Despite various efforts made by successive governments over the past half century the proportion of the workforce with any supplementary pension coverage over and above their state entitlements remains around the 50 per cent mark. Indeed, it has actually fallen from a high point of 54 percent reached in 2008.
Generous tax relief, the introduction of simple and cost-effective Personal Retirement Savings Accounts (PRSAs) and a variety of other initiatives failed to persuade people of the value of saving for their retirement. Ireland is not unique in this problem and a number of countries have addressed it through varying degrees of compulsion.
And this is firmly on the agenda in Ireland as well. Minister for Social Protection Joan Burton announced not long after taking office that she was considering the introduction of some form of auto-enrolment scheme.
This would work by compelling all workers to automatically enrol in some form of default scheme to which they, their employer, and the Government would contribute. However, they would have the ability to opt out of the scheme if they wished. This is similar to the schemes introduced in Britain and New Zealand.
Burton asked the OECD to report on the issue and make recommendations and this was expected to endorse the auto-enrolment option. However, in what was a surprise to many observers the OECD report actually highlighted many of the drawbacks of such schemes and recommended a compulsory model instead while still leaving the door open for some kind of halfway house between the two.
“The OECD did put some caveats to the compulsory model but they recommended it as being the best way to achieve comprehensive coverage”, says Brian Sexton of Invesco pensions consultants. “People are bad at saving for their retirement and nothing else has worked.”
According to Sexton the details have yet to be fleshed out for any new scheme and it could be a long while coming.
“The initial thinking for an auto-enrolment scheme was contribution rates of 4 per cent for the employee, 2 per cent for the employer, and 2 per cent for the government. But we don’t know what the contribution levels for a compulsory scheme would be. Minister Burton has talked about the scheme offering people a safe way to save for their pension. This implies that there would be no risk and an element of a government guarantee.
“It will be interesting to see what the investment strategy for such a scheme would be and how it will be structured. It will also be interesting to see if it applies to everyone or just those earning above a certain salary. There is a lot of work to be done yet and I wouldn’t see anything being in place before 2020.”
Munro O’Dwyer, director of the PwC Pension Solutions Group believes a mandatory solution has now become necessary. “To be honest, it’s needed at this stage. Nothing else has worked. If we look at our own savings habits we can see it is much easier to switch off savings.”
While most commentators believe there could be some resistance to a mandatory model and a perception of it being another form of taxation there is evidence that they can gain acceptance over time. The Australian Superannuation Guarantee scheme introduced in 1992 is an example. This provides for a mandatory employer contribution to a private pension plan for their employees and is fully compulsory with no opt-outs allowed.
“This scheme was quite negatively received at the outset but has turned out to be quite a success,” says O’Dwyer. Indeed, the figures show that the number of people saving for retirement in Australia has increased from 40 per cent to 80 per cent since its introduction.
“The reality is that if they are left to themselves most people will not save for the long term and some form of compulsion is probably necessary,” O’Dwyer adds.