SLOW AND STEADY. Easy does it. Don’t be hasty. Etcetera, etcetera.
After almost two decades, multiple modifications and almost endless talking, Ireland’s new auto-enrolment (AE) pension system steadily staggers towards the finish line.
Proposed by the government in 2006, legislation to allow for the creation of AE was finally signed off by Cabinet last week.
The government is saying it now wants the system up and running by 1 January 2025.
It would be a brave soul that would put money on that deadline being met, with a slew of deadlines being missed in recent years.
But regardless, the green light for the legislation is a big step towards making AE a reality.
It’s now at a stage where workers should sit up and take notice, as it could make a big difference in how much money is in their pockets – now and in old age.
Looking at AE from a worker’s perspective, one clear benefit emerges, mixed in with one big fear.
Currently, private Irish businesses have no legal obligation to contribute to their workers pensions.
Therefore, the advantage of AE for private workers is obvious – employers will have to pay into their retirement pots.
A quick rundown of AE (with more detail is here for those interested). Under the system, all three of the worker, the employer and the state will contribute to an employee’s retirement fund.
Employer and employee contributions will start at 1.5% a year, with the state chipping in 0.5%.
Essentially, this means for every €3 an employee pays into their pension, an additional €4 goes in via employer and state contributions.
For a worker earning around the minimum wage of €26,000 a year, this would mean employer contributions of about €400.
These will scale up, eventually rising to 6% a year from the employee and employer and 2% from the state. Meaning that (leaving the figures the same), the worker would then get almost €1,600 a year in employer’s contributions.
It’s hard to see exactly how this will play out, such as whether companies will slightly dampen wages to offset the new payments.
Many businesses are also arguing that AE comes at a time when they are already facing surging costs in areas such minimum wage increases and sick pay entitlements.
But coming back to an employee perspective – on paper, this would be a major win for workers.
Currently, there are about 750,000 employees without a pension. These are almost entirely in the private sector and likely tend to be lower-paid. These will be the winners if AE works as intended, getting help to build up retirement savings that many of their older peers never did.
That is, *if* AE works as intended.
To ensure this is actually a benefit, AE needs to be a supplement to the current state pension, rather than a replacement.
Which brings us to…
There are many worries over AE – that the fees for fund managers will be too high, that the system will be too complicated, that it could be a tempting target for a repeat of the crisis-era pension levy, and so on.
But the most pressing concern for the majority of workers is likely a more existential one.
Put simply, many fear that AE will be used as a means to water down the state pension in the future.
However it was viewed in the past, the current idea of the state pension is ‘poverty alleviation’ – that it ensures recipients are not destitute.
But it is not aimed at ensuring people can live with relative financial comfort – this is instead the stated aim of AE. Retired workers who paid into an AE pot would use it to supplement their state pension payments, boosting their standard of living.
The concern is that the cost of the state pension will surge in the coming decades as the population ages.
Attempts to directly deal with this tend to be met with resistance, such as the government’s scrapped plan to raise the state pension age above 66, which was shelved after a massive political backlash.
A more insidious way of doing the same thing – ensuring the state pays out less in pensions – would be to avoid raising state pension payments in future. Or keep any increases below inflation.
This would result in the real value of the state pension falling. Some fear the state would then expect workers to use their AE funds to make up the difference.
There is also a greater chance of this happening in Ireland. Of the 19 euro area countries, Ireland is the only one where decisions about state pension payments are made by politicians as part of the annual budget cycle.
In most other European nations, state pension payments are linked to some kind of benchmark, such as inflation or average wages. So if inflation goes up by 3% a year, so does the state pension.
This ensures the payment doesn’t lose its value and also means retirees have more certainty over their financial future.
The sustainability of the state pension is definitely a worry, but it is a problem which can be addressed in multiple ways.
These could be raising the state pension age, increasing PRSI payments for existing workers, or using corporate tax windfalls to buff up a recently-created sovereign wealth fund, which could generate surpluses to help fund the state pension.
The short of it is, for workers to actually feel the benefit of AE, the value of the state pension would have to be maintained.
This would suggest that introducing some kind of benchmarking system for the state pension alongside AE would make sense.
But that does not mean it will get done. It is more likely efforts to bring in this type of change would meet the same fate as previous pension reform ideas – being endlessly talked to death.
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