Doubts about whether Ireland’s mandatory workplace pension scheme will achieve “ambitious” targets on contributions from workers and employers could undermine hopes for the scheme to deliver adequate retirement income for future generations.
The ability of the proposed auto-enrolment arrangement, due to come into operation next year, to hit those targets is seen by benefits consultant WTW as “the biggest unknown” in its projections on the amount the pension scheme will pay workers in later years.
Under the scheme, an expected 800,000 workers who are not members of any private workplace pension scheme will be automatically signed up to a State-organised programme, provided that they are aged between 23 and 60 and earn a minimum of €20,000 in total across one or more jobs.
Contributions by workers and their employers are scheduled to start at just 1.5 per cent of gross earnings, with the State contributing based on €1 for every €3 committed by the worker.
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Four years after the scheme commences, those figures rise to 3 per cent for each of the worker and the company, rising to 4.5 per cent apiece from year seven and to 6 per cent from year 10. The State contribution will rise to 1 per cent, 1.5 per cent and 2 per cent as those stages progress.
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That would mean workers would see 14 per cent of their gross earnings invested in a pension from 2035.
But WTW says it expects “significant pushback by employees and employers” on the “very significant increases in future contributions over the next 10 years”.
“In particular, the final targeted contribution levels of 6 per cent (employee), 6 per cent (employer) and 2 per cent (State top-up) are ambitious,” WTW said “We need to point out that there is no certainty that contributions will increase to these levels.”
The consultants note ongoing and rising concern in business at rapidly rising labour costs following a sharp rise in the national minimum wage, improved sick benefits, a new public holiday and a rise in the rate of PRSI contributions in 12 months. For those in hospitality, where most workers would be in line for enrolment, the return of VAT has added to that. And that is before any auto-enrolment contributions.
And the hit to workers’ take-home pay will be felt more keenly than the 6 per cent rate suggests as the money will be calculated against gross earnings but paid from net earnings. For 40 per cent taxpayers, that could mean an effective contribution of closer to 10 per cent of net earnings each month.
WTW note that in the UK, largely a template for auto-enrolment in Ireland, the minimum contribution from the employer is 3 per cent with workers having to add 5 per cent of earnings to this, of which 1 per cent comes from tax relief.
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