Forcing employers to put in place a company pension scheme into which workers are automatically signed up – auto enrolment – and which takes contributions out of salary at source, like income tax, has driven pension membership in the UK to a record high.
But even there, concerns remain about the low level of contributions being salted away, currently around 4 per cent of salary.
The scheme was introduced at a deliberately low contribution level of just 1 per cent from employees, and 1 per cent from employers, to start off, with a view to gaining acceptance of the idea.
The minimum contributions made under auto enrolment are in the process of being gradually raised, to 8 per cent of qualifying earnings in 2019, of which a minimum of 3 per cent must come from the employer.
Automatic enrolment was introduced in the UK in 2012 and is estimated to have brought an additional six million people to pension membership. And that figure is growing. Membership of occupational pension schemes in the UK stood at 33.5 million in 2015, up 10 per cent on the previous year.
Concerns are growing however that even 8 per cent may not be enough to ensure a comfortable retirement. In addition, auto enrolment has done nothing to improve pension coverage for the self employed, already at a disadvantage in not having the benefit of employer contributions to count on.
In Ireland, pension membership is driven almost entirely by tax incentives. Yet, “the world over, wherever you rely on tax relief incentives to put money into your pension, you will only ever achieve a rate of around 50 per cent”, says Jonathan Daly, head of propositions at Zurich Life.
One alternative to auto enrolment is the introduction of mandatory pension membership legislation. In this case, workers have no option to but to contribute.
Ireland is likely to favour auto enrolment, reckons Daly, because it makes sense to allow people have the choice to opt out, particularly in situations where people are only working for a short period of time.
Mandatory occupational schemes may yet prove best of all however.
“Australia is the shining example in this regard because it got to grips with pensions coverage around two decades ago and now a person retiring there has an average pension pot of the equivalent of GB£200,000 (€222k), compared with GB £50,000 (€55.5k) in the UK.”
Unfortunately for Aussies, increased longevity means that that £200,000 is still not enough,” he says.
If that is bad news for them, it is worse for us. “In Australia mandatory enrolment ensures contributions stand at 15 per cent of salary,” says Daly. “In the UK auto enrolment will get that figure up to 8 per cent. We have no plan at all.”
