Pensions auto-enrolment: The huge pensions shake-up that 70% of us don’t know about

Minister for Social Protection Heather Humphreys is warning businesses to sort out their budgets and systems to start making pension contributions late next year for 750,000 employees who are not part of a work pension scheme.

But will she be ready to press the green button in 2024 on the biggest pensions shake-up in the history of the State?

First proposed eight ministers ago by Seamus Brennan in 2006, auto-enrolment (AE) of most workers not already in a pension scheme is slated to start in the second half of next year, after years of delays and false dawns.

The Department of Social Protection says it will later this month launch a tender worth as much as €150 million to find a firm to build technology and systems and provide administration services for 10 years to a new Government agency, known as the Central Processing Authority (CPA), which will preside over AE. Interested parties have been told the process will conclude early next year.

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Enabling draft legislation, originally scheduled to be published before the Dáil’s summer recess, is “at an advanced stage” and expected to be published by the end of the year, a department spokeswoman said.

Officials have also signalled to the pensions industry that they will start a tender by the end of the year for investment companies to manage assets, with four successful bidders to be signed up in the second quarter of 2024.

Realistically, it feels optimistic to suggest auto-enrolment will be up and running by the end of 2024. If you look to the UK, it would suggest a more realistic timeline might be second half of 2025, early 2026

—  Ray McKenna, partner and pension specialist at Lockton

“Implementation of the agree design [auto-enrolment] is well under way and employers should prepare for the introduction of AE in the second half of 2024,” said a spokeswoman for the department, referring to the complex legal, payroll and financial planning that businesses must carry out to be ready.

[ Pension auto-enrolment in 2024 a ‘mammoth task’, says Aon Ireland chief ]

The CPA will be set up “on an administrative basis” in advance of the Automatic Enrolment Retirement Savings System Bill being passed. Few observers believe the timelines will be met.

“Realistically, it feels optimistic to suggest auto-enrolment will be up and running by the end of 2024. If you look to the UK, it would suggest a more realistic timeline might be second half of 2025, early 2026,” said Ray McKenna, a partner and pensions specialist at the Irish unit of Lockton, the world’s largest private-owned insurance broker. AE was introduced in the UK in 2012.

“Public procurement and having the right infrastructure for something as big as this takes a long time.”

A senior pensions industry executive who has engaged with officials on the stop-start process for years, but declined to be named, said: “Trying to run a tender and working on a Bill that could change at any stage before it is enacted is a recipe for disaster.”

Another key challenge, according to several commentators, is the political backdrop, with employers and workers alike facing the cost of initial contributions – albeit initially low ones – ahead of the next general election, due in March 2025. A change in Government, meanwhile, risks a total rethink of how the project should be delivered.

The financial imperative for the only country in the Organisation for Economic Co-operation and Development (OECD) without AE or a similar system to widen pensions coverage is clear.

The latest Central Statistics Office (CSO) data shows that two-thirds of workers aged 20-69 have pension coverage of some form outside of the State retirement income. However, when public sector workers are stripped out, the figure slumps to about 33 per cent. As the State pension is paid at a flat rate, workers without a supplementary pension are exposed to a significant drop in their living standards in retirement.

[ Pension auto-enrolment: most people still in the dark ]

Life expectancy is also increasing and the State’s population is ageing. When Brennan first pushed for AE there were 16.4 people aged over 65 for every 100 workers aged between 15 and 64, Since then, the old-age dependency ratio has increased to 22 per cent and is set to more than double to 47 per cent by 2050, according to the Irish Fiscal Advisory Council (IFAC).

Although about 35 per cent of workers without occupational cover failed to say in the 2022 CSO pension coverage survey that they would stay in the AE scheme, international evidence suggests inertia around pensions cuts two ways.

The UK system, known as Nest, only saw about 8 per cent of workers mopped up by the scheme in its first 10 years subsequently opt out, according to Nest’s latest annual report, which added that the rate “is much lower than predictions made before auto enrolment started”.

Employees who are enrolled in the “soft mandatory” Irish scheme will have to stay in the system for a minimum of six months, but can opt out in a brief window between months seven and eight. The same opt-out rules apply in the periods after contributions increase over time.

Under the AE plan, workers and their employers will each initially pay 1.5 per cent of a person’s gross salary into the scheme. From year four of the scheme, that will increase to 3 per cent – irrespective of when someone joins the scheme – rising again to 4.5 per cent in year seven and 6 per cent from year 10.

There is a concern some companies may see the lower AE contribution rates as a new benchmark for their own occupational schemes, resulting in a ‘levelling down’ of what they are prepared to put into private plans

For every €3 a worker pays in, their employer would pay the same and the State would top this up by €1.

The 25 per cent State contribution is different from the current tax relief on pension savings. Higher earners on the State’s 40 per cent tax rate can claim tax relief at this rate on their pension contributions, whereas lower-paid workers attract relief at the 20 per cent standard income tax rate. While the Economic and Social Research Institute (ESRI) estimates 75 per cent of likely AE participants will be on the lower tax rate, meaning they will get a better rate from the State contribution system, the 25 per cent on the higher rate would be worse off on the relief front.

The AE scheme would apply to those aged between 23 and 60, earning at least €20,000 annually. Both an employer’s and the Government’s contributions will be capped at €80,00 gross annual salary.

There is a concern some companies may see the lower AE contribution rates as a new benchmark for their own occupational schemes, resulting in a “levelling down” of what they are prepared to put into private plans. The average employer contribution in existing schemes is about 5 per cent.

“That would be a very negative development. Coverage levels might have gone up, but the quality of coverage would have gone down,” said the senior pensions industry executive.

