The low-paid must not be left behind on pensions
The lower-paid need pensions too. Auto-enrolment must not leave them behind.
When the Government launched its strawman proposal for the automatic enrolment of people into pensions from 2022, Employment Affairs and Social Protection Minister Regina Doherty said we were faced with a twofold challenge.
First, we needed to create a sense of imperative around saving for retirement. Second, we needed to help people on lower to middle incomes to accumulate retirement funds.
It seems odd, therefore, that the proposal involves effectively cutting the low-paid out of auto-enrolment.
The proposed earnings threshold would exclude anyone earning below €20,000 per annum. They will be free to sign up voluntarily; however, the failure of people to sign up voluntarily for pensions is the main reason for proposing auto-enrolment.
Any pension practitioner, not just in Ireland but globally, can confirm that where any section of society is left to enrol themselves, rather than being automatically enrolled, the overwhelming majority will not do so.
The rationale behind the Government's exclusion of the lower-paid is that people on very low incomes tend to consume all their incomes and will have little scope for savings, particularly long-term savings.
The Government also observes that if the idea of retirement savings is to replace working income, State benefits will substantially achieve this goal. On current rates, someone earning €19,000 a year during their working life could reasonably expect the State pension, plus other social welfare benefits, to provide 82pc of their net working income in retirement.
As Mercer argued in its submission to the Government's public consultation, these reasons do not stand up to scrutiny; nor do they meet the challenges articulated by the minister.
Whether a lower-paid person consumes all they earn depends on their situation. They can be part of a higher-paid household if, for example, they are a younger person still living with their parents or have a higher-paid spouse.
Equally, housing may be provided at low or no cost or, for other reasons, income needs may be low. People closer to retirement age, with reasonable means, may take lower-paid or part-time jobs as they wind down their careers. By applying an income threshold, Government effectively cuts people out of the auto-enrolment net by means of an unjustifiable generalisation.
The level of replacement of working income - or replacement rate - provides a very poor rationale for omitting the low-paid. This is akin to saying that it's fine for someone on a low income in their working life to be on a low income in retirement too - but that Government should support those on a reasonable or good income in their working life over and above the lower-paid, so that the former retain their elevated position in retirement. The State is meant to redistribute equitably, not to entrench inequality.
However, even if we accept the Government's logic on replacement rates, there is a very dangerous assumption here: that the State pension will continue to replace income for the lower-paid at acceptable rates.
Given the fiscal pressure our ageing population will bring in the coming decades, this is highly doubtful. By cutting the lower paid out of auto-enrolment, the Government leaves them dependent on a very uncertain future retirement income foundation.
The Government's rationale is that lower-paid people would not want to be, and do not need to be, part of the auto-enrolment system.
Bearing in mind the behavioural tendency to go with the flow, this should be turned on its head.
It makes more sense for those individuals to make their decisions on auto-enrolment in the same manner as everyone else: they should be automatically enrolled, with freedom to withdraw if they feel they don't want or need retirement savings.
The experience in countries such as the UK and New Zealand shows that most people who are automatically enrolled to retirement savings systems stay there voluntarily. The marginal effect of every extra euro of retirement income will be far greater for the lower-paid than for those who already have greater means.
A little saving by the lower-paid may go much further in terms of helping them enjoy retirement than a lot more saving by the higher-paid.
Danny Mansergh is head of Member Communications at Mercer in Ireland