Thursday 22 March 2018

Automatically enrolling workers in company pensions is the smarter move

A great many fine words have been spoken about how we defuse the ticking pensions time bomb. Enough already, says Andrew Hodnett, it's time for action

Andrew Hodnett Photo: John Daly
Andrew Hodnett Photo: John Daly

As Albert Einstein is reputed to have said, "The definition of insanity is doing the same thing over and over again, but expecting different results".

When it comes to major pension reform to ensure security in retirement in Ireland, the same thing is happening over and over - a lot is being said but very little is being done.

In 2005, the National Pensions Review report recommended consideration of an auto-enrolment system in which employees are automatically enrolled by their employer in a pension but can choose to opt out.

More than 10 years on, no meaningful action has been taken. The pension crisis is getting worse, not better, and the likelihood of increased poverty in retirement for future generations is all the more real.

This is borne out by figures from the CSO last week showing the number of workers who had a pension in the fourth quarter of last year had fallen by approximately 5pc since the fourth quarter of 2009. Over the same period, the number of workers who expect the State pension to be their main source of income rose from 26pc to 36pc.

This expectation is extremely worrying, as all available research indicates that Ireland's current State pension system is unsustainable in the long term.

Demographic changes mean the ratio of employees to pensioners is expected to fall from the current level of five to one, to just two to one by 2055.

This is a startling prospect, as is the enormity of the pension crisis, with the future cost of providing public sector pensions and the State pension estimated at €440bn, more than 12 times the €35bn spent bailing out Anglo and Irish Nationwide.

The McKinsey report Is Ireland's population ready for retirement? notes that "Ireland is at a crucial juncture with its pension system as the debate continues on options to strengthen it."

The debate needs to end now; options quickly evaluated and decisions taken.

It is encouraging to hear the Minister for Social Protection Leo Varadkar speaking about his intention to proceed with a universal pension system. However, the way in which this new system addresses the twin issues of coverage and adequacy will dramatically influence its success.

So, what steps should be taken?

Introduce auto-enrolment with clear targets

With only half of employees in Ireland in an occupational pension scheme, more must be done to promote pension saving. Auto-enrolment can be extremely effective in tackling inertia and affordability as the causes of low engagement.

Indeed, Mercer research indicates that where pension membership was 'opt out' as opposed to 'opt in', not only did 90pc+ of younger employees stay in the plan but approximately 80pc maintained the top level of contribution. Our new Minister for Social Protection must now urgently finalise a plan to introduce auto-enrolment. A target of over 70pc pension coverage within 10 years would be a good starting point.

Implement a word-class system by learning from other countries

One advantage of lagging behind other countries in pension reform is the opportunity this presents to learn from their experiences.

For instance, having identified an 'advice gap' in its latest pension reforms, the UK is now to provide independent financial advice to members at retirement.

Also, as highlighted at last week's Irish Association of Pensions Funds conference, master trusts (which enable many smaller occupational schemes to group together under a shared trust) have become a mainstay of the UK and Australian systems as a best-practice way of realising auto-enrolment.

This has resulted in stronger governance and higher-quality service for members, especially in the smallest schemes, long a key focus of our own Pensions Authority.

Simplify the current system

At present, there are nine types of defined contribution pension schemes with myriad different rules, increasing costs, reducing understanding and impeding retirement saving.

Simplifying this complex system, alongside structural reform, will enable people to understand their pension more easily, increase engagement and reduce the cost of advice and administration.

These steps would go a long way towards putting Ireland in a more secure position for the future and allowing the current generation of workers to face into old age with greater security and confidence.

Andrew Hodnett is a Senior Consultant at Mercer, the global consulting leader in talent, health, retirement and investments

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