Force employers to fund worker pensions, says industry body

Employers should be compelled to contribute up to 5 per cent of an employee’s salary to help fund their retirement, representative body Insurance Ireland has said.

In its road map for a universal pension plan in Ireland, published on Monday, Insurance Ireland asserts that the Government’s mooted MySaver plan could “dramatically” increase pension coverage for Irish workers.

Pension problems have increasingly been in the news lately, with figures from the Central Statistics Office showing that just 47 per cent of the population now has a private pension, down from 54 per cent in 2008, while data from Aviva last week showed that Ireland now has the second-largest pension gap in Europe.

Minister for Social Protection Leo Varadkar has said he favours a universal pension system where employees would automatically be signed up to a workplace pension scheme, unless they chose to opt out.

"Given our demographics and coverage rates, we urgently need a policy approach that maximises participation, achieves simplification of offering and reduces costs," said Kevin Thompson, chief executive of Insurance Ireland. It's expected that a universal pension or auto-enrolment scheme in Ireland could provide pension coverage to about 600,000 workers.

Auto-enrolment has already been implemented in Australia, New Zealand and the UK, with the former opting for mandatory enrolment, and the latter two adopting a “soft” option. It has been a success in terms of boosting pension coverage, but contributions in the various schemes may not yet be high enough.

Soft approach

Insurance Ireland proposes a soft approach for the new MySaver product, with employees allowed to opt out within three months of being auto-enrolled but re-enrolled every two or three years at the beginning of the tax year.

The scheme should target low to medium earners who do not have retirement savings, Insurance Ireland says, while existing defined benefit and defined contribution arrangements should be preserved.

“It makes no sense to damage the existing infrastructure if it provides benefits at least as good as MySaver,” the report says. One option would be to adopt he existing template of personal retirement savings accounts (PRSAs) to a MySaver product.

With the aim of allowing people to retire on at least 50 per cent of their income at the State pension age, from both the State pension and MySaver contributions, Insurance Ireland suggests savers should contribute 10 per cent of gross salary by phased increases over the first five to seven years.

Employers would be requested to contribute 1 per cent initially, increasing to 5 per cent after five years, while employees would contribute the same. In Australia, employers now contribute 9 per cent of salary, while in the UK, employer contributions have started at 1 per cent and will rise to 3 per cent by 2019.

Insurance Ireland also suggests that annuities, which have fallen out of favour due to plummeting interest rates, should be considered as an option for decumulation, or drawing down the pension fund.

“Retirees should be persuaded of the benefit of reinvesting their lump sums into deferred annuities, the report says.

Costs need to be kept “as low as possible”, the report says, noting that “ industry will rightly be challenged to benchmark prospective fees against international comparisons”.

In order to identify member accounts, Insurance Ireland has suggested the PPSN should be used.

“This we believe, would be a critical success factor for MySaver to avoid lost accounts”.

In Australia, the “MySuper” scheme lost thousands of accounts due to the lack of a unique identifier for members.