High hopes for ambitious pensions auto-enrolment plan
Future planning: In the UK, every employer must register an employee aged between 22 and retirement age who earns over £10,000 a year (a much lower minimum threshold than that proposed for Ireland).
The new auto-enrolment system is to be introduced on September 30 next.
This has been finally confirmed by the Minister for Social Protection Heather Humphries. Speaking on RTÉ on September 29, the Minister confirmed that the Cabinet had agreed to the plan. It is expected that around 800,000 employees will be affected.
The announcement brings to an end a lengthy period of uncertainty regarding the date of implementation of the reform which has been in gestation for many years.
Auto-enrolment is an ambitious plan that is aimed at significantly boosting the numbers of employees — younger people in particular — contributing towards their retirement.
It is an idea whose time, arguably, has come. It is also the policy dog that has failed to bark in the night and here I am suggesting that while there has been much talk regarding the initiative, at least until quite recently, there has not been much in the way of real action.
In recent months, however, there have been real signs of movement — and about time too given that Ireland has fallen behind the rest of the field. It is almost a dozen years since the UK introduced a scheme aimed at nudging employees in the direction of private pension provision.
The Automatic Enrolment Retirement Savings System Act 2024 has recently been signed into law and a preferred bidder for the job of administering the system has been selected.
The task will be handled by Tata Consultancy Services. These are viewed in Government as two major milestones in the rolling out of AE.
A Department of Social Protection team is currently working on the establishment of a new National Automatic Enrolment Savings Authority, NAERSA, and full details on dates of implementation have been promised. Officials have described the tasks as “an incredibly difficult piece of work”. That said, there is impatience regarding the ongoing delay. Public officials have a track record when it comes to missing promised deadlines.
In a recent budget submission, the Irish Association of Pension Funds pointed to the “vagueness” in the level of detail provided by the Department, suggesting that this flaw could risk undermining the whole concept. It is “impossible” for employers to plan against such a background, they suggest.
To be fair to the Department, considerable planning has been required and there have been certain political obstacles strewn in the way of the project.
Many employers have been faced with a big increase in input costs in the wake of the pandemic and the invasion of Ukraine. They are less than enthusiastic about the prospect of part-funding AE schemes when they are absorbing other State-driven costs such as increases in the National Minimum Wage while dealing with the impact of rising wages in a booming economy.
AE is a product of ‘nudge economics’. Current and new employees aged between 23 and 60 will be automatically enrolled in a pension scheme where their earnings exceed €20,000 a year. There is an option for those earning less to join up voluntarily.
The system is voluntary in the sense that people may opt out after six months. The experience is that most stay in due to an “inertia effect”, a reluctance to spend the time on a decision — suspending retirement saving — that is at best debatable allied to the fact workers are offered juicy carrots in the form of subsidies to remain in.
There is a State top contribution of one euro for every three saved up to an earnings ceiling of €80,000. A matching contribution is provided by the employer.
Initially, the contribution rate is 1.5% of earnings, but this is expected to rise to 6% after ten years.
If the employee is the happily laying hen under AE, then some fear that the employer is the pig who gets sent to the financial slaughterhouse under the system as it beds down.
This may be overstating things, particularly as the availability of proper retirement cover could be an important selling point in what is currently an exceptionally tight labour market.
The Small Firms Association, a branch of IBEC, had lobbied politicians to delay the rollout until 2026 to allow the space for firms to prepare. They argued that their members were faced with “layer upon layer” of costs — such as the introduction of statutory sick leave — that have not been coordinated.
The SFA suggests that the upper income threshold for AE is too high and that it should be more focused on lower-paid employees.
Social Justice Ireland has also criticised the plan. It warns that the cost to the State will ‘balloon’ at a time when an extra 20,000 people each year qualify for a State pension. They argue that the focus should be on the latter and on extending coverage to those, particularly women who currently miss out. AE will not reduce the pension burden on the State in the long term, they suggest.
A recent ESRI report has suggested increases in PRSI as a means of ensuring the sustainability of the social insurance fund though this would involve a modest hit to households, particularly those on high incomes.
Many view enhanced private pension provision through AE as vital to continued retirement coverage at a time when State pension systems are coming under increased pressure. Indeed, a successful AE model could act as a catalyst in driving pension providers to offer greater value for money to their clients while facilitating the spread of personal retirement provision into groups of the population who have relied completely on the State heretofore.
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AE should be viewed as part of a broader reform of our pension system, one that is being driven in part from within the legal system.
So how has AE worked out where it has taken root?
The UK is a key port of call. The former Chancellor George Osborne, a keen pension system reformer, introduced a Pensions Act in 2008 which led to the phasing in of AE between 2012 and 2017 in stages, starting with the largest employers. It was introduced as a means of addressing the decline in workplace pension provision.
Every employer must register an employee aged between 22 and retirement age who earns over £10,000 a year (a much lower minimum threshold than that proposed for Ireland).
The minimum contribution rate started at 2% of qualifying earnings. It now stands at 8%, of which 3% is provided by the employer, 5% by the employee.
According to London Economics, the great success of AE has been the extent of coverage: 10.6 million enrolments as of January 2023.
This has been mainly, but not exclusively in the private sector. Private sector pension enrolment has risen from 42% to 86%. It now rivals that in the public sector.
The gap in enrolment between those with an income of over £60,000 per annum and those earning between £10,000 and £20,000 has fallen from 49% to 11%.
“Historically, private pension wealth has been more unequally distributed than total wealth. AE is helping to reduce income inequality in older age,” says London Economics.
But there are challenges.
Current eligibility criteria exclude the self-employed and multiple job holders. Women and ethnic minorities are underrepresented.
There are concerns that savings are being diverted and that some employees may actually be reducing their payments into schemes. The Association of British Insurers has recommended an increase in the minimum contribution to 12% of qualifying earnings. Putting together a successful AE package is no mean task. Complexity abounds. But the prize could be significant.
