Auto-enrolment edges closer to being a reality
The outgoing chairman of the Irish Association of Pension Funds, Jim Foley, did not beat around the bush when he suggested, earlier this year, that pension funds were “facing a perfect storm”.
We are all fairly familiar with the challenges faced by the industry and more pertinent ly, by the large numbers of people who will be relying on it to provide them with a decent income in retirement.
Arguably, this is a storm that has been raging since the onset of the financial crisis when the value of many investments was decimated, prompting the introduction of a programme of quantitative easing design to promote economic revival.
The‘Q E’ programmes have boosted asset values but have been accompanied by an implosion in levels of interest that can be earned on investments.
And all the time, people live longer and the number of people drawing from company schemes continues to grow. In many cases, deficits have mushroomed pushing the schemes in question to the brink.
Mr Foley, meanwhile, went on to call for an ‘ orderly winding up process’ for pension schemes that could be said to be beyond salvation. But he also touched on a broader issue, the challenge of ensuring that greater numbers of employees in the private sector receive coverage in the first place.
Between 2009 and 2015, the proportion of workers with private pension coverage fell from 51.2% to 46.7% while for those working in the private sector alone, the rate has fallen to just one third of employees.
This falling trend is simply just not sustainable —particularly at a time when the qualifying age for the State pension has been raised dramatically.
The ability of the State to provide directly for people’s retirement is being challenged by the combination of rising life expectancy and a lower birth rate.
There are around five people at work in Ireland for every one person drawing a pension. That ratio is predicted to fall to 2.5 per retiree by 2040, that is, in barely 20 years from now.
The Australians, British, New Zealanders and Singaporeans have moved to promote greater pension participation by introducing a system of automatic opt ins, or compulsory saving, in some instances.
According to Jim Foley, “if Defined Benefit is the past and Defined Contribution the present, then Auto Enrolment and Master Trusts are the future.”
Mr Foley went on to express disappointment at the slow pace of progress with respect to the introduction of auto enrolment and he called on the Minister to bring the work at Government level to a conclusion.
As it happens, at the time of writing, the Minister of Social Protection was none other than the current Taoiseach, Leo Varadkar.
Mr Varadkar will have brought Mr Foley and other advocates of reform some comfort with his announcement at the Ibe can nu al lunch, recently, that the Government is to press ahead with the introduction of automatic enrolment in pensions after what has been a lengthy ge station period.
The Taoiseach has set out an ambitious schedule for its introduction, with automatic enrolment to apply to all employees within a three year period.
“This issue has been long fingered for too long and now that the economy is recovering, we must act decisively”, he said, committing the Government to publish its reform plans before the end of the year.
Similar pledges from Ministers have come and gone over the years, it has to be said. However, the former Minister for Social Protection, Joan Bur ton, was an active minister, setting up the Pensions Council and a group to examine the whole issue of retirement savings.
Certainly, the time for a system of automatic enrolment in an employee pension plan is overdue.
We have the UK experience of auto enrolment as an example to study.
Between 1997 and 2012, there was a 10% drop in membership of UK pension schemes. The former head of the CBI and Financial Regulator, Adair ( now Lord ) Turner was engaged to produce a report on the future of pension provision.
He proposed the introduction of a system of auto enrolment, a voluntary system under which employees are signed up automatically to a scheme but can elect to opt out either immediately, or later, at any stage.
Turner suggested a target date of 2018 for the full introduction of the system into which employers would contribute 3% of pay- roll, employees 4% and the taxpayer 1%.
The UK Government began introducing the system, on a gradual basis, in 2012. At first, it applied only to very large companies, at a much lower rate, but it has been gradually extended to all companies and next year, all companies will be subject to the new system and to the contribution levels envisaged in the Turner report.
In a presentation recently to the Irish Institution of Pension Management, a senior Z uri ch Insurance executive Simon Foster reviewed the operation of the scheme. By March last, more than five million employees ( 5.2 million ) had been auto enrolled.
The employee opt out rate was between 6% and 12% lower than envisaged.
Concerns that there would be a levelling down in preexisting contributions by employers have not come to pass.
Almost 60% of employees are now ‘active members’ of schemes — up from 47% in 2012.
There are flexibilities built into the system. If an employee opts out within a month of enrolment, they will receive a full refund. An employee can opt out later, but at that point, existing contributions remain invested in the scheme.
The now system poses ongoing challenges not least in the area of IT. More sophisticated software to allow for employee segmentation may be required.
Employees need to be educated while the industry needs to consider its system of charges.
The 2008 UK Pensions Act has introduced a cap on the fees that can be levied on auto enrolled members.
Some pensions companies are stepping up the support in the area of governance they offer to employer clients. Providers have set up ‘ master trusts’, that is boards of trustees as an alternative to the trusts established by employers.
Concerns have been raised about such master trusts and their independence from the provider life and pensions companies.
Introducing the new system and winning the support of employees will require careful work. The indications are, however, that employees could well be receptive to the idea, even if some firms may hardly be ‘ over the moon’ about the concept.
It is about time that some serious efforts were made to defuse the famous ‘ ticking pensions time bomb’.
Taoiseach Leo Varadkar told those at the recent Ibec annual lunch the Government is to press ahead with pensions auto-enrolment.