The Irish Prime Minister, Mr Leo Varadkar recently announced that the Irish Government will “publish a five year road map for pensions reform before the end of the year”. The centrepiece of this roadmap will be a new auto-enrolment system of pension provision for private sector workers. Mr Varadkar went on to say that “I anticipate the first payments being made into those new individually held funds by 2021”.
Those involved in the pensions industry are very familiar with road maps. Over the past decade, various road maps have been produced by the Irish Government, representative bodies and think tanks such as the Organisation for Economic Cooperation and Development (OECD) and the Economic and Social Research Institute (ESRI).
In 2015, the then Deputy Prime Minister and Minister for Social Protection “confirmed Government’s approval to proceed with work to develop a roadmap and timeline for the introduction of a new supplementary workplace retirement saving scheme”. It now appears that this roadmap will be with us before the end of 2017. However, it seems to be taking a considerable amount of time to solve a problem which, if not addressed, will place a considerable financial burden on future generations.
The current economic upturn provides the ideal environment to put in place a mechanism to solve the problem of low pensions coverage in this country.
A good roadmap is, of course, an essential prerequisite for a successful journey but the window for defusing the “pensions time-bomb” is closing quickly. Unfortunately, it will slam shut should the economy hit a bump in the road. This begs the question: should the roadmap be ditched altogether in favour of a GPS?
The significance of four words mentioned in Mr Varadkar’s statement will not have escaped the attention of pensions industry participants, namely “new individually held funds”. These words may help to give a flavour of the auto-enrolment system that will be introduced in 2021.
The word “new” suggests that the auto-enrolment apparatus will differ from existing pensions products such as PRSAs or trust based retirement annuity contracts. It also signals that it may be based on a new retirement product or system. The existing range of retirement products has been considered by many to be capable of modification to meet the needs of an auto-enrolment system. The wording of the Prime Minister’s statement suggests also that this option has not been pursued and we will be looking at the birth of a new retirement product in 2021.
The words “individually held funds” could be interpreted in a variety of different ways. Could the Irish auto-enrolment system operate like a highly portable PRSA that can follow an employee from job to job? This would certainly make sense based on the high levels of mobility we are seeing in our workforce. The words could also refer to a large DC type scheme where the members each have a separate pot of money in the fund. This would be similar in many ways to the UK’s National Employment Savings Trust (NEST) system. NEST is a trust-based scheme that was set up mainly for workers whose employer did not have an existing pension scheme in place.
The announcement made by the Prime Minister merely whetted the appetite for the impending changes. Whilst the language used may be taken as indicative as to the nature of the system to be introduced, uncertainties remain as to how auto-enrolment will work in Ireland. Many questions remain unanswered, including:
- Will the system be trust or contract based?
- What will the contribution structure of the system be – how much will employers have to contribute?
- Who will pay for the system? In the NEST system, the employer is not required to pay a fee to participate. Fees are levied on the employer and employee contributions.
- How will the new system sit with the existing retirement benefit structures that are in place?
- Will auto-enrolment also apply to public sector workers? If not, how will the growing inequity between public and private sector pensions be addressed?
- Will auto-enrolment apply to self-employed individuals?
- How will the State fund auto-enrolment contributions? Will another pensions levy be required to fund the scheme?
It is hoped that the roadmap will address many of these questions but it may be that we will only find out the finer details as we approach 2021.
Stanley Kubrick's science fiction epic ‘2001: A Space Odyssey’ predicted that by 2001 we would be travelling to Jupiter and playing chess with self-aware super-computers.
In 2017, 16 years later than projected, the human race has not quite reached the zenith of its powers that Kubrick had predicted. The only celestial event likely to occur in our immediate future is the financial eclipse that will affect 54% of private sector workers who do not have a pension and will rely solely on the Irish State pension during retirement.
We have four years to plan and implement a system that will work efficiently with the existing retirement benefit structures and enhance retirement provision in the private sector. This is an achievable goal. However, we may have to wait little longer for a trip to Jupiter.