However, John O’Toole, the Dublin-based global head of multi-asset fund solutions at Amundi, Europe’s largest asset manager, said he sees little prospect of “cannibalisation” of existing plans, as pension benefits are key to hiring and retention for the types of roles already covered by occupational schemes.

Pension industry players say employers are increasingly looking at encouraging AE-eligible staff to join their existing company plans.

“The argument companies are making is that it will deliver more consistency for their employees – but there are contract issues about whether employers should be entitled to nudge people into their own plans,” said one source.

Stephen Rice, investments and pensions proposition lead at Aviva Life & Pensions Ireland, said: “It remains important for employers and individuals to seek financial advice to ensure they are saving into the right pension vehicle and to ensure that they fully understand how their money is invested and what they can do to maximise pensions adequacy at retirement.”

The CPA will be responsible for the operation, co-ordination, supervision, and development of the AE system and will collect contributions and allocate them on a pooled basis to the preferred fund choice of members.

The department has been carrying out pre-tender engagement since the summer with potential systems and administration providers to the planned CPA. Industry sources say Irish-American professional services firm Accenture, London-based investment platforms specialist FNZ Group and Indian IT company Tata Consultancy Services, which set up and runs the UK system, are among parties planning to pitch.

Investment groups such as Amundi, Irish Life’s investment management arm and State Street Global are expected to be among bidders for the investment management contracts, The gig is geared towards investment managers rather than life and pensions companies because of the CPA model being adopted.

The department, which sees the size of the AE pot growing to about €21 billion after 10 years, excluding investment returns, plans for annual management fees for assets under management at 0.5 per cent. It is understood that officials see more than two-thirds of this going to the CPA to manage running costs, with only 0.15 percentage points – or 15 basis points – being paid to investment managers.

One industry source said: “A rigid fee structure like that may rule a number of investment management companies – particularly smaller ones – out of the running. Assets under management will be tiny at the start and this would likely initially be loss-making for investment firms. It will require firms to take a long-term strategic view of things.” The source noted that the investment management contracts are currently expected to last between five and seven years.

Still, the general view among industry participants is that fees of the order of 15 basis points would be profitable business over the long term, as most of the money will be invested in low-cost, passive – rather than actively managed – funds that track stock and bond market indices.

Aon Ireland, which runs the largest employee benefits consultancy in the State, has said the plan for each of the four asset managers to provide four different fund types – a conservative, moderate risk, higher risk, and default option – will lead to the appointment of “generalists” in all asset classes rather than those who are “best in class” in particular assets.

[ The Irish Times view on pension auto-enrolment ]

The default option would automatically adjust from higher- to lower-risk assets as a worker’s retirement date approaches.

Aon submitted to the Oireachtas social protection committee late last year, as TDs and senators assessed the published heads of the AE Bill, that appointing specialist managers for individual asset classes would also result in greater economies of scale and give the CPA more flexibility to bring in and remove providers.

Another key concern with the AE scheme is the fact that employees and employers will not be able to make top-up contributions to individuals’ pots. This is seen as a particular issue for women, who may be out of the workforce, or move to part-time employment, for a period to care for family.

The Government, meanwhile, faces a mammoth task selling the project to the electorate before the scheduled launch late next year – and months before the scheduled general election. Seven in 10 members of the public are not aware of the project, according to research published in August by Standard Life.

“I don’t think anyone’s against auto-enrolment, per se. But you’d worry about general apathy around the project – both in the political system and general population,” said Jerry Moriarty, chief executive of the Irish Association of Pension Funds. “Is anyone willing to die on a hill to get this over the line?”

A senior pensions industry executive said there is a “bunker mentality” among officials in the department presiding over the project.

“It’s not a vote-winner and may even be seen in the short-term as a financial drain for employees and employers alike,” said the senior pensions figure. “But the big fear has to be that this drifts to an election and you have a new minister come in and order a review. It’s not up there with more pressing issues of the day like housing and health – even if it is as important.”

Sinn Féin, leading in opinion polls, has been supportive of the idea of AE, but has proposed that the National Treasury Management Agency (NTMA) should play a central role in managing funds rather than collecting money and “handing over to the private pension industry”.

It will need to be explained to people that the current State pension system is something that Ireland – or, indeed, any country in Europe – can’t afford to maintain in the long term

—  Ray McKenna, partner and pension specialist at Lockton

Still, the NTMA’s Ireland Strategic Investment Fund (ISIF) and its predecessor have used various investment firms to manage equity and bond assets. A similar approach is planned for new NTMA-run sovereign wealth funds announced by the Government last month.

McKenna at Lockton thinks it’s time for some grown-up conversations.

“The State pension system currently provides a reasonable replacement of income for people on the average industrial wage. There is a risk that auto enrolment will be seen by many as taking money out of people’s pockets. It will need to be explained to people that the current State pension system is something that Ireland – or, indeed, any country in Europe – can’t afford to maintain in the long term,” he said.

“We would like real focus on is ensuring there is a cohesive integration of auto-enrolment with the existing occupational pension and the State retirement systems. We think there is still some work to be done here from Government and the social partners.”

Amundi’s O’Toole, who says his group is interested in pitching for an AE investment management gig, reckons in retrospect that “it’s a bit of a shame” the project didn’t take off when first pushed by Brennan 17 years ago.

“The problem with pensions is that people generally don’t start to worry about them until they wake up, maybe, in their mid-40s and go, ‘Oh sugar’ – when the whole point is get people in when they’re in their 20s,” he said.

“It’d be a bigger shame to let auto-enrolment continue to slip.”