Last Wednesday, the government published their Strawman proposal on the auto enrollment pension scheme. In other words, this is a very rough draft and the actual form of the scheme will be different. Personally, I am in favour of mandatory pension schemes as I believe that people should be able to enjoy retirement as well as the rest of their life and you need to save to do that. So lets have a look at what they are proposing (my thoughts will be in italics).
What’s in it?
If you are aged between 23 and 60, earning over €20,000 and not a member of a pension scheme, you will automatically be enrolled. The self employed and those outside the criteria have to opt in.
Employees will be free to choose from a limited number of savings options (I’m not sure who will provide advice on this. Will employers engage a financial advisor to talk to their staff on investment options?)
There will also be default options if employees don’t make a decision themselves.
The initial employee contribution is 1% of salary, increasing 1% each year up to 6% total.
Employers will match the contribution and can deduct them for corporation tax purposes.
The State will contribute €1 for every €3 contributed by an employee, which equates to tax relief of 25% (Currently, tax relief is at the marginal rate, so if you earn over €34,550, you receive 40% tax relief. Reducing tax relief on personal contributions is a very bad deal for those who want to save for retirement).
The scheme will be a defined contribution scheme, so the value at retirement will be based on how much you contributed and how the fund performed.
The employee’s pension pot will follow them between employments (What if they join a work pension scheme, can they transfer their benefits out of the auto enrollment scheme?)
Contributions will be on earnings up to €75,000 (The current cap on personal contributions is €115,000. Having two caps only leads to confusion, unless they are planning to reduce the €115,000 cap).
You have the option of opting out during the 7th & 8th month of membership.
If you don’t opt out then, there will be limited opportunities that weren’t given when you can opt out again.
If you opt out, you will be re-enrolled after 3 years and can opt out again during the 7th & 8th month (I agree with this because people who opt out once will most probably not rejoin unless prompted).
If you opt out, you will receive a refund of the value of your contributions.
The State and employer contributions will be used to pay for the CPA (I don’t see why employers shouldn’t get a refund of contributions too).
They envisage that this will be in place by the end of 2022 (they have just rolled out their initial thoughts on this. It has to go through a consultation process and finalise the exact nature of the scheme. Then the IT infrastructure has to be built to run what will be a massive scheme. I can’t see it being ready in just over 4 years).
Who will run it?
The scheme will be run through a Central Processing Authority (CPA) who will receive all the premiums from employers and distribute them to the Registered Providers for investment.
Insurance companies/ fund managers will apply to be a Registered Provider which is where the money will be invested.
The maximum a Registered Provider can charge is 0.5% (This isn’t very much. If you consider there will be a lot of small contributions, someone on €20,000 will put in €2,800 a year. The provider will be paid €14 in a year to provide the infrastructure).
It is not clear who will pay for the CPA. They have stated that the employer and State contributions from those who have opted out will be used but that won’t be enough. I can only presume it will be another tax funded operation.
What happens at retirement?
The paper is a bit vague when it comes to what happens at retirement. It appears that they haven’t fully thought this true yet.
Contributions will stop when an employee reaches State pension age (it does not say if you can access your fund if you stop before then).
A lump sum will be payable at retirement.
If your fund is a particular size, you may have to purchase an annuity. (they indicate that bigger funds will have to do that. I would have though that having a big fund allowed you to take more investment risk and you wouldn’t require the safety of an annuity?).
They suggest that you may be able to continue in the scheme past retirement and instead of putting money in, you take money out, like under the ARF structure (If they are going to allow draw down from this scheme, surely they must get rid of the AMRF requirement for the rest of us.
It’s hard to know what to think about this. It is good to have some form of pension scheme for everyone but I am thinking that this government are looking at reducing tax relief for everyone down to 25%, which will be a massive disincentive for a lot of people who save hard for their retirement. And where would that leave the self employed? Company directors can still make company paid contributions and offset it against corporation tax. But the self employed will have more limited scope to make big contributions and will only get 25% income tax relief.