Setting a course for a better pensions future

The most wide-ranging changes ever proposed for pensions in Ireland were announced by the Government earlier this year. The Roadmap for Pensions Reform 2018-2023 comprises six strands which cover everything from the State pension to the validity of a compulsory retirement age.

The six strands include reform of the State scheme; building “retirement readiness”, which is about the introduction of a new auto-enrolment retirement savings system in 2022; improvements in pension-scheme governance and regulation; measures to improve the operation of defined benefit schemes; public-service pensions reform; and greater individual flexibility to support for fuller working lives in both public- and private-sector employment.

The two aspects which have received most attention are the reform of the State pension and the introduction of a national auto-enrolment scheme. The proposed reform of the State pension sees a commitment to maintaining it at 34 per cent of the average industrial wage and a move to a total contributions approach (TCA). The TCA is a new method for calculating entitlement to the State contributory pension, whereby the level of pension will be directly proportionate to the number of social insurance contributions made by a person over his or her working life.

There is also a commitment not to further raise the State pension age from 68 until 2035 at the earliest and, even then, to give at least 13 years’ notice of any change.

"The 13 years' notice of further changes to the State pension age is good news," says Bank of Ireland head of pensions Bernard Walsh. "I wonder how many people genuinely know that they are not going to get the State pension until they are 68."

David Boylan of Davy also welcomes the proposed changes. “The commitment to maintaining it at 34 per cent of the average industrial wage reviewed every five years confirms that the State pension will be a pillar of the Irish pension system and a foundation to stop people falling into poverty,” he says.

“The total contributions approach allows for credits for unemployment or caring responsibilities. The current system is unfair where someone living in Ireland all their life but who has worked for 20 years is only entitled to a reduced pension whereas someone who has only been living here for 10 years can qualify for a full pension.”

Auto-enrolment

While the proposals in the roadmap in relation to an auto-enrolment pension have received a warm reception generally, there are some concerns in relation to affordability, as noted by KPMG pensions actuary Joanne Roche.

“Affordability of pension contributions for both employees and employers, particularly those employers with no pension scheme in operation currently, will represent a very significant headwind in the years ahead,” she says. “Small and medium enterprises in particular are worried about the double whammy facing them over the years 2022-2028, whereby for the first time they will need to contribute on behalf of staff under the new auto-enrolment scheme. The proposed rates ratchet up very quickly such that a 6 per cent contribution is payable by year six. At the same time, the same firms may be facing pay demands by staff struggling to afford the required employee contributions under the system.”

The governance and regulation strand principally involves delivering on Ireland’s obligations to transpose the provisions of the EU IORPS II Directive on the activities and supervision of institutions for occupational retirement provision. It also proposes the introduction of measures to provide for the rationalisation of pension schemes along with improved pension-scheme governance and trustee standards as well as an enhanced regulatory framework.

"The directive has got to be implemented – there is no discretion," says Danny Mansergh, head of member communications with Mercer. "It's going to mean some changes and a good bit of tightening of the standards in relation to occupational pension schemes. It will improve outcomes and security for members and a lot more will be expected of trustees. It is due to come into force in January 2019, but we are still waiting for the Government and Pensions Authority to say what they are going to do."

There is broad agreement that there are too many pensions trusts in Ireland and there is a need for rationalisation. “There are 70,000 of them,” says Mansergh. “But an awful lot are one-member schemes. There are still over 10,000 standalone schemes. One route to a solution which has been explored in other markets is the master trust which looks after a number of schemes. The Pensions Authority is working on regulations for master trusts.”

A particular concern

The defined benefit issue is of diminishing importance, but David Boylan raises a particular concern. “Ninety per cent of defined benefit schemes are closed to new entrants and many of the remaining schemes are not meeting the funding standard,” he points out. “Lots of people are being offered transfer values and that is not a decision to take lightly. Value for money is very important. People have to ask themselves about the funding position of the scheme and how far they are from retirement. There is a need for good independent advice.”

The public service pensions reform proposals include making permanent the existing pension-related deduction and raising the mandatory retirement age from 65 to 70 for those public servants who were recruited before April 1st, 2004.

The sixth and final strand deals with the very notion of retirement and how that is subject to some radical changes. Interestingly, the roadmap proposals are predicated on a prediction that the ratio of working to retired people is going to decline from its current level of 4.5 to one, to just 2.3 to one over the next 40 years. However, the sixth strand is aimed at creating a positive ageing environment where older people are provided with greater flexibility to work to, and beyond, what is considered normal retirement, if they want to.

This would neatly help solve the problem of the declining ratio, thereby supporting the State pension commitments and taking the pressure off many people who face a sudden income drop in retirement.

Supporting fuller working lives

Under the proposals on extended working lives, individuals with the capacity to defer receipt of the contributory State pension will receive an actuarial adjustment to increase the rate they receive when the pension entitlement is drawn down. In addition, there is confirmation of the Workplace Relations Commission’s Code of Practice on Longer Working and a potential future review of mandatory retirement age provisions and practices to provide greater flexibility in the retirement decision and a review of pension draw-down rules.

“I definitely support the Government’s line of thinking but are they thinking radically enough?” asks Danny Mansergh. “Retirement used to be thought of as a cliff edge. You worked up to 65 or 68 and just stopped. In future that may not be the reality and you may have a large part of the population easing back gradually. That’s desirable from the Government’s point of view. But the State, occupational pensions, and auto-enrolment pensions have to be organised in a way that facilitates it. The concept of a mandatory retirement age really needs to go apart from a small number of professions where it is clearly necessary. The State shouldn’t back up employers who enforce mandatory retirement ages.”

This is a necessity, according to State Street Global Advisors managing director Ann Prendergast, who points to research carried out by the company. “There is an increasing trend where people are becoming more aware of what retirement looks like for them,” she points out. Forty per cent of people in our survey expect to do part-time work in retirement.”

Bernard Walsh agrees. “We are going to have to rethink the retirement age and reimagine retirement,” he says. “Bismarck introduced the retirement age of 65 to Germany at a time when average life expectancy was 59. People can now expect to live well into their 80s.”

There is another reason why the retirement age has to be reconsidered, according to David Boylan. “You have to acknowledge the people who have started late with their pensions. If they are 10 years out from retirement they won’t have enough time to build up an adequate replacement income. I wouldn’t say it’s too far down the road when the retirement age is abolished except for certain specified reasons.”