What’s all this talk about auto enrolment in pension schemes?
You might have heard references in the media to “universal pensions” and to “auto enrolment” of employees in pension schemes. So we thought it might be useful to give you some thoughts about our thinking on these concepts.
What are universal pensions and auto enrolment?
Universal pensions are pretty much what it says on the tin. It is a concept of every adult (or at least every working adult) having retirement savings in place to help fund their old age, when they are no longer working.
Auto enrolment is a similar concept, but this time aimed at all employers who would be obliged to include all of their employees in a pension scheme. At the moment, some do and many don’t. An employee would automatically have to be included in a pension scheme by their employer, with contributions paid by the employer, the employee and the state (via some form of tax relief). The employee could then choose to opt out if he/she so wished.
Why might auto enrolment be introduced?
Because Ireland has a looming retirement crisis. State old age pensions, which provide subsistence level benefits only, are likely to be under significant pressure in the future as they are paid out of current tax revenues – there are no savings in place to pay them. So today’s workers pay tax, which funds the payments to pensioners today. Currently there are 5 people working for every pensioner. However this rate will halve by 2040. There will be less money coming in and more going out – the cost of state pensions are increasing by approx. €200m each year.
So the government has a problem and needs people to save for their retirement themselves. And this challenge is only getting bigger too, as a result of the collapse of the economy. In 2009, private pension coverage in Ireland (those with pension funding in place) was 51.2% of workers. However by the end of 2015, this figure had fallen to 46.7% coverage. When you look at the private sector alone (excluding all public servants), coverage levels are down at less than one third of employees. So the issue is that under the current voluntary system, a great proportion of workers simply don’t (or are unable to) make provision for their future needs. The government has articulated that auto enrolment is the main plank of a potential solution to driving up coverage levels.
When might it be introduced?
This is the big question! Auto enrolment is certainly a number of years away as it’s one of those nettles that successive governments have failed to grasp. However it appears to now be on the horizon within the Dept. of Social Protection. There’s no doubt that it will take some time to design a scheme, gain agreement with all social partners and then implement the scheme. Maybe we’ll see it in the early 2020’s?
Is auto enrolment the way to go?
First of all, Ireland is not the only country with this ageing population and retirement challenge. Auto enrolment has been introduced successfully in a number of countries around the world, and as recently as 2012 in the UK. As a result, pension coverage in the UK jumped from 47% in 2012 (similar to our coverage today) to 66% last year. So the results have been very encouraging there and in other countries such as Australia, New Zealand and Singapore.
The benefit also of following these countries is that there are also lessons to be learned from mistakes that they made. Any system that is introduced needs to minimise the administrative burden for employers. Any new system also needs to avoid a “race to the bottom” where employers with good pension schemes in place for employees might reduce benefits to the minimum allowed under auto enrolment.
How will it impact you?
We work hard with all of clients, encouraging structured retirement planning. After all, our goal is to help you to live the life that you want to live, without money being an insurmountable hurdle. Retirement planning is central to the achievement of this goal. So if you’re following a structured retirement plan, then auto enrolment will not impact you at all as it is aimed at people with no retirement funding in place. If you have no pension funding in place, auto enrolment will get you started, through your employer setting up a scheme.
But waiting for auto enrolment is not the answer. This has been one of the biggest political cans kicked down the road by successive governments. Don’t risk your future waiting for this to stop. Come and talk to us and we’ll help you to start taking control of your financial future in retirement.