Mandatory Pensions on the Horizon?
IT MAY HAVE gone unnoticed, but the Government recently announced that it was planning for the introduction of universal pension coverage in Ireland.
This decision came almost two years after a report by the OECD recommended that mandatory pensions be introduced here. It also follows the introduction of auto-enrolment in the UK, a type of pension coverage system that allows employees to opt in and out.
As a first step, our Government appointed an expert group to look at how a system of mandatory occupational pensions would be implemented here. Until that group provides its proposal, we do not know exactly what type of mandatory pension system will come in. However, we do know with certainty that the current system is unsustainable and needs a radical overhaul.
Looming pension crisis
The looming pension crisis is due to demographics. In the decades ahead, the number of people in retirement across Europe will far outnumber those who will be in the workforce.
The Irish numbers will not be as heavily skewed towards those in retirement as in other European countries due to our relatively high birth rate – but, despite this, an ageing population will mean that the current State pension will become unsustainable in the decades ahead and we need to think now about how to provide an alternative.
Although there are few details about how the make-up of an Irish mandatory pension scheme, it appears that the Revenue will be responsible for collecting contributions.
Our industry would be concerned if the National Treasury Management Agency (NTMA ) was responsible for investing pension contributions, given its record with regard to the National Pension Reserve Fund. In turn, this raises the question of what independent entity should be responsible for making these investment decisions.
To best understand how a mandatory pension scheme might work in practice, we need to look at and learn from other countries that have brought in similar schemes.
Our nearest neighbour
As our closest neighbour, Ireland’s policy decisions are often influenced by UK initiatives and vice versa.
The UK introduced its auto-enrolment scheme a few years ago and it is worth looking at. This system allows workers to opt in and out, and the government there has created an environment that encourages workers to start up pensions. Indeed, the UK’s 2014 budget introduced a number of measures that provided pension savers with flexibility and choice as they approached retirement.
In the past, savers who were nearing retirement purchased an annuity, which provided them with a fixed annual amount of money, but since the UK government made the rules more flexible, savers can now choose from a range of options.
These include the possibility of withdrawing cash early from their fund, a move that generated a lot of publicity when it was introduced in the UK. This measure provided those near retirement age with far greater spending power and was also viewed as a way to help the economy out of recession.
It remains to be seen if this measure will be introduced in Ireland as part of pension reform.
The Australian example
The Government may also consider the Australian experience with pension reform. Introduced during the start of the 90s, when Australia’s economy was in the doldrums, 90% of workers there now have mandatory pensions. On average, employees with a Super retire with 65% of their final salary – the kind of retirement benefit that only certain public sector workers in Ireland currently enjoy.
Over one million Australians manage their own retirement assets, but this has led to some criticism over the lack of transparency and simplicity of some of these investment products. However, the Australian government has commissioned a series of reviews on foot of this criticism, which has made investment options more transparent and diversified. In turn this is expected to lead to reduced fees for savers.
Equally, the UK approach of providing early access to pension funds could make policy-makers who witnessed the moneyed excesses of the Celtic Tiger nervous.
We have turned into a nation of savers
In any event, as a result of the crash, Irish people have become very cautious and we have turned into a nation of savers, with almost €100 billion on deposit by the end of 2014. This government is to be commended for taking the first step on the road to pension reform, a path that previous administrations shied away from.
Hopefully the expert group’s proposal will be acted on swiftly and decisively once it is published and our decision-makers stop the looming pension crisis.
Take control of your retirement planning today and talk to CMCC Financial Solutions of Headford (093 34033 ) & Moycullen (091 556399 ) for a no-obligation consultation.
CMCC Financial Solutions Limited are regulated by the Central Bank of Ireland
