Key decision on pensions is to choose one good system - Duval

Donald Duval is known for two things. The first is his nickname, the Don - which is derived from his academic and professional qualifications that read MA FIA; the second is the fact that he was government actuary in Australia when that country decided to introduce mandatory pensions.

Against the generally low profile people in his profession tend to seek, such factors rank him almost as a showman but if this second-generation actuary is worried by the exposure, he hides it well.

Duval was in Dublin to address the National Pensions Forum convened last week by Social Affairs Minister Séamus Brennan to examine ways forward for pensions in Ireland - in particular the introduction of some form of mandatory pension.

The Minister sees little alternative if Ireland is to attain its target of ensuring 70 per cent of the workforce over the age of 30 has some private pension provision as the ratio of workers to pensions falls in the coming decades.

Ironically, Duval says, pension adequacy was not even a consideration when Australia introduced compulsion.

"The two major drivers were economic and political," says the wild-looking but mild-mannered Duval. "Economically, Australia had significant macroeconomic problems. High wages were driving price inflation; along with a low savings rate, this generated a currency crisis and something had to be done.

"The political driver was the then Labour government's drive for 'democratic capitalism'. While the government was deregulating everything in sight, it wanted workers to have a share in the fruits of the capitalist system.

"The solution to both issues was to give people a wage rise but divert some of it into compulsory superannuation. People think they are getting a wage rise but it breaks prices link because it does not go into consumption."

Duval is dismissive of the long-standing Government attachment to the 70 per cent target in Ireland's voluntary private pension programme.

"No purely voluntary system will ever achieve 70 per cent. No-one ever has and people have tried quite hard to increase coverage," he says. "It is just not practical in my view."

Auto-enrolment, or an opt-out system - one of the models being considered by the Pensions Board for a report to be presented to the Minister next month - might achieve such a target, Duval concedes. But he points out that there is no such scheme in operation yet anywhere in the world.

Duval says that compulsion might work in Ireland but only if it was introduced in a very slow, phased system like in Australia - where it started at 3 per cent and rose gradually to 9 per cent - and "is traded off for wage increases so you do not get either a fall in take-home pay or an increase in labour costs. Those are the two things you are trying to avoid".

However, if the Minister does opt for the route of compulsion, Duval is clear that he should stay away from a "retail compulsory system" where individuals buy pension products off life companies. "I think retail compulsory systems are quite dangerous because they become very inefficient and very heavily sales driven and sales costs go through the roof."

Duval favours employment- based schemes, if a mandatory system is to work, such as company-wide or industry-wide schemes. He argues such entities have better buying power and tend to produce higher investment returns.

He also stresses that compulsory schemes are not a licence for employers to walk away from their responsibilities, suggesting that their involvement could be incentivised through tax relief.

As it happens, the Australian scheme sees the employer pay 9 per cent for every employee with the worker having the right to add further voluntary contributions.

He concedes that the way the scheme was introduced in Australia did lead to a decline in the provision of defined pensions but does not accept the inevitability that a compulsory system will lead to a "race to the bottom".

"In Australia, we are now starting to see voluntary contributions coming in. You do get a transition effect and I would have been very worried about that 10 years ago but the fact now in Ireland and the UK is that company contributions have got so low, so how much are we going to lose anyway?"

One point where he and Mr Brennan concur is that the time is right for Ireland to make a decision on the future shape of pension provision.

"Whatever you do, you should do it now," he says. "But remember that the key decision is not whether it is mandatory, auto-enrolment or incentive-driven; the more important thing is what are you doing to make that system good. A good system of any one of those three would be better than a bad one of the others."

Whatever Ireland does decide, Duval warns it will have to address the regulatory and funding standard concerns that have blighted defined benefit occupational schemes both here and in the UK where he now heads up the pensions practice of life company AON.