The changing pensions landscape

There is a huge amount of change taking place at the moment in the Irish pensions market with different options available for people wishing to save for retirement. Until recently, people either joined an employer who already had their own pension scheme in place or else set up their own pension plan through an insurance company or with the help of a financial adviser. Where a company had a pension scheme in place it was only for their employees. This results in lots of small schemes but often suits employers who then have more control over the design and structure of the pension scheme.

Many other countries operate larger schemes through collective industry or multi-employer arrangements. There has been a trend globally to move to such arrangements as they are presumed to have better governance and lower costs as a result of their scale. The Irish pensions regulator, the Pensions Authority, has indicated many times that it wanted Ireland to follow this trend.

A revision of the European Pensions Directive allowed the opportunity to force this change. While smaller pension schemes had previously been exempted from the requirements, the Government chose not to apply this exemption when implementing the new requirements. This meant that all schemes faced additional costs and that smaller schemes were unsustainable. This has resulted in a mass exodus of schemes to Master Trusts. A Master Trust is a pension scheme with lots of different unconnected employers. They have mostly been established by insurers and employee benefit consultants. As it is just one scheme the governance is centralised with one set of trustees responsible for the running of the scheme.

By January of this year there were 180,000 members of 15 Master Trusts with €7.4bn of assets. This movement will continue throughout 2023 and Master Trusts will be dominant in the Irish market in the coming years.

There is also a lot of change happening in the market for personal pensions which have generally been used by the self-employed or company owners and directors. Their options have been to set up a personal pension or a Personal Savings Retirement Account (PRSA) or a pension scheme under trust which could accept employer contributions. As there were a lot of tax disadvantages to setting up a PRSA contract, a trust was set up to cater for people who could also benefit from employer contributions.

Generally, these schemes only had 1 member. As these were also subject to the requirements of the pensions directive, they also became too expensive to sustain. Many pension providers have established Master Trusts specifically for these and most will move over the coming months as well. The Finance Act in 2022 removed many of the tax disadvantages of the PRSA so that is now a real option for retirement funding for that type of company owner or director.

AUTOMATIC ENROLMENT

The other major change on the horizon is the introduction of Automatic Enrolment which is due to begin in 2024. This is designed to increase pensions coverage and has been successful in doing so in other countries, most notably in the UK, where it was introduced over 10 years ago. Basically, anyone employed who meets specified criteria and is not in an employer’s pension scheme, would be automatically enrolled into one. They would have the option to opt-out, but general experience is that most people remain in and continue to save.

The criteria proposed for Ireland is that it will apply to anyone aged over 23 and under 60, earning over €20,000 per annum. The plan is that everyone who meets these criteria will be identified and enrolled into a pension scheme that will be set up by a newly established Central Processing Authority (CPA). The CPA will be responsible for the administration of the scheme. People who do not meet the criteria will have the option of choosing to join. Everyone will have to stay in the scheme for 6 months but will have the option to opt out in months 7 and 8.

The amount paid in will be phased ultimately reaching the level of 6% of earnings from the employee, 6% from the employer and 2% from the State. The 2% State contribution will be instead of the tax relief employees normally get on their contributions to a pension scheme. In the first year of operation, the contribution levels will start at 1.5% from the employee and employer and 0.5% from the State. After every 3 years these will increase by another 1.5% and 0.5% until reaching the final amount after 10 years.

The CPA will also hire 4 investment managers who will invest the funds. Employees will be able to choose from low, medium and high-risk funds but there will also be a default fund for employees who do not want to make a choice or feel unable to do so. In the UK’s biggest Auto-enrolment fund, NEST, 99% of members are in the default fund. Benefits will only be paid at State Pension Age.

The Government is planning to tender for the administration of the CPA in the coming weeks and introduce legislation before the Dáil’s Summer recess. They will then tender for the investment managers later in the year. As there is a significant amount of work to be done to put the infrastructure in place, the ambition to start Auto Enrolment in 2024 is very ambitious. However, if we are to improve pension provision in Ireland and are serious about ensuring more people are saving for retirement, it needs to happen as soon as possible.