Teens as young as 16 should start paying pension automatically, committee advises

Teenagers as young as 16 who are working should be automatically made to start saving for a pension, a key Oireachtas committee is to recommend.

The Committee on Social Protection will on Wednesday publish a report scrutinising Government plans to put in place an auto-enrolment scheme for pensions – a key part of defusing the pensions time bomb in the decades to come.

Among the key recommendations of the committee following its pre-legislative scrutiny of the bill are that the lower age limit for auto-enrolment be reduced from 23 to 16 years, aligning it with the age at which PRSI contributions start among those teenagers who are working.

It also recommends that the lower income threshold – the level of earnings at which workers become eligible for auto-enrolment – of €20,000 be removed from the Government’s draft legislation.

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The committee’s report will argue that the inclusion of the threshold can penalise young workers, low earners and women disproportionately. Under the draft plan, people can opt out after six months of mandatory contributions. They will then be re-enrolled after two years, but will be able to opt out after a further six months’ mandatory participation.

Minister for Social Protection Heather Humphreys has said the Coalition intends to set up the auto-enrolment system by the end of 2023, with enrolments beginning in 2024. She has said it is a “generational reform” issue that will “combat pensions inertia by turning the present system on its head”. Employers and the State will contribute €4 for every €3 saved by a worker, under this plan.

However, officials have previously expressed scepticism over whether the system will be rolled out on time – and the committee is set to recommend a two-year lead-in period following passage of the bill to “allow business be ready for the implementation”, according to a list of key recommendations seen by The Irish Times.

It also recommends that the total amount of all charges levied on a customer should equate to a maximum of 0.5 per cent, and calls for an examination of whether the fund should have a mandatory minimum amount invested in Irish bonds and equities in order to support the domestic economy.

The report also calls for a ban on investment in fossil fuels or the arms industry, and that a minimum percentage of the funds should be put aside to invest in Irish renewable energy developments in order to ensure compliance with climate action obligations.

It recommends that the State pension should be linked in law to inflation, or a percentage of the living wage, to ensure the real value of the pension is not eroded as auto-enrolment is rolled out. The committee also says participants should be given a sample of the likely pension they will receive on retirement in real terms by adjusting for inflation, and for the imposition of a “strong governance framework, incorporating annual evidence-based reviews”.

The Government estimates that initially 750,000 workers will be enrolled into the scheme and that this figure will grow significantly over time. While there are mandatory periods and enrolment is automatic, overall the scheme is voluntary. The plan is to phase it in over a decade, with employer and employee contributions starting at 1.5 per cent of gross salary and escalating automatically every three years before reaching a maximum contribution rate of 6 per cent after a decade.

There will be a range of savings funds to choose from and drawdown will be aligned with the state pension age.