Regina Doherty: We can create a pension system to deliver a good quality of later life
A new approach to pensions is needed so people can save now and pay later, writes Regina Doherty
The idea behind pensions is simple - save now to spend later. However, it is clear that many people find pensions complicated. Too many find it difficult to save what they need for retirement.
This is reflected in the fact that just one third of all employees in the private sector have a supplementary pension; this means the remainder are not currently saving for their retirement, or our ''golden'' years.
Before saying any more, I want to emphasise that it is my view, and that of the Government, that the State pension is, and will remain, the bedrock of the pension system and will continue to protect our older people against poverty. This is evident in our intention to maintain the State pension at 34pc of average wages over the long term.
However, beyond this, it is clear many people are not setting aside personal savings to meet their own income expectations for when they retire (relative to the income they enjoyed while employed). With the welcome increases in life expectancy this ''retirement savings gap'' means that, without action, large numbers of people may face significant and unwanted reductions in their living standards in their retirement years.
Over the last 20 years, in a period where the policy objective has been to increase the overall pensions coverage rate (to around 70pc), the level of supplementary pensions coverage has remained stubbornly low.
Clearly, and despite the considerable efforts of Government and the pensions industry to promote voluntary participation in supplementary pensions, the marginal change in coverage over the last 20 years indicates that the purely voluntary approach to participation has not achieved the desired goal of increasing coverage to an appropriate level.
Ireland is one of only two OECD countries without a mandatory earnings-related element to retirement saving. The need for action to address barriers to saving was supported in the outcome of the Citizens' Assembly deliberations with 87pc of members agreeing that the Government should introduce some form of mandatory pension system to supplement the State pension.
Last Wednesday I published an Automatic Enrolment (or AE) ''Strawman'' proposal and commenced a consultation process to help improve the decisions that we will need to make in terms of the operational structure and design of AE for Ireland.
The Strawman is not in any way a confirmation of what form AE will ultimately take, nor are its features definitive. Rather it is a high level draft intended to generate and prompt discussion and improved ideas.
It is my hope, that in hearing from the very people who will benefit from AE, on conclusion of this consultation we will be in a stronger position to design and deliver a system for retirement savings that will sustainably ensure a good quality of life for our latter years.
The AE Strawman is primarily targeted at employees earning more than €20,000 and between the ages of 23 and 60 who do not already have pension arrangements. We know that there are approximately 410,000 such employees without coverage right now; these employees would be auto-enrolled into a defined contribution (DC) retirement savings scheme. Employees would then have the option to opt out if they wish to. International experience makes clear that, if designed correctly, a significant majority of those enrolled will remain in to utilise the benefits of the system.
All other employees earning less than €20,000 or outside of the age band suggested, and those who are self-employed, would have the option to ''opt in''. We know that there are approximately 675,000 people in these categories that do not have pensions right now. If they do opt in, then their employer (where applicable) and the State would be required to make contributions as well.
Everyone will have their own savings ''pot'' and the system would operate the "pot-follows-member" approach so that, regardless of the number of employments a person has, they would always have one consistent retirement savings arrangement over their lifetime.
For the purpose of the Strawman, the State incentive is presented as a contribution worth €1 for every €3 the employee contributes towards their retirement savings account, with an additional €3 provided by the employer.
Automatic Enrolment will provide the basis for perhaps the most fundamental policy reform in a generation in terms of retirement savings provision. It will ensure the combined use of public and private pension savings allows employees, employers and the State to play a part in addressing the provision of retirement incomes. Automatic Enrolment will overcome the decision-making inertia which prevents large numbers of employees from saving for retirement whilst ensuring they retain the freedom to opt out from the benefits of the system should they so choose.
Automatic Enrolment will improve the financial well-being and retirement readiness of current employees and provide a quality assured retirement savings option to employees and ensure they are further supported and incentives to save with employer contributions and a State incentive.
Automatic Enrolment will facilitate and ensure the simplicity behind pensions that I mentioned earlier - saving now, spending later.
Responses are requested by November 4, 2018 and should be emailed to email@example.com. You can make a written submission and post it to:
Automatic Enrolment Programme Management Office,
Department of Employment Affairs and Social Protection,
Floor 1 Aras Mhic Dhiarmada,
Store Street, Dublin 1.
In addition to this formal response mechanism, the Government will host a consultation meeting in the coming months at which interested parties will be able to contribute views and ideas. Details of the dates, venues and how to register for these events will be posted on the Department's website.
Regina Doherty is Minister for Employment Affairs & Social Protection and represents Meath East