Auto-en­rol­ment edges closer to be­ing a re­al­ity

Irish Examiner - Supplement - - FRONT PAGE - Kyran Fitzger­ald

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.

Greater par­tic­i­pa­tion

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’.

Pic­ture: Conor McCabe Pho­tog­ra­phy

Taoiseach Leo Varad­kar told those at the re­cent Ibec an­nual lunch the Govern­ment is to press ahead with pen­sions auto-en­rol­ment.

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