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Fiona Reddan: What lessons on pension auto-enrolment can be learned from the UK?

The Government’s plan to boost private pension coverage looks likely to have less of an impact than had been hoped

A new report by a UK think-tank has found that over a quarter of private sector employees are still not saving into a pension. Photograph: iStock
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Fiona Reddan
Tue Oct 01 2024 - 06:00

It still hasn’t been introduced, and already the Government’s plan to boost private pension coverage looks likely to be less impactful than had been hoped.

A new report, which shines a light on the experience of auto-enrolment in the UK, finds that it has proven to be less successful than expected in terms of increasing private funding for retirement.

The report, published by the UK think tank, the Institute of Fiscal Studies (IFS), finds that over a quarter of private sector employees are still not saving into a pension. And even when they are saving, as many as four in 10 won’t have enough funds in retirement for a “minimum standard of living”.

This is all the more worrying for Ireland when you consider that the UK is more than a decade in advance of Ireland in adopting an automatic pension savings approach.

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So what can be learned from the UK experience?

Ireland’s progress

First discussed some 20 years ago, auto-enrolment looks finally to be on the way. Up until this week, the Department of Social Protection had yet to put a firm date on when the scheme would launch, with an expected introduction date during “early” 2025.

At the weekend, Minister Heather Humphreys finally put a firm date on when it will come into effect - September 30th, 2025 - assuming the Government in place at that time does not tinker further.

Once introduced, some 800,000 Irish workers aged between 23 and 60, who are earning ¤20,000 or more and aren’t currently part of a pension plan will be automatically enrolled in a pension scheme.

Pension inadequacy

Delays in getting this far mean Ireland remains the only country in the Organisation for Economic Co-operation and Development (OECD) that doesn’t operate a type of auto-enrolment system to boost pension savings.

That’s a concern, given the ongoing fears that many Irish workers will face income poverty in retirement.

Consider this from a recent report from the Central Bank: “Put simply, consumers are not saving enough to provide for a comfortable retirement.” When combined with falling home ownership figures, this is setting up some serious difficulties for the future.

As a 2022 Economic and Social Research Institute (ESRI) report outlined, estimates that 65 per cent of those currently aged 35-44 are likely to become homeowners by retirement raises the risk of a greater proportion of pensioners living in income poverty.

Auto-enrolment – if and when it is finally introduced – is supposed to boost these retirement savings. But the report from the IFS shows that it may not be the silver bullet authorities hope it will be.

Not enough savings

In its report, the IFS finds that the issue of pension inadequacy is a growing problem in the UK – even though some 11 million people have enrolled in the National Employment Savings Trust (Nest), the UK’s auto-enrolment vehicle, since 2011.

“Despite the success of automatic enrolment in increasing pension participation, we still find that over a quarter of private sector employees are not saving into a pension, half of whom are targeted by automatic enrolment,” the report outlines.

It estimates that between 30 and 40 per cent of private sector workers won’t have enough funds in retirement for a “minimum standard of living”, which it defines as spending about £14,400 (€17,000) a year for a single person, and £22,000 for a couple. This figure includes the UK state pension.

Single people, women and those renting in the private sector were found to be less likely to meet this minimum income standard.

It could be argued that as the Irish approach is expected to have higher contribution rates – rising to a combined (employee, employer + government) 14 per cent after 10 years – inadequate savings may be less of an issue.

In the UK, after all, the top rate of savings is just 8 per cent.

However, given that the scheme has yet to get off the ground in Ireland, and that much lower rates are due to apply in the early years (just 1.5 per cent from the employee/employer for the first three years) achieving a higher savings rate may be ambitious.

So it’s worth bearing in mind the recommendations the IFS has put forward to boost pension coverage in the UK.

Broaden eligibility

Under the Irish approach, employees who earn €20,000 or more a year, are aged between 23 and 60, and aren’t currently part of a pension plan, will be automatically enrolled into the new scheme.

In the UK, the equivalent scheme starts at age 22. However, the IFS suggests that, given the issues around pension inadequacy, it would be a better approach to lower the eligibility age to 16, and keep people enrolled up to the age of 74.

Of the one quarter of UK private sector employees who are not saving into a pension, about half don’t qualify for auto-enrolment. Broadening eligibility, then, would boost private pension cover.

A lower age had been recommended for the Irish scheme by the Oireachtas Joint Committee on Social Protection Community & Rural Development and the Islands back in 2023. They expressed concern that a starting age of 23 was “exclusionary to those who do not attend third level education and work in a trade”.

Benefit for all

Apart from the cohort in the UK not caught by the eligibility rules of auto-enrolment, a similar number of private sector employees who do meet the criteria are not saving into a pension, according to the IFS research - i.e. they have opted out.

So why aren’t they saving? Possibly because they can’t afford it.

But should this mean that they miss out on potential employer contributions? The IFS doesn’t think so.

“There is a strong case for employees to receive an employer pension contribution of at least 3 per cent of total pay, irrespective of whether they contribute themselves,” it argues.

This would benefit lower earners, the IFS says. While it acknowledges that doing so could encourage some of those who currently contribute to stop doing so, it doesn’t expect this impact to be significant.

“Our reading of the available evidence is that the numbers responding in this way would be small,” it says, adding that this move alone could see an extra £4 billion go into pension savings a year.

In the UK, employees have to contribute 5 per cent, with employers putting in a further 3 per cent.

In Ireland, Irish workers will initially pay in 1.5 per cent of their salary, with their employer putting in another 1.5 per cent, and the State 0.5 per cent.

If such an approach was adopted in Ireland, opt-out rates would likely be lower, as employees would still benefit from a pension contribution of at least 2 per cent (rising thereafter) if they also received the State stake – even if they paid nothing themselves.

Allow access to funds

It’s an option that has been suggested several times: give people the option of accessing their savings early, in order to encourage greater savings. Brokers Ireland for example, has argued that Ireland’s “rigid approach” is out of line with occupational schemes, some of which allow you to retire from age 50.

It might sound counter-intuitive, because if you withdraw your retirement savings you’ll have nothing left for retirement, but the IFS argues that there is a “good case” for allowing just this.

“Such schemes could increase individuals’ abilities to weather some financial shocks,” it says, “as they are more likely to build up a ‘rainy day’ fund that they could draw upon during working life, and it would only lead to additional pension saving if the liquid savings account reached a particular limit.”

It does add a caveat, however: such liquid savings should not attract tax relief (or a State contribution in the Irish example).

And the IFS is arguing for this despite the fact that access to retirement savings happens a lot sooner in the UK (at age 55) than in Ireland, which is linked to the state pension age, currently 66.

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