Is pension auto-enrolment happening at all?

There was a new State-backed pension structure planned for workers who don’t have a private pension. I have not read or heard anything about this for quite some time.

Can you tell me where we stand on this now? There are many people who are waiting to join this scheme. As you know every year lost in building up a pension is less pay out when it comes to withdrawal.

I am aware that Covid is a factor in the speed at which Government business is conducted. However, there are other important aspects to people’s lives that need attention, and this is one. If this proposal is on hold or not going ahead, let us know please. People are waiting to decide what they should do about their pension.

Mr SB, email

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Governments are fond of talking about radical plans to shake up this sector and that – housing, health and, yes, pensions. But, when it comes to action, successive ministers seem to have been put off by the fear that such a move will cost their parties or administrations votes.

In terms of the Irish political agenda, auto-enrolment goes back at least as far as the ministerial regime of Séamus Brennan in social welfare 16 years ago. Back in 2006, after publication of the National Pensions Review, Mr Brennan said he would not countenance reform that did not feature auto-enrolment.

It's not even that Ireland had to be revolutionary in its approach to get to that point. Auto-enrolment is not a uniquely Irish idea; in fact, it has been discussed in various countries since the 1980s.

Australia introduced its compulsory superannuation guarantee fund for employers as far back as 1992 and New Zealand's KiwiSaver was introduced a month after Brennan left office in 2007, the year when Israel also introduced a similar scheme.

Even the United Kingdom has had one in place for almost a decade. Seven ministers have occupied the office since Brennan, including two who were, or subsequently became party leaders – Leo Varadkar and Joan Burton – and all have found reason not to trigger the introduction of auto-enrolment.

Delayed

Close to four years ago, in the fanfare of unveiling the roadmap for pension reform, then taoiseach Varadkar quoted Benjamin Franklin no less to make the point that we should not put off till tomorrow what can be done today.

“Important decisions delayed don’t get any easier,” Varadkar said. It hasn’t stopped his government and the successor in which he now serves as Tánaiste doing precisely that – delaying the important decision around auto-enrolment regardless.

And that’s a problem because, as you say, the secret to a financially secure retirement is an early start to pension saving so you can benefit from the power of compounding. As you put it, “every year lost in building up a pension is less [of a] pay out when it comes to withdrawal”.

It is not an insignificant issue. Estimates suggest that only about 35 per cent of private sector workers have any occupational or private pension savings. That means close to a million workers in the State are relying entirely on a State pension.

As has become clear recently, regardless of political manoeuvrings, the long-term trend is that the age at which State pensions are paid will rise over time. And the amount we have to pay towards them will also almost certainly increase.

The last 15 years have included a period that features the longest equity bull market in history, a period when pension savings might have been expected to perform well. This is especially so for people towards the start of their working careers – the very ones being targeted by auto-enrolment – because standard pension strategy is to assume greater risk earlier in your pension saving on the basis that you have more time to recover from temporary blips in performance.

What’s the plan?

An opportunity has been missed, no doubt. So where do we stand now?

In truth, we don’t know because the Government has yet to set down its definitive plans. The understanding is that it will apply to employees aged between 23 and 60 earning more than €20,000, who are not already enrolled in a private pension. Workers earning less than this can opt in but they will not be auto-enrolled.

Part of the thinking here appears to be that, for those workers, a State pension paid at a rate of €253.30 – or €13,424 including the Christmas bonus – is perfectly adequate for people earning below this threshold.

In terms of contributions, again we are going on the most recent information available, but it appears that, initially, workers will be required to invest 1.5 per cent of their salary. This will be matched by their employer.

The contributions will, we understand, increase by 1.5 percentage points every three years – to 3 per cent of salary from year four, 4.5 per cent from year seven and 6 per cent from the start of the 10th year after the structure is introduced. Employer contributions will match those of the worker along the way.

The State will also contribute at a rate yet to be determined. It is expected to be on the basis of €1 from the State for every €3 invested by the worker.

This is also a bone of contention as it is less favourable than current tax relief on pension savings. Government says it is worried that people do not understand the current scheme but, if it is compulsory and properly explained, there is no reason why it should not work.

The suspicion is that the Government will look for offsetting savings by cutting tax relief on existing pensions – a move that is only likely to make members of those schemes less likely to fully provide for themselves.

What’s not clear is whether people like you who, in exasperation, have set up their own pension while they wait for auto-enrolment, will be allowed to transfer in once the scheme is up and running.

Again, in the absence of updates, we understand employees will be able to opt out after some time in the scheme, but will subsequently be re-enrolled a couple of years later if they have still not entered a private pension scheme.

Introduction

Most importantly, when is it coming? It was due to be the start of last year, then it was deferred to this year. The latest word from the current Minister for Social Protection, Heather Humphreys, is that it will now be the end of next year, 2023. If you can believe that.

Employers’ bodies have been vocal on the need of an extended timeline to allow them prepare for any such major change but the issue has yet to be brought to Cabinet, much less the final details announced. That “end of 2023” deadline could yet slip and then you are getting perilously close to a general election to entertain any real expectation that the Government will introduce a measure that will mean less in people’s weekly pay packets – albeit for a longer-term benefit.

We can only hope.

Even if we make end-2023, as you can see from the contribution levels above, the scheme will be phased in very delicately. It would still be the end of 2033 before meaningful contributions of 12 per cent of salary were going into such a scheme. That’s more than half a working lifetime from Brennan’s demand for an auto-enrolment system.

[ dcoyle@irishtimes.com ]