WHAT PENSION AUTO ENROLMENT MEANS FOR YOU?

WHAT PENSION AUTO ENROLMENT MEANS FOR YOU?

Ireland has a looming retirement crisis, both in its state-funded pension schemes and also in its private sector pension schemes. Something will have to “give” in the not too distant future.  

First of all, state old age pensions which provide subsistence level benefits only (the maximum pension is increasing to €243.30 per week in March 2018), 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. 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 people to contribute to the system, with more people looking to take pensions from it – the cost of state pensions are increasing by approx. €200m each year. 

the government has a problem

The government has a problem and needs people to save for their retirement themselves through private sector pension schemes. And this challenge is only getting bigger too as the years go on.

In 2009, private pension coverage in Ireland (those with pension funding in place) was 51.2% of workers. However by the end of 2015 (the last reported figures), 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.

To address this, the government has mentioned that “auto enrolment” is the main plank of a potential solution to drive up coverage levels.

What is auto enrolment?

Auto enrolment is a pension funding method aimed at 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.

Would it work?

This of course is the big question! Luckily Ireland can benefit here from experience in other countries as we are not unique with our pension 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% in 2016.

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.

When might it be introduced?

 Auto enrolment is certainly a number of years away as it’s a huge political challenge. What employer will welcome being forced to pay into a pension scheme for all of their employees?

However it does at least appear now to 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 to mid 2020’s?

How will it impact you?

First of all, it’s important to note that it won’t affect everyone, in fact the impact will be minimal on many of our clients.

We work hard with all of our 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.

It will however impact our clients who have employees for who they are currently not providing any pension funding.

Of course, 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, a national solution to the pensions crisis is years away. Come and talk to us and we’ll help you to start taking control of your financial future in retirement. 

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he plans to retire in 10 years time…

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Michael Geoghegan QFA CFP, previously of Canada Life and The Irish Government Foreign Affairs Dept., is the Managing Director of Agathos Financial Planning. At the top of his field for nearly 20 years, he is a renowned expert in taxation and trusted adviser to some of Ireland’s wealthiest individuals and businesses.
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