When American baseball player Yogi Berra famously quipped, “It feels like deja vu again,” he might well have been speaking about the efforts of successive Social Security secretaries to persuade more of us to take out private pensions.
Last week, current incumbent Heather Humphreys was the last to make an effort.
First out of the traps was the late Seamus Brennan in 2006. He was followed by Joan Burton in 2012 and then Regina Doherty in 2018.
But nothing ever happened. Why should it be different this time? With elections likely at some point in the next two years, isn’t this latest set of proposals more likely to join their predecessors and gather dust somewhere on the shelves of the Department for Social Protection?
All employees with a salary of more than €20,000 who are not yet in an operational system are automatically registered
Not if Humphreys, one of the cabinet’s more cunning politicians, gets his way. Last Monday it announced that it had received government approval for the draft Automatic Enrollment (AE) Retirement Savings Act.
The draft, or general scheme to use the correct terminology, of the Bill is now submitted to the Oireachtas Joint Social Protection Committee for pre-legislative consideration.
Under Humphreys’ proposals, all workers earning over €20,000 who are not already members of an occupational pension scheme for their work will be automatically enrolled in the new pension plan.
While automatic enrollment is “voluntary” in the sense that workers can opt out after six months, they are automatically re-enrolled after two years.
Employees can deregister after another six months, but the hope is that most of them will simply find the back and forth too annoying and remain enrolled.
There is no doubt that something needs to be done to increase the proportion of Irish workers saving for retirement.
The latest figures from the CSO show that nearly 66 percent of all workers had some form of pension plan in the third quarter of 2021, not including the state pension. This was an increase of 1 percent from the third quarter of 2020.
Unfortunately, there’s a lot less truth to these numbers than you might think.
The PRSI rate would need to increase from 4 to 10 percent by 2030 and then by another 2.4 percent by 2040
If workers with pension entitlements (no matter how small) from previous jobs are excluded and only those currently paying into either a company or personal pension are counted, the proportion of workers with pension protection drops to just 56 percent.
Pull out 420,000 public-sector workers, 17 percent of workers who are virtually 100 percent insured — and the proportion of private-sector workers who are either members of occupational schemes or have a private pension falls to a worrying 47 percent.
Although pension protection among private sector workers has increased in recent years, it is still far, far too low at less than half the total.
Private sector workers who rely on the state contributory pension to provide for their old age could be in for a rude awakening. A rapidly aging population will put an unbearable burden on the state pension.
When Seamus Brennan published the first AE proposals in 2006, there were nearly 5.5 people between the ages of 15 and 64 for every person over 65, the so-called dependency ratio.
The dependency ratio had slipped to 4.5 to one by 2022 and will only drop to 24:1 by 2051.
This collapse in the dependency ratio is being driven by the exponential increase in the number of people over 65, from 467,000 in 2006 to 769,000 this year, 1 million by 2031 and 1.6 million by 2051.
“Back in 2006 we gave ourselves a pat on the back that we had a lot of time [to introduce AE]’ says Jerry Moriarty, chief executive of the Irish Association of Pension Funds. “Unfortunately, we wasted a lot of time.”
The fiscal impact of the almost fourfold increase in the number of people over 65 in the first half of this century on the contributory state pension is hardly worth considering.
Will this latest set of proposals join their predecessors and gather dust?
“The cost of the contributory state pension will increase very sharply – on the order of 65 percent by 2030, which is not far off.
By around 2040, spending on state pensions could wipe out the entire Social Security Fund if nothing changes,” wrote Pensions Commission chair Josephine Feehily at the time of the commission’s report release 12 months ago.
What this might mean in practice was laid out in grisly detail in the report. It estimates that the PRSI rate for the self-employed would need to rise from 4% to 10% by 2030 and then by a further 2.4% by 2040, while the standard rates for employees and employers would have to increase by 1.35% to 5.35% and 5.35% respectively. 10.15 percent would increase in 2040.
While the government has effectively rejected the Commission’s main recommendation to phase out the contributory state retirement age to 68, the release of the report appears to have provided the impetus needed to move AE forward.
Convincing workers to save more for their retirement is crucial if massive increases in both employer and employee PRSI rates are to be avoided.
And make no mistake, AE has proven very effective in increasing pension coverage in other countries where it has been introduced. Australia was the first country to introduce automatic registration in 1983. New Zealand followed in 2007 and Great Britain in 2012.
Australia’s AE scheme is mandatory, with 10 per cent of workers’ income, rising to 12 per cent by 2025, paid into an approved ‘super’ pension fund.
As of March this year, 15 million Australians had invested a total of A$3.5 trillion (€2.26 trillion) in their Supers.
This makes Australia the fourth largest pension fund holder in the world with fewer than 26 million people.
Mandatory AE was never an option in this country. However, the UK and New Zealand examples, both of which have opted for quasi-voluntary schemes, show that even ‘voluntary’ AE is very effective in raising pension coverage rates, as the combination of constant re-registration and inertia wears down the resolve of all but the most determined Opponent.
This is certainly the experience in the UK, where the proportion of those with occupational pensions has risen from just 47 per cent in 2012 (roughly comparable to Ireland’s pension coverage rate back then) when AE was first introduced, to 79 per cent in 2021.
The results from New Zealand are more ambiguous, as the number of those who chose not to have AE has doubled in the past decade, with about 15 percent of those eligible for AE now choosing not to.
A feature of AE in both the UK and New Zealand has been the use of existing infrastructure, with the UK operating through existing pension providers while the Inland Revenue does the work in New Zealand.
Instead of using existing infrastructure for AE, Heather Humphreys went the DIY route instead.
Under their proposals, AE will be governed by a shiny new Central Processing Authority (CPA).
The CPA will select the fund managers, collect pension contributions, install the IT and have it up and running by January 1, 2024, just over 14 months from now.
Given the slow progress in implementing AE over the past 16 years, this seems an almost impossibly ambitious timeline.
On the other hand, given our previous inertia, a tight deadline might be just what’s needed to focus and get things moving on AE. The consensus in the market is that when it comes to AE this time, it will probably be in 2025 or even 2026.
“Irish Life is very pro-AE. We are concerned it may be delayed and not delivered properly,” says Oisín O’Shaughnessy, head of corporate banking at Irish Life, Ireland’s largest pensions provider.
Younger people need to invest in about 70% to 80% stocks and then gradually de-risk
Even if AE gets up and running more or less according to plan, there’s a risk that it might end up not doing what it’s supposed to do.
Contributions start at 1.5 percent of gross salary for both employer and employee and gradually increase to 6 percent each after 10 years.
“The contributions in the first few years are too low, 1.5 percent are tiny,” says a pension expert. This problem will be exacerbated for younger people who choose the low-risk default fund under AE.
“That doubles the problem. They won’t bring in enough and they won’t get enough growth.
“Younger people need to invest in about 70% to 80% stocks and then gradually de-risk as they approach retirement.
“Too cautious an approach just won’t get the desired result.”
With a cost-of-living crisis in full swing — the latest figures released last week show annual inflation at 8.2 percent — an initial 1.5 percent contribution rate for employers and employees may be as much as politically feasible .
“We must not allow the perfect to be the enemy of the good,” warns Bernard Walsh, Bank of Ireland’s pensions chief.
In the meantime, any additional delay adds to the already massive costs; to employees, employers and the state; to solve our pension problem.
“I feel very strongly that this [AE] must happen. We just have to keep going,” says Irish Life’s O’Shaughnessy.