Pensions Roadmap 2018-2023

The government published the Pensions Roadmap, another document outlining the government’s plans to address a  number of pension issues that have tackled. This is another document that can be added to a number of pension papers that have been written and left sitting on a shelf. I have summarised some of the main points addressed in the paper below.

The State Pension

1. The current method of paying for the State pension is Pay as you Go ie it comes out of the coffers each year. This is sustainable as long as there are at least 4 workers for every pensioner.
2. Over the next 40 years, the number of workers to pensioners is due to fall to 2.3:1 causing a potential pension deficit of up to €400 billion over the next 50 years.
3. The government want to set a benchmark that the State pension provides an income of 34% of the average national earnings.
4. State pension increases are explicitly linked to the consumer price index and average wages.
5. The current ‘yearly average’ system is being replaced by a ‘Total Contributions Approach’. This will eliminate the anomalies where someone with 10 years contributions can get paid more than someone who has made more contributions but has a gap in their working history.
6. There will be pension credits given to those who have taken time out of the workplace to perform caring duties.
7. The State pension age will be linked to life expectancy so the average payout period for the State pension is the same for all. If life expectancy increases, the State pension will be paid at a later date.
8. There will be no increases to the State pension age prior to 2035

Comment – It is good to see that the PRSI average system is being replaced. It was disadvantageous to those who took time out to raise a family or take care of an elderly parent as well as those who had summer jobs. The government have failed to address the elephant in the room, how is this going to be paid for? They have acknowledged that there will not be enough working people to pay for all the benefits but completely ignore how we will continue to provide this expensive benefit.

Auto Enrollment Private Pensions

1. Just 35% of the private workforce have private pensions.
2. All private sector employees over a certain age and income level e.g. 23 years of age and €20,000 per year income, who are not already in a pension scheme will be automatically enrolled in the system.
3. Those on lower salaries, the self employed and those already in schemes can opt in if they wish.
4. You can opt-out after a particular period of time e.g. 9 months and get a refund of contributions.
5. The amounts paid in haven’t been set yet but they give an example of employer matching employee contributions up to 6% of salary and the State paying in 1/3 of the employee contributions.
6. Any contributions paid by the State will replace existing tax reliefs.
7. The benefits paid under the scheme will be payable at the same time as the State pension.

Comment – While I welcome auto enrollment, I think this can be improved. Why wait for someone to reach a particular age? The public service has 100% pension coverage for all employees. We should be looking at reaching that level of coverage for private sector workers too. The proposal also looks at standardising the tax relief on contributions to 30%. This will discourage those being taxed at 40% and you will find that it will not particularly incentivise those on the lower tax bracket to contribute more. Having it payable at the same time as the State pension is inconsistent with all other pension plans which have much more flexibility. A lot of people don’t want to have to work to age 68. If all of their post retirement income isn’t paid until that age, they won’t have a choice.

Improving Regulation

1. Rationalise the number of individual pensions available in the market.
2. Rationalise the number of employer based pensions by creating large multi-employer structures.
3. Give the Pensions Authority more powers,
4. Introducing a fitness and probity regime for pension schemes.
5. Reduce the overall costs and risk of pension schemes.

Comment – We are all for ensuring that pensions are run in a compliant manner but I am not sure if this is a problem that needs to be addressed? Pension schemes are by and large run in a prudent and efficient manner. The Pensions Authority are certainly looking for more power but how much will this cost? Pension scheme members pay Pensions Authority  fee of €9.50 a year. With all the extra powers that they are looking for, this fee will increase. They will also be looking for master trusts to run smaller company schemes, again, something that has to be paid for. I am sceptical as to whether the government will reduce pension costs. The market is doing a pretty good job of doing that themselves and the government introduced standard PRSA is one of the most expensive contracts in the market.

Overall, I welcome the auto enrollment scheme as private sector workers need to start providing for their own retirement. Reducing the tax relief on pension contributions to 30% will annoy a lot of people and make pensions less attractive. So will dictating the retirement age of the plan, especially if it is 68 for most people. As an official government document, it is very vague and lacking definitive figures and strategies. A lot will be changed or left on the shelf…along with the other ones.

If you have any questions, send me an email to steven@bluewaterfp.ie