Launch of a Public Consultation Process on a Strawman Automatic Enrolment Retirement Savings

Launch of a Public Consultation Process on a Strawman Automatic Enrolment Retirement Savings System for Ireland

Wednesday 22nd August 2018

Speaking Points by Minister for Employment Affairs and Social Protection

Regina Doherty, T.D.

Check against delivery

Good morning everyone. I am very pleased to be here today to launch a public consultation process on a Strawman ‘Automatic Enrolment’ Retirement Saving System for Ireland.

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 47% of all employees, and 35% of private sector employees, have a supplementary pension.

The Government is determined that the State pension is, and will remain, the bedrock of the pension system and will protect our older people against poverty.

To this end the recently published ‘Roadmap for Pensions Reform 2018-2023’ confirmed our intention to maintain the State pension at 34% 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 this overall rate (to around 70%), the level of supplementary pensions coverage has remained stubbornly low. Clearly, and despite the considerable efforts of Government and the pensions industry to promote and incentivise voluntary participation in supplementary pensions, the marginal changes 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 87% of members agreeing that the Government should introduce some form of mandatory pension system to supplement the State pension.

The Government has previously confirmed an intention to develop and introduce an Automatic Enrolment system. To deliver on the commitment we made in the ‘Roadmap for Pension Reform 2018-2023’, today we are publishing an AE ‘Strawman’ proposal and commencing 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.

To this end, before moving on to the content of the Strawman itself, I would like to reconfirm some of the decisions that have already been made by the Government.

• AE will be available and operational by the end of 2022.
• AE will not be a substitute for existing pension provision – it will supplement the existing State Pension and complement, rather than replace, existing private pension provision.
• AE will be an earnings related workplace savings system where enrolled employees will retain the freedom to opt-out if they so choose.
• AE will entail a Defined Contribution (DC) model with personal accounts.
• Members will have the option to choose from a range of retirement savings products.
• Employees, Employers and the State will each make a contribution to the member’s account.

Firstly, I would like to make very clear that this is a public consultation process on AE which will use the ‘AE Strawman’ to underpin that consultation. The Strawman should not, in any way, be construed as a confirmation of what form Automatic Enrolment will ultimately take. Readers should not take the key features as definitive. It is a high level draft intended to generate and prompt discussion and improved ideas.

As the OECD and colleagues internationally have cautioned, AE is a very complex policy reform and it requires extensive analysis and consideration to develop the best approach. Our goal is to help interested parties conceptualise plausible approaches to AE and to facilitate a focused debate around key design issues and how to address income adequacy for our retirees. In that regard, the paper sets some 50 specific questions and discussion items to prompt our conversation.

But people will not be limited to addressing these questions. We want people to raise their own questions and make suggestions for improving the proposal. And when we get those responses from the public, from representative groups and various other stakeholders, we may have to change elements of our thinking or perhaps even radically alter it.

In summary, the Strawman proposes the following –

• All employees earning over €20,000 and between the ages of 23 and 60 who do not already have pension arrangements would be auto-enrolled into a defined contribution (DC) retirement savings scheme. We know that there are approx. 410,000 such employees without coverage right now.

Under the proposals, employees would 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 approx. 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.

In the Strawman we are also asking for people’s views on how those outside of employment might avail of the system.

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.

Initially, employees will make contributions of 1% of earnings. This would auto-escalate by one percentage point each year until year 6 when the contribution rate will be fixed at 6%.

There will, for the first time, be a mandatory employer contribution to the employee’s account, employers will be required to make contributions matching those of their employees with the same increments in the same timeframe subject to a maximum of €75,000 of earnings (which is approximately twice the average earnings). Such employer contributions would be tax deductible.

Both the value and the mechanism for providing a State incentive will only be finalised following wide consultation. In addition, to underpin the development of an AE system, the Government’s ‘Roadmap for Pensions Reform 2018-2023’ contains a commitment to review the cost of funded supplementary pensions to the Exchequer*1. This review is in progress and a separate public consultation process is currently being undertaken via the Interdepartmental Pensions Reform and Taxation Group and the Department of Finance in this regard.

