In a recent survey carried out by State Street Global Advisors, Irish respondents were least confident of all those surveyed about their retirement readiness, with 39 per cent of Irish savers not confident that they were on track to meet retirement goals, compared with 15 per cent in the US and 28 per cent in the UK.
With private pension coverage in Ireland at only 42 per cent, that’s hardly surprising.
So what is the Government doing to increase pension coverage and what other plans or initiatives are being put in place when it comes to individuals providing for their retirement?
The biggest initiative being discussed by the Government currently is an auto-enrolment pension scheme, much like the UK system.
Nigel Aston, head of defined contribution with State Street Global Advisors says that in a survey carried out by the company, 80 per cent of Irish respondents favoured automatic enrolment and nearly two-thirds would also take advantage of automatic annual increases in contributions.
Paula Finlay, financial planning specialist with Davy, says the Minister for Social Protection, Leo Varadkar, is looking at a universal retirement savings system (URSS).
Automatically enrolled
“In the UK, when you start a new job and earn over a certain salary and are over a certain age, they’ll automatically enrol you into a pension scheme. You can then opt out but the opt-out rate has been low – between 6 per cent and 12 per cent – so it has been very successful. If you are over 22 years and earn over €10,000 you are enrolled. You start out at 2 per cent contributions and then you build up to 8 per cent – it’s a mix of employer and employee contributions and there is a government top-up as well.
“The Minister has been vague on how it will work here and has said it’s not on his agenda this year but next. He also wants to retain the value of the State pension. He didn’t say how he’s going to do that, as the research is showing that it’s completely in deficit (the Social Insurance Fund is currently €2.7 billion in deficit). He has said the URSS will supplement this, that people will do it as an addition to the State pension.” She says they need to get “buy-in” from the public for this and should heed the UK in terms of a government top-up.
A spokesperson for the Department of Finance said that among the many issues to be decided as part of a new retirement savings system that would progressively achieve universal pensions, is the “extent and nature of any State support for pension savers in such a system”.
Reform drive
In addition to auto-enrolment, there is currently a reform drive from the Pensions Authority with all pension providers taking part in a consultation process.
Finlay highlights some of the reforms the authority is pushing for. “The Pensions Authority is now committed to simplifying pension schemes. What we are going to see is the rationalisation of the number of pension schemes – the removal of two pension products: the buy-out bond and retirement annuity contracts – RACs or personal pensions. The authority will also be moving towards simplification of fee structures, simplification of investment offerings and jargon-free communications to scheme members.”
Finlay says the hits that pensions have taken over the past 10 years, including the pension levy, increased mandatory ARF withdrawals and the reduction of the maximum tax-efficient pension fund to €2 million has led to lower pension coverage rates. She says the Government needs to make it more attractive to take out a pension.
A spokesperson from the Department of Finance says that while the Minister sees no reason at this point to change the marginal rate relief incentive on pension contributions that applies for current pension savers, arguments have been put forward in the past, for example, for a system of direct subvention or matching contributions to pension savings to be made by the State as opposed to the provision of tax relief. He says he will consider a case for these.