Pension Schemes Face More Intrusive Regulator Oversight
Government enthusiasm has diminished for meeting a 2022 target date for compulsory pension auto-enrolment. However, new enforcement powers are imminent for the Pensions Regulator, writes Emily Styles
There is not much consistency across Ireland’s small and medium businesses surrounding how much they contribute to employee pensions. There is no legal obligation to do so, and though government has promised compulsion in the coming years, for the moment such contributions are entirely voluntary.
Looking at some of the medium-size enterprises featured among this year’s EY Entrepreneur of the Year contenders (see page 36) highlights the lack of consistency. Among the seven companies whose accounts detail salaries and pension costs, the employee pension payment as a percentage of wages and salaries is highest at General Paints Group (19.7%), followed by Ard Ri Group (7.7%), M50 Truck & Van Centre (3.2%), Errigal Contracts (2.6%), Kiernan Structural Steel (2.1%), and Carlow Craft Brewery (0.1%). West Cork Distillers, with a €1.9m payroll, doesn’t detail any pension payments for its 53 staff.
This random evidence suggests that many SMEs are in for a land when pension auto-enrolment (AE) is finally introduced. Until recently, government was promising that AE would be rolled out from 2022, after having outlined the concept in 2018. The Department of Social Protection updated the pensions reform roadmap last year, specifying that AE will mean people in employment aged between 23 and 60 and earning at least €20,000 a year will be auto-enrolled if they are not already in an employer’s pension scheme.
Proposed contribution levels for this compulsory private pension were set at 6% from employees, 6% from employers and a 2% direct contribution from the state. These contribution levels would be phased in, rising gradually over six years from a starting point of 1%, 1% and 0.33%. The department’s latest proposal talked about a phase-in period of ten years, starting at 1.5% from employees and employers and increasing by 1.5% increments every three years. There was no clarity about the level of state contribution.
Under the government’s original AE ‘Strawman’ proposals, the current pension tax relief regime would be adjusted. At the moment the net cost of a €100 pension contribution for an individual paying 40% income tax is €60, while for people on the 20% rate, the net cost of the same contribution is €80. Under the Strawman proposal, all employees contributing €100 would pay the full cost, and the state would top up pensions rather than allowing an immediate tax benefit.
Outside of the corporate world of defined benefit pensions, the main driver for the pensions industry in Ireland is professionals, business owners and other high earners making regular, substantial pension payments to avail of the 40% tax break. If the pension tax incentive is equalised for all taxpayers, then that is not going to suit a very large vested interest.
Apart from that industry resistance, there’s the Covid factor too. Employers in some sectors are under enormous financial strain, and the last thing they need is a compulsory extra cost.
Social Protection minister Heather Humphreys told the Dáil in July that the government recognises the exceptional strain that both employers and employees are now under as a result of the Covid-19 emergency.
“The government will therefore seek to gradually deliver the autoenrolment scheme,” the minister stated. “Full implementation of the AE scheme by 2022 was extremely ambitious. The AE programme management office in my department will work on developing options for the government to consider, in order that the system can be introduced on a phased basis. Until decisions have been made on these options, it is not possible to give a more detailed timeline for the introduction of the AE scheme.”
Kicking the can down the road stores up trouble for politicians. In the general election earlier this year, pensions emerged as live issue on the doorsteps, with the qualification age for the contributory State Pension due to be raised to 67 from January 2021.
That increase has been stalled pending a review by a new Commission on Pensions.
The Irish Fiscal Advisory Council commented recently that the pension age has not followed rising life expectancy, and numerous official reports have not led to change. “Not increasing the pension age as planned in 2021 would add up to €575m to annual spending, with this cost steadily rising over time. Average life expectancy at age 65 increased from 79 in 1980 to almost 85 in 2016, and is projected to rise to 89 by 2050,” IFAC stated.
Longer life expectancy isn’t just an issue for government funding of the State Pension. It also affects private defined benefit (DB) and defined contribution (DC) pension schemes and their 880,000 members. The Pensions Authority regulates 700 DB schemes and c.9,000 group DC schemes, as well as c.66,000 active non-group DC schemes. All these pension arrangements have trustees attached, and Pensions Regulator Brendan Kennedy is advising trustees that they can expect more oversight in the years ahead.
An EU regulation called IORP II boosts the powers of the Pensions Authority to ensure proper management of retirement savings. Kennedy says that transposing the directive into Irish law is complex, but he’s hopeful the process will be concluded by the end of 2020.
Addressing the Society of Actuaries in Ireland earlier this year on oversight of DB schemes, Kennedy noted that the objective of a defined benefit scheme is to pay the benefits set out in the scheme rules. “Our supervision must therefore be forward looking,” he said. “That means not just looking at whether the scheme is solvent today but whether it will be solvent and in a position to pay the promised benefits, when the time comes.
“Trustees must also be forward looking in how they manage the