Pensions are on the agenda again, as the Pensions Authority seeks further reform to many areas of private pensions. It is consulting (here) on proposals aimed at reforming and simplifying private pensions in Ireland.
It’s a welcome development, say industry experts, but the proof will be in the pudding.
" I want to see a little bit of conviction about implementing it," says Jim Connolly, head of pensions at Goodbody Stockbrokers, noting that "a lot of vested interest groups" could thwart realisation of the proposals.
So what’s on the Pensions Authority’s agenda and where else is the Irish pensions regime ripe for reform?
1. Simplification
As set out in the Pensions Authority consultation paper, there is a need for a streamlined and simplified pension system.
Andrew Hodnett, principal and defined contribution (DC) specialist with Mercer, points to nine different types of defined contribution pension scheme arrangements "all with their own requirements, while Connolly notes that there are about 14 different acronyms in Irish pensions, including PRSAs (personal retirement savings accounts), ARFs (approved retirement funds), and AVCs (additional voluntary contributions).
“It detracts from the very simple idea that the pensions structure is a savings contract; it gets lost in the complexity,” he says.
The Pensions Authority agrees. “Navigating the pensions system takes considerable time and effort, which is potentially off-putting for consumers,” it says in its report, while Insurance Ireland argues that there are “too many unnecessary rules in the current pensions model and it needs to be streamlined in order to make pensions more understandable”.
This issue is nothing new. Connolly recalls a national policy pensions report in 1998 which said pensions were too complicated and the real barrier to achieving greater engagement. The solution then was to introduce the PRSA, which would replace other structures such as buy-out bonds.
“Essentially what’s happening now is that they’re bringing this to fruition,” says Connolly.
The move will likely mean that small self-administered schemes will now convert to PRSAs
“But the PRSA structure is a little too rigid from a cost and investment perspective; you can’t do in a PRSA what I can do in a self-administered scheme,” says Connolly, noting that there might be scope for a “light touch” PRSA.
2. Broader pension coverage
Given that just half of employees in Ireland have a private pension – and this figure is falling – increasing pension coverage should always be a goal.
Recent figures from the CSO show that the numbers relying on the State pension jumped from 26 per cent in 2009 to 36 per cent in 2015. And it’s likely to increase, with just a little over a third of millennials having their own private pension fund, for example.
This puts considerable strain on the Government to maintain State pension benefits, which are already in doubt.
Against this background, the Government is working on a universal workplace pension, with a model due to be published in September. Its shape is as yet unclear, but Insurance Ireland says it should use the existing infrastructure of Irish pensions providers to prevent expensive duplication.
One possible method of boosting pension coverage is to follow the UK and New Zealand’s KiwiSaver scheme – known as auto-enrolment. First mooted by the OECD in 2014, auto-enrolment would see employees automatically enrolled in a pension scheme, which employers are obliged to contribute to.
Hodnett says such schemes can be “extremely effective in tackling inertia and affordability as the causes of low engagement”.
A key feature of auto-enrolment is that disinterested employees must opt-out – rather than opt-in – to such a scheme. According to Mercer, research has shown that, in an opt-out scenario, 90 per cent of younger employees stay in the plan and about 80 per cent maintain the top level of contribution.
“Auto-enrolment should be introduced with clear objectives for increasing pension coverage. A target of over 70 per cent pension coverage within 10 years would be a good starting point,” Hodnett says.
Others, however, suggest an alternative – mandatory pensions. The Society of Actuaries in Ireland, for example, says a mandatory system is better than auto-enrolment, as it’s more effective at increasing private pensions coverage.
One challenge to introducing either scheme will be getting employers to pay for it. “International experience suggests that starting both employee and employer contributions at a relatively low level, with a defined path to increases over the medium term, is a good approach,” says Hodnett.
The National Pensions Framework in March 2010, for example, suggested a contribution of 8 per cent of income (split 4 per cent from employees, 2 per cent from employers and 2 per cent from the Exchequer). One concern is whether this might inadvertently suggest that such contributions are sufficient to deliver adequate replacement income in retirement.
And, of course, if pension coverage is increased, it gives Government more leeway to cut back State pension benefits – one potential outcome of efforts to introduce a universal pension that would alarm many workers.
3. Increase in employer contributions
But it’s not just about pension coverage; pension adequacy is important too. This means that employers may also need to consider how they can contribute more to their employees’ retirement.
The typical employer contribution for an Irish DC scheme is 8 per cent according to Mercer, but some are a s low as 3 per cent, says Hodnett. Pension experts typically say that people need contributions of between 15-20 per cent of salary to secure an adequate retirement income. With employer contributions typically so low, this puts the onus on the employee to make up the shortfall.
Mobile workforce solutions company Fleetmatics, for example, pays just 3 per cent of an employees salary as a pension contribution on its PRSA scheme – and this is only if the employee matches this 3 per cent.
4. More transparent charges
A frequent criticism of pension schemes is that they are too expensive, with studies showing that the fees and charges levied on private pensions can wipe out any gains accruing from tax relief.
The authority alludes to this in its consultation, noting that “charges borne by some DC schemes are clearly higher than they could be”. It would like to see more transparent, if not necessarily lower, charges. This in itself would introduce more competition which could facilitate lower charges.
Gary Owens, managing director at Willis Ireland, thinks something like an APR (annual percentage rate) structure (used when people take out a mortgage to indicate how much their borrowing costs are, or to show how much savers are earning on their money and to compare rates between providers) could be a useful tool in pensions.
“It would mean full transparency of charges,” says Owens, as all the various charges used to take money out of your pension would be shown in one easy to understand figure.
It would also help consumers shop around.
5. Deeper engagement
Figures show that about one in two people have a private pension in Ireland. That’s not one in two pensions that are adequately funded, that’s just one in two people who actually have them.
“Unless you force people, they don’t actually do it,” says Owens, noting that it’s particularly difficult to get younger people to participate. This failure to engage means that people are unaware of changes that will have a massive impact on their wellbeing in retirement.
Consider the Government’s decision to move the pensionable age to 68 by 2028. This decision means that someone retiring after this will effectively lose three years worth of pension entitlements.
“It wiped out €36,000 overnight, yet no-body gave out about it,” says Owens.