However, 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. Therefore, when the employee contribution ultimately rises to 6%, the State contribution will rise to 2%. While this is a different arrangement to the current tax relief provisions for pensions, it is aimed particularly at people on lower to middle income brackets where the current tax relief arrangements may be less favourable than for higher earners.

The system would be overseen by a statutorily-independent ‘Central Processing Agency’ or ‘CPA’. Employers will be required to register their employees with this CPA and deduct their contribution through payroll and then hand these over to the CPA.

The Strawman proposes that the CPA will run a tender to select a maximum of 4 ‘Registered Providers’ and each of these will be required to provide three different retirement saving fund options based on risk: i.e. low-risk, moderate-risk and medium-risk.

The CPA will provide a secure portal through which employees will then be able to choose the Registered Provider and the particular savings fund they wish depending on their risk appetite.

However, experience in other countries is that most people who are auto-enrolled into an AE system do not always select a preferred provider or retirement savings fund from the menu of options available to them.

To overcome this decision making inertia, the CPA would allocate members who do not exercise choice to a carefully designed ‘default’ fund option provided by one of the AE ‘Registered Providers’ on a ‘carousel’ basis.

This form of allocation of members to the Registered Providers would mean that they would all be treated equally and it should support the achievement of scale economies and the reduction in management and other fees resulting in improved member outcomes.

The Strawman proposes that the CPA would re-tender for Registered Providers every 5 to 10 years. Whilst the exact mechanism and legal underpinnings for this would have to be worked out, such an approach would ensure healthy competition and a focus on good member outcomes.

This CPA-based approach with a limited number of providers allows us to achieve significant economy of scale and in that way gives us the ability to dictate the governance and communication standards we want, to impose a tight regulatory regime and to minimise charges which is critical for the savings pots of lower to middle income people.

The Strawman recognises that there may be periods in a person’s life when they may wish to suspend their contributions to deal with other pressing financial matters and facilitates limited “Savings Suspension” periods – employers and State contributions would be suspended during these periods also.

Retirement income at the pay-out phase will be based on a customer choice of the standard drawdown options such as lump sums, annuities, Approved Retirement Funds, etc. and providers will be required to facilitate all of these.

While the Strawman proposes a limited number of ‘Registered Providers’ selected through a tendering process, it also highlights that we could operate an open market approach where those in the broader retail market could apply to the CPA to be registered as an AE provider as long as their products complied with specified standards.

However, given the size of the Irish market and the requirement to achieve scale efficiencies, the Government is minded, subject to consideration of feedback to this consultation document, to develop AE on the basis of a limited number of providers. Nevertheless, the Government welcomes comment and feedback on this approach and any alternatives that might be suitable in an Irish context.

Stakeholders and interest groups will have until the 4th of November to submit their views on the Strawman to the Department.

We recognise many people have a limited knowledge of pensions and perhaps an even more limited interest in taking the time to read and understand the detailed Strawman proposal.

Therefore, to give those who may want a quick and easy access to our proposals, we have also produced a summarised ‘Plain English’ version of the Strawman.

We also intend to hold a number of consultation fora for interested parties in a number of locations around the country before the closing date for submissions. Details of these events will be announced on the Department’s website in due course.

In addition, to ensure Government is fully aware of the views of those who will be most impacted by Automatic Enrolment i.e. individual employees and the likely membership, dedicated ‘Focus Groups’ will also be undertaken to draw together potential members of the system to ascertain their preferences regarding the structure and operation of the Automatic Enrolment system.

Once we have gathered all the inputs and analysed all the submissions, we plan to hold an Automatic Enrolment Conference to give people an understanding of the responses received and to give a further opportunity for discussion and debate.

The publication of the Strawman document today is the start of a consultation process to try and to generate as broad a consensus as possible and ensure that the final design of an AE system will be, trusted by employees and employers, will be affordable and will enhance personal independence during retirement.

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.

My officials will be available after this launch to assist you with any technical questions that you might have. Furthermore, to assist participation in the consultation process, the Department’s website will host a range of support documents and information.

To help us ensure the new system is the best we can make it, I would strongly encourage the participation of all interested parties in this national consultation process.

Thank you.

• 1At present, the State incentivises supplementary pension provision in the form of tax relief on a saver’s pension contributions.