The latest delay to the introduction of the State-backed auto-enrolment pension scheme will come as welcome news for some businesses who see it as an additional cost being deferred at a time of economic uncertainty.
However, the announcement by Peter Burke that the mechanics required to implement scheme will not be in place by the scheduled September date is another setback to a long delayed measure just about everybody agrees is necessary to address a looming pension crisis in the State.
What is pension auto-enrolment?
The scheme, which has been talked about in one form or another for more than 20 years, would provide for the roughly 800,000 private sector workers, aged between 23 and 60 and earning more than €20,000 a year, who are not part of an existing company pension. These workers have no other provision to save for a pension and would be automatically enrolled in one that employers must generally facilitate.
It would involve an initial 1.5 per cent of gross salary, up to €80,000 per year, being paid in by each employee with their employer matching the sum and the Government adding 0.5 per cent. So, for every €3 the worker pays an additional €4 is added to their pot.
These contributions grow over time so that after 10 years, the employee and employer will be contributing 6 per cent each and the Government 2 per cent. It means that in year 10 and beyond, a person earning €40,000 would have €5,600 a year contributed to their pension pot.
[ More than one in five Irish adults do not have a pensionOpens in new window ]
Why is it being done?
The aim is to ensure that people have adequate provision for their retirement. At present many of those 800,000 workers face a very substantial drop in income when they retire. For many, their only income at that stage would be the State pension, which is about €15,000 per annum.
Will the auto-enrolment pension replace that?
No. It’s intended to complement it.
Do you have to join?
Those who fall within the qualifying criteria have to be enrolled but can opt out after six months. It is expected that some employers will encourage workers to join company schemes to avoid having to administer both. These potentially offer greater benefits as they attract tax breaks.
How much would auto-enrolment one be worth?
As with most pensions, it depends on a lot of things including the age a person joins, how much they earn and the rate of return the fund makes on investments. Accounting firm EY crunched some numbers last year and suggested that a 23 year-old then earning €47,200 whose salary increased by 2 per cent annually would, if the fund averaged a 4.5 per cent return, end up with a pot of almost €900,000 on retirement at aged 66.
That would allow them to take a €200,000 lump sum and a pension, on top of their State one, of €36,000 increasing by 3 per cent each year. It is far from certain what those figures would be worth after 43 years of inflation, but clearly this would represent a better proposition than relying on the State pension alone. Many people will be far closer to retirement when the scheme gets up and running, though, and so the benefits would be much reduced in their cases.
How much difference will the delay make?
On the face of it, not an enormous one to most people and the delay has not surprised many given the structures required to run the scheme were still being put in place less than six months before it was due to kick in. But it is the latest in very long line of delays and will ultimately cut the pension pot of every worker involved.
What are people saying?
Employers’ representatives say they support the establishment of the scheme, but some firms will welcome the delay at a time when they argue other costs are increasing.
They say they are being hit with a raft of pro-worker legislation enacted by the Government, including minimum wage increases, that is placing an unfair financial burden on firms already struggling with higher costs.
Unions are critical of the delay, arguing there is a real urgency to getting the scheme going at a time more people are struggling to retire with a decent standard of living.
