Saving plan for mandatory pensions could lead to poor return, say actuaries

Government plans for mandatory pensions are likely to disappoint, the Society of Actuaries has said.

The low-risk default investment strategy "which is likely to be where the vast majority of savings are invested . . . is unlikely to provide an adequate income at retirement", society president Maurice Whyms said, as the group published its submission to the Government consultation on the plan.

The Government intends to introduce auto-enrolment – where all workers above a certain income bracket and between certain ages are automatically put into a private pension scheme – by 2022.

The Government plan for a low-risk default could actually increase the risk of the worker not having enough money in their pension fund on retirement, the actuaries say. They argue that cash funds should instead be more accurately described as “low return”.

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“It should also be noted that the returns on these funds are currently close to zero and are negative after charges,” the submission states.

It notes that a 4 per cent return on lifetime contributions of around €250,000 from a person who is currently aged 30 and earning €30,000 would create a pension fund of €450,000 – assuming the salary rises at 2.5 per cent every year.

A “low risk” 1 per cent return for the same person, on the other hand, would create a fund of €270,000, almost all of it accounted for by the €250,000 of lifetime contributions

The actuaries’ submission says scheme members should instead “be educated and encouraged to invest in assets that are likely to both keep pace with inflation and provide a real return over the medium/long term”.

They have also come out against the plan to limit enrolment to workers between the ages of 16 and 60.

“We suggest that everyone in employment earning over the minimum threshold should be automatically enrolled,” Mr Whyms said. “This means people get used to saving into the scheme immediately and don’t see a reduction in their pay after their 23rd birthday.”

He also suggested there should be no upper limit of 60 as “even saving for a relatively short period is worth doing when your contribution is matched by the employer and there is also a Government contribution”.

Union response

The position mirrors the views of the Irish Congress of Trade Unions, which has also published its submission to the pension reform consultation.

Ictu expressed concern that the proposed State contribution rate of €1 for every €3 saved was effectively reducing the tax relief on offer for pension contributions.

At present, relief is available at the higher 40 per cent rate of tax for those paying income tax at that higher rate. The proposed contribution is effectively a rate of 25 per cent. Ictu wants that raised to €1 for every €2.50 – an effective rate of 28 per cent.

The actuaries also warn against upsetting the current system of tax relief.

While a cash contribution rather than tax relief may be more easily understood, it said, “care must be taken that introducing automatic enrolment does not undermine the coverage or adequacy of retirement saving of those who already do so under the existing pension framework”.

“We are strongly of the view that granting tax relief on personal contributions at the individual’s marginal tax rate is appropriate for the existing pensions system as it incentivises those who wish to save for an adequate pension in retirement to do so, particularly those on middle incomes who are subject to higher-rate tax.”