When American baseball player Yogi Berra famously quipped, “it feels like déjà vu all over again”, he could well have been talking about the efforts of successive social protection ministers to persuade more of us to take out private pensions.
ast week the current incumbent, Heather Humphreys, became the latest to make the effort.
First out of the traps was the late Seamus Brennan in 2006. He was followed by Joan Burton in 2012 and then Regina Doherty in 2018.
But nothing ever happened. Why should it be any different this time? Is it not far more likely that, with an election likely some time over the next two years, this latest set of proposals will join its predecessors gathering dust somewhere on the Department of Social Protection’s shelves?
Not if Humphreys, one of the Cabinet’s wilier political operators, gets her way. Last Monday she announced that she had secured Government approval for the outline of an Automatic-Enrolment (AE) Retirement Savings Bill.
The outline, or general scheme to use the correct terminology, of the Bill will now go to the Joint Oireachtas Committee on Social Protection for pre-legislative scrutiny.
Under the Humphreys proposals all workers earning over €20,000 who aren’t already members of an occupational pension scheme for their work will be automatically enrolled in the new pension plan.
While automatic enrolment will be “voluntary” in the sense that workers can opt out after six months, they will then be automatically enrolled once again after two years.
While workers can opt out once more after a further six months, the hope is that most of them will just find all of this toing and froing too much bother and stay enrolled.
That something needs to be done to increase the proportion of Irish workers who are saving for their retirements isn’t in any doubt.
The most recent figures from the CSO show that just under 66pc of all workers had some kind of pension coverage, excluding the State pension, in the third quarter of 2021. This was up 1pc on the third quarter of 2020.
Unfortunately, there is a lot less to these figures than meets the eye.
When workers who have some pension entitlement (no matter how small) from previous employments are excluded and only those who are currently contributing to either an occupational or a personal pension are counted, the proportion of workers who have pension coverage falls to just 56pc.
Strip out 420,000 public sector workers, 17pc of those in employment who have virtually 100pc pension coverage – and the proportion of private sector workers who are either members of occupational pension schemes or have a personal pension falls to a worrying 47pc.
While pension coverage among private sector workers has been rising in recent years, at less than half of the total, it is still way, way too low.
Private sector workers who are relying on the State contributory pension to provide for them in their old age may be in for a rude awakening. A rapidly ageing population is going to place intolerable strain on the State pension.
Back in 2006 when Seamus Brennan published the first AE proposals there were almost 5.5 people aged between 15 and 64 for every one aged over 65, the so-called dependency ratio.
The dependency ratio had slipped to 4.5 to one by 2022 and will have fallen to just 24:1 by 2051.
Driving this collapse in the dependency ratio is the exponential increase in the number of over-65s, from 467,000 in 2006, to 769,000 this year, 1 million by 2031 and 1.6 million by 2051.
“Way back in 2006 we were patting ourselves on the back that we had plenty of time [to introduce AE]”, says Jerry Moriarty, chief executive of the Irish Association of Pension Funds. “Unfortunately, we wasted a lot of that time”.
The fiscal implications of the contributory State pension having to take the entire strain of the almost quadrupling in the number of over-65s during the first half of this century hardly bears thinking about.
“The cost of the contributory state pension will increase very significantly – of the order of 65pc by 2030, which is no longer in the distant future.
By about 2040, expenditure on State pensions could consume the entire social insurance fund if nothing changes,” wrote Pensions Commission chairperson Josephine Feehily at the time of the publication of the Commission’s report 12 months ago.
What this might mean in practice was spelled out in grisly detail by the report. It estimates that the self-employed PRSI rate would have to increase from the 4pc to 10pc by 2030 and then by a further 2.4pc by 2040 while the standard employee and employer rates would each rise by 1.35pc to 5.35pc and 10.15pc respectively by 2040.
While the Government has effectively rejected the commission’s main recommendation to raise the contributory State pension age by stages to 68, the publication of the report does seem to have provided the necessary kick up the transom for it to move ahead on AE.
If massive increases in both employer and employee PRSI rates are to be avoided, then it is vital that workers are persuaded to save more towards their retirements.
And make no mistake about it, AE has proven very effective in increasing rates of pension coverage in other countries where it has been introduced. Australia was the first country to introduce auto-enrolment in 1983. It was followed by New Zealand in 2007 and the UK in 2012.
