JOAN BURTON LIKES the name “shamrock saver” – but in most peoples’ lingo the compulsory, privately-funded pension is a more-obvious title for what could soon be on the way.
The Tánaiste this week announced the government was putting together a “universal retirement savings group” to come up with a plan for a new retirement funding system.
While we are at least six months away from hearing what proposal the group comes up with, TheJournal.ie had a look at what this scheme might look like – and what it could mean for workers.
Why bother changing the system at all?
In one word, demographics. The average life expectancy in Ireland has gone up more than a decade in the last half-century and it should continue to rise. That means thousands more pensioners each year with proportionately less young workers to pay for their benefits through taxes.
The current ratio of working-age people to retirees is more than 5 to 1, however by 2060 that share is forecast to drop to 2 to 1 – a problem many developed countries are grappling with.
And while that demographic shift will make for an ever-increasing burden on the public purse, the ageing population also has big implications for private pension systems.
Traditionally, many Irish workers were on employer-funded defined benefit pension schemes – in which they were guaranteed a regularly income once they retired.
But longer-lived ex-employees have turned these plans into a ticking time bomb on companies’ balance sheets and firms have already been desperately trying to switch workers over to less-costly, defined contribution schemes.
There’s also the risk to retirees that their pensions will disappear if their former employer goes belly-up, as happened to ex-Waterford Crystal workers.
As it stands, Ireland and New Zealand are currently the only countries in the OECD without a mandatory, earnings-related pension scheme to work alongside state benefits.
Only about 40% of private-sector workers currently have pension coverage outside the state benefit and the figure is much lower among the low-paid.
So how would this compulsory pension scheme actually work?
Burton was light on detail as she hand-balled the issue to the planning group, which was told to work on “an efficient and effective universal retirement savings system” – and deliver a roadmap on how it would be introduced.
But the Táinaiste made a few references to the Australian “superannuation” scheme, which is one likely model the government would be considering.
There, a mandatory, employer-funded model was first put in place for all workers in 1992. The defined-contribution scheme features employers paying money on their workers’ behalf into individual investment accounts.
Australian employers currently pay 9.5% on top their workers’ salaries into approved pension funds – a figure which has been rising from an initial 3% to a planned 12% levy from 2025.
Aidan Kennedy, from the Society of Actuaries in Ireland, said a similar, mandatory scheme was the best option if the government wanted to deliver the maximum “impact” in fixing pension problems.
“We think the most sustainable model is the defined-contribution type, with both employees and employers making payments, and the state contributing through tax relief,” he said.
Wait, what’s to stop all that money disappearing?
Instead of guaranteeing an income, these schemes only specify the amount that will go into an investment fund. How much you get to retire on will depend on what goes into the fund during your working life and how well the fund performs.
So there is no guarantee of a set benefit or that the investment won’t lose money, although they generally target low-risk assets like bonds and blue-chip stocks.
Kennedy said any new system would need strict “safeguards” for things like fund-management fees and how pension money was invested to make sure peoples’ retirement nest eggs weren’t frittered away.
I’m confused, is this all just another tax? Or is it a pay rise?
Not so much a tax, more like forced savings. If employers have to start making pension contributions this will be factored into their wage bill and either salaries or staff numbers could be cut to cancel out the added costs.
But the short-time effect, assuming the government bans employers immediately slashing wages, will be an effective pay rise for existing workers – although one they won’t get to enjoy for a long time.
An alternate system would feature the money being docked directly from employees’ wages like regular PAYE taxes, which would mean people suffered immediate take-home pay cuts. But the money would come back, hopefully with interest, on or near retirement.
Some countries, like Canada, run mandatory systems on a collective model, with both workers and employers making payments into a public pension fund.
Canadian retirees are given a regular, guaranteed payment – calculated as a share of their income when they were working.
This would be a lot harder to sell as the payment would effectively be seen as another tax, although one which should be ring-fenced to pay for pensions exclusively.
This all sounds shite. Can I opt out?
Possible, but unlikely. While this week Burton said the government’s advisors would be looking at both mandatory and “quasi-mandatory” systems, her department’s statement suggested an opt-out system wasn’t on the cards.
Its stated aim was to ”progressively achieve universal coverage, with particular focus on lower-paid workers”, pointing towards a compulsory system for everyone who wasn’t already covered with an existing private- or public-funded scheme.
Does this mean the government will axe the state pension?
Again, unlikely. Even countries with comprehensive, privately-funded schemes still have a public safety net for those with little or no retirement savings.
Kennedy said a universal private scheme would almost-certainly be “a second pillar that would stand on top of the state pension.”
But the obvious aim for the government is to take the sting out of an ever-rising pension bill. Part of a universal, privately-funded system would probably be a means test for the state pension – so those with enough money to fund their own retirement would have their public benefits cut.
Those who are already on company or public-sector pension plans would be unaffected by a move to a mandatory scheme, although it’s less likely businesses will offer generous in-house schemes in the future if there is a compulsory system to fall back on.
How soon will any of this happen?
Well, there are no guarantees it will happen at all. This is the second time Burton has had a look at the Irish pension system after the OECD produced a review into the issue in 2013.
But the idea goes back way further than that. In 2005 the then-Fianna Fáil government commissioned a report which discussed the need for a mandatory supplementary pension scheme, although it stopped short of recommending one outright.
Burton said the reason she hadn’t put anything in place sooner was because the economic crisis was no time to be introducing major pension changes. The current review is due to be finished by the end of the year with recommendations then put before the government.
Who cares about pensions, won’t my kids just look after me when I’m old?
It’s a nice thought, but if you live until you’re 100 they’ll probably be retired as well. So it will be up to the grandkids to look after the lot of you.
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