolment. Carers, part-time and low-income earners, who are predominantly women, may not meet the €20,000 threshold with enrolment schemes in other countries set at a much lower level with the specific aim of reducing the gender gap.
Insurance Ireland raised concerns previously as to how the system will work for those who will take maternity leave or if it is possible for them to top up their pensions to account for any gaps in service.
The Pensions Council in their report on the Gender Pension Gap in Ireland also argued that the AE system is not gender-proof. Insurance Ireland contends that the system as proposed is a missed opportunity for Ireland to take real steps to reduce the gender pension gap and, in fact, further exacerbates the gap by excluding this cohort from being able to avail of or benefit from the system and make provision for their retirement.
In relation to pension fees, the Government believes the operation of the NAERSA will, over time, deliver economies of scale that will keep fees and costs down.
Analysis carried out by the Labour Party in 2021 raised concerns that high fees were eating away at pension pots amounting to 3%. However, the industry has strongly rejected this report. Insurance Ireland published analysis last year saying typical pension charges for an occupational pension scheme in Ireland today are of the order of 0.8% per annum.
“The findings show that the Irish pension market is highly competitive where employers take steps to seek out best-in-class terms for their employees,” Moya Murdock CEO of Insurance Ireland, said. “Thousands of employers are delivering valuable pension arrangements to their employees."
Insurance Ireland also said AE was likely to drive pension costs down given that it will be significantly more onerous and costly for an employer to run a standalone pension scheme and has driven an increase in the use of Master Trust pension arrangements where great economies of scale can be achieved.
With such a large influx of new members next year, the issue of fees is likely to move front and centre in many pension discussions. That will also increase the demand for greater transparency and communication in relation to the operation of pensions in Ireland.
“Increased clarity not only develops confidence around the pension savings system but also highlights that the pensions industry offers good value for money to consumers and employees,” Ms Murdock said.
