The mandatory solution for individuals without coverage

According to the latest CSO quarterly, national household survey just 46.7 per cent of Irish workers have any pension coverage beyond the State pension. This leaves a majority of Irish workers facing into retirement dependent on the €233.30 State pension.

There is general agreement within the pensions industry that a significant proportion of those individuals without coverage will be low-paid workers. This is borne out by the CSO finding that inability to afford the contributions was the main reason cited for not having a pension.

John O’Connell, director of Trident Consulting pensions consultants, believes that there will eventually have to be some form of mandatory national pension scheme if low-paid workers are to have adequate coverage. “There is going to have to be a mandatory system,” he says. “If you look at sectors like the hospitality industry where there are large numbers of transitory low-paid workers, you are never in a million years going to see those people covered by the existing system.”

The question is what form such a mandatory scheme should take. Brian Sexton of Invesco pension consultants believes it will be an auto-enrolment scheme similar to that introduced in the UK in recent years and the Kiwi Saver scheme which was established in New Zealand in 2007.

These schemes typically involve a requirement on employers to provide pension schemes for staff with the employer, the employee, and the government all paying their share of the contributions – usually starting at around 2 per cent, 2 per cent, and 1 per cent respectively. This has the advantage of expressing the government contribution in the form of a cash amount rather than tax relief. As the SSIA scheme here proved in the past, this tends to be a more powerful incentive than a deduction from tax.

But this may not be enough, according to Sexton. “For lower-paid workers you are probably going to have to give additional incentives,” he says. “In New Zealand everyone who joins the Kiwi Saver scheme gets €600 from the government to kick start their fund. When they introduced the scheme in 2007 they had pensions coverage of 15.8 per cent in New Zealand and this increased to 63.7 per cent by 2011.”

The UK also has an added incentive specifically aimed at the low paid. “They have Help to Save scheme which allows qualifying individuals to save up to £50 (€55.5) a month and claiming a 50 per cent bonus on their balance after two years, worth up to £600 (€664). They can then choose to roll it over for a further two years bringing the total bonus up to £1,200 (€1,327).”

Again this hard cash option is probably a more attractive incentive than tax relief, particularly for workers who don’t earn in enough to pay tax in any case.

Sexton believes that the type of scheme favoured by Social Protection Minister Leo Varadkar will be what is known as “soft mandatory” with it being mandatory for employers to offer a scheme but where employees will be allowed to opt out. This may not have the desired effect of increasing coverage among the low paid and underlines the need for additional incentives.

O’Connell highlights another potential difficulty regarding such schemes, mistrust. “A recent ICTU conference on pensions pointed to the government raid on pension funds,” he says. “It would be reasonable to assume that governments might raid them every eight to 10 years as soon as people had forgotten the last one. The solution put forward was for some form of constitutional protection for mandatory schemes.”