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The Government’s decision to finally move ahead with an auto-enrolment pension scheme is welcome – indeed long overdue. However, there is significant work to do in launching the new arrangements and winning wider acceptance for them. This needs to be a scheme serving the wider public interest. The pension industry will benefit from more business, but cannot be allowed to cash in through excessive charges.
The lack of private pension provision – and the resulting reliance of large sections of the population on the State pension – has long been recognised as a major policy issue. However, the complexities of dealing with this have meant action has been put off for well in excess of a decade. Now Minister for Social Protection Heather Humphreys has got Government clearance for the scheme to go ahead from the start of 2024. With around 750,000 people likely to be automatically signed up, this is a big logistical exercise.
The scheme will be phased in over a decade, so the initial impact on people’s pockets and on the businesses they work for will be limited. There will be an opt-out option for individuals after six months though, as the combination of the employer contribution and the State top-up will far exceed what people put in, the hope is that most will stick with it.
The State pension, at less than €13,500 a year, generally results in a big drop in post-retirement income for those who do not have a supplementary pension or some significant savings. Increasing pension provision is all the more important if longer-term home rental is, by choice or necessity, to become more common. The main asset of most families – the home they own – now often plays a key role in post-retirement finances.
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There are some issues which need to be addressed in the run-up to launch. Communications will be key, particularly as the nature of the top-up from the State is different to that which applies to conventional pensions, which benefit from tax relief. Some consideration is needed as to how these sit together in the longer term.
Then there is the issue of charges. The indication is that a cap on charges of 0.5 per cent may apply. Although a cap is a good idea, the aim should be to set it at a lower level. The economies of scale involved should allow a more favourable charging structure, which will be vital to longer-term confidence and support for the scheme. It is also important in terms of the return to investors, with even a small difference in the charge levied making a big impact on returns over a long period of time.
Those who build up funds will see their pot rise and fall with the markets, while pension companies get paid whatever the level of performance. They need to be pushed to offer the best deal possible.