The Australian AE system is compulsory with 10pc of employee income, rising to 12pc in 2025, being contributed to an approved superannuation “super” fund.
As of March of this year, 15 million Australians had a combined total of A$3.5 trillion (€2.26 trillion) invested in their supers.
This makes Australia, which has a population of less than 26 million people, the world’s fourth-largest holder of pension fund assets.
Compulsory AE was never an option in this country. However, the British and New Zealand examples, both of which opted for quasi-voluntary systems, show that even “voluntary” AE is highly effective in raising pension coverage rates as the combination of constant re-enrolment and inertia wears down the resolve of all but the most determined opponents.
This has certainly been the UK experience, with the proportion of those with workplace pensions rising from just 47pc in 2012 (roughly comparable to the Irish rate of pension coverage at that time), when AE was first introduced, to 79pc by 2021.
The results from New Zealand are more ambiguous with the number of those opting out doubling over the past decade, with approximately 15pc of those eligible for AE now having opted out.
A feature of AE in both the UK and New Zealand was the use of existing infrastructure, with the UK operating through existing pension providers while the Inland Revenue does the job in New Zealand.
Rather than use existing infrastructure for AE, Heather Humphreys has gone the DIY route instead.
Under her proposals, AE will be administered by a shiny new Central Processing Authority (CPA).
The CPA will choose the fund managers, collect the pension contributions, install the IT and be up and running by January 1st 2024, just over 14 months from now.
Given the slow progress on implementing AE over the past 16 years that seems an almost impossibly ambitious timetable.
Then again, given our previous sloth, a tight deadline might be just what is required to concentrate minds and make things happen on AE. The consensus in the market is that, if AE does happen this time, it will probably be in 2025 or even 2026.
“Irish Life is very much in favour of AE. Our worry is that it might be delayed and not delivered in the right way”, says Oisín O’Shaughnessy, head of corporate business at Irish Life, Ireland’s largest pension provider.
Even if AE does get up and running more or less on schedule, there is a danger that it may not end up doing what it is supposed to do.
Contributions start at 1.5pc of gross salary for both employers and employees, rising in stages to 6pc each after 10 years.
“The contributions in the early years are too low, 1.5pc is minuscule,” says one pension expert. This problem will be compounded for younger people who opt for the low-risk default fund under AE.
“This doubles the problem. They won’t be putting in enough and they won’t be getting enough growth.
"Younger people need to be in something like 70pc-80pc equities and then gradually de-risk as they approach retirement.
"An overly cautious approach just won’t deliver the desired outcome”.
However, with a cost-of-living crisis in full spate – the latest figures published last week show inflation running at an annual 8.2pc – a 1.5pc initial contribution rate for employers and employees may be as much as is politically achievable.
“We must not let the perfect be the enemy of the good”, warns Bernard Walsh, head of pensions at Bank of Ireland.
In the meantime any extra delay adds even further to the already massive cost; to workers, employers and the State; of fixing our pension problem.
“I feel very strongly that this [AE] needs to happen. We just need to get on with it,” says Irish Life’s O’Shaughnessy.
Even if AE does get up and running more or less on schedule, there is a danger that it may not end up doing what it is supposed to do.
Contributions start at 1.5pc of gross salary for both employers and employees, rising in stages to 6pc each after 10 years.
“The contributions in the early years are too low, 1.5pc is minuscule,” says one pension expert. This problem will be compounded for younger people who opt for the low-risk default fund under AE.
“This doubles the problem. They won’t be putting in enough and they won’t be getting enough growth.
"Younger people need to be in something like 70pc-80pc equities and then gradually de-risk as they approach retirement.
"An overly cautious approach just won’t deliver the desired outcome”.
However, with a cost-of-living crisis in full spate – the latest figures published last week show inflation running at an annual 8.2pc – a 1.5pc initial contribution rate for employers and employees may be as much as is politically achievable.
“We must not let the perfect be the enemy of the good”, warns Bernard Walsh, head of pensions at Bank of Ireland.
In the meantime any extra delay adds even further to the already massive cost; to workers, employers and the State; of fixing our pension problem.
“I feel very strongly that this [AE] needs to happen. We just need to get on with it,” says Irish Life’s O’Shaughnessy.
Read the original article here.