On the 22nd August 2018, the Government launched proposals on how a new auto-enrolment Pension Scheme may work. The proposals from the Social Protection Minister, Regina Doherty are open for consultation. The announcement of the ‘Scheme’ is intended to generate a debate around the proposed structure and where possible create a new and more applicable proposal for implementation. It is proposed that a period of consultation, will apply to the 4th November 2018.
It is proposed that Auto-enrolment will be introduced on a phased basis from 2022 and is aimed at low to middle-income earners who do not have private pensions. There are around 900,000 people who have no works pension, currently in Ireland. The new scheme would apply to 410,000 workers who will be left with the State-contributory pension only in retirement if action is not taken. Presently the State pension is circa €12,000 a year, which is a third of the average wage. Most of the one-third of the workforce with no supplementary pension face straitened times in retirement unless a supplementary pension scheme is put in place.
Automatic enrolment will not impact on Employees who already have pension’s coverage which meets, or exceeds, any minimum standards required. The new system will not be a substitute for existing pension provision. It is intended to supplement rather than replace existing private pension plans.
The initial proposed structure of the Scheme is targeted for those earning over €20,000 p.a., aged between 23 and 60 with no existing pension provision. An Individual can choose to opt out, should they so wish. In addition, Employees outside the above limits and Self-employed individuals can opt in. Initial Employee contributions will be 1%, increasing by 1% p.a. to a maximum of 6%p.a.
Employer contributions will match those made by the Employee and will qualify for tax relief, subject to an earnings limit of €75,000.Employer contributions will be tax deductible.
How will the new Scheme be operated?
It is proposed a new independent, statutory body, the Central Processing Agency (CPA), will oversee the new Scheme. Employer and Employee contributions will be paid to the CPA. There will be a maximum of 4 private sector “Registered Providers”, appointed following a tendering process, who will administer the individual Employees account. With regard to the contributions applied to the Scheme, three Investment options will be provided low, moderate and medium Risk. In addition, from a charging perspective the proposed Scheme will have a maximum charge of 0.5%p.a.
What is the alternative?
The alternative is that a massive burden is placed on the State. The number of people aged over 65 in Ireland is expected to double to more than one million within two decades, putting a huge strain on the State pension, which is paid for by PRSI (pay-related social insurance) contributions. There is widespread agreement that the biggest problem with our pensions system is complexity. So why are we considering adding another option to what we have already? Why not make contributions to an updated PRSA compulsory?
The draft design has the appearance of another Pension compromise. The scheme should be run by either a public or a private sector entity. The necessity to provide advice and guidance to those Employees seeking assistance was catered for with the introduction of the Personal Retirement Savings Accounts (PRSAs) in 2002. Such vehicles can cater for auto-enrolment, simply by making contributions to same compulsory. The necessity exists to inform and promote the proposed Scheme on an ongoing and consistent basis. To ensure widespread coverage, communicating the reforms in an efficient and easily understood fashion presents a huge challenge. For many, the language of pensions will be new and complicated – the detailed requirements around auto-enrolment and opting-out should not leave both employer and employee confused or frustrated. It is our view that the pension industry should be responsible for the ongoing management and investment of the scheme: competitive Charging structures and competition are likely to be the best route to drive down costs and it should be open to all potential providers to enter the market.
For those wishing to participate in the consultation process please do so, through the following Link: www.welfare.ie/consultations.