The Roadmap for Pensions Reform 2018-2023

Under the Roadmap for Pensions Reform 2018-2023, the Government has committed to a comprehensive overhaul of Ireland’s pensions system, and soon.

From 2020, a new total contributions approach for the State contributory pension is to be introduced. This means a person’s total social insurance contributions paid, rather than when they were paid, is taken into account when assessing their entitlement to a pension. It also includes a new home-caring credit.

Governance is to be tightened up, including through the transposition of an EU directive concerning occupational schemes, as well as enhanced supports for defined-benefit schemes and protections for their members and beneficiaries.

Public-service pension reform was outlined, with the compulsory retirement age raised to 70. Greater flexibility is to be allowed in retirement decisions, including the deferral of the contributory State pension and clarification around mandatory retirement age provisions.

Far and away the biggest revision envisaged in the roadmap, however, is the introduction of auto-enrolment to the contributory State pension scheme. This will see workers, and their employers, make a contribution which the State will top up. The aim is to ensure the contributory State pension stays pegged at a value of just over one-third of average earnings.

Workers on lower salaries, self-employed workers and workers with existing private pension provision will be able to opt in to the system. All this is due, according to the roadmap, to be introduced by 2022.

Given that the burden of financing pension spending by Government is set to be carried by a smaller share of the population in years to come, the reforms were widely welcomed. By one estimate, the ratio of working-age people to those aged above the State pension age will fall from 4.5:1 today, to 2.3:1 within four decades.

Such reforms, particularly the introduction of auto-enrolment, are not just welcome but necessary, according to Ann Prendergast, chief executive of State Street Global Advisors Ireland.

Because it operates globally, its perspective is both global and national, she says. “One of the most significant issues we see relates to demographics. We have an ageing population and higher dependency ratios. Though we often hear it talked about as if it were a negative, it is a good thing – we have succeeded in enabling people to live longer lives.”

Ensuring the country has a sustainable pension system to support them is an issue that needs to be addressed.

“No country has cracked it effectively 100 per cent and some are better than others. Ireland, unfortunately, doesn’t do too well, with just 35 per cent of people making provision for pensions, which is why the new auto-enrolment changes are to the fore in this report.”

Having a global perspective enables State Street to see what works well elsewhere. “We also undertake annual surveys to allow us to understand how people feel, and in particular to see if they feel ready for retirement if they are close to it.”

One of the themes it surveys is what it calls “retirement happiness”, a composite of feelings including an individual’s trust that their pension is safe and sustainable, ownership of their retirement savings planning and overall preparedness for the event itself.

Disappointing

The fact that just 16 per cent of respondents to the survey felt confident in relation to their preparedness is disappointing but not surprising, she points out, given that only 35 per cent have access to a pension.

The vast majority of that 35 per cent have such access only because their employers put the mechanism in place. The fact that young people today will have on average 11 different jobs in their careers is opening up gaps in even this facet of our pension coverage.

“You may be in a very constructive corporate pension scheme today but change jobs, and tomorrow you may not be,” Prendergast says. That fact is impacting on the levels of trust unearthed in the survey.”

What was perhaps most surprising, however, was in relation to ownership, with 74 per cent of Irish people reporting they felt responsible for their own retirement planning.

“That was really interesting because it is very high, much more so than in other countries,” says Prendergast. “It tells us that people in Ireland understand about taking personal responsibility for retirement, yet we’ve left them in a vacuum by not giving them an easy mechanism by which to do that.”

There are a number of areas around this which the roadmap does not include, including issues such as financial literacy, and the fact that pensions can seem a daunting topic. “But there is a willingness there and we should be leveraging it as soon as possible.”

Among the issues not fully addressed in the roadmap is coverage. While there are good reasons for putting minimum incomes and ages into the auto-enrolment system, “by having them you are creating issues for people down the road”, Prendergast cautions.

Women in particular might be affected in greater numbers than men, which is why overall household income might be a better determinant, particularly if there are two incomes in a family.

In terms of age, it makes sense for people to start as young as possible. “If a graduate comes into a job and from day one has a pension deduction, they learn to live with it. It will feel a lot harder to have it introduced two years down the road, which could see more people opt out,” she says.

On the adequacy side, the roadmap’s auto enrolment proposals make sense, Prendergast reckons, particularly as they start to auto-escalate within a reasonably short period of time.

There is, however, one big issue. “We haven’t seen much progress yet. The report sets out a number of milestones, the first of which was a design of sorts in Q1 of this year. I’m sure that work has been ongoing, but we are in Q4 now and nothing has been made public. The start date of 2022 was always an aggressive date – it now seems even more ambitious but I’m hopeful.