An Automatic Enrolment Pension Scheme for Ireland?

An Automatic Enrolment (AE) pension scheme is in the process of preparation for Ireland.

The start date has been postponed several times. The most recent estimate is that the scheme will  be introduced in the second half of 2024. Tenders for fund managers and  technology and services will be announced shortly.

The AE scheme is aimed an estimated 750,000 employees who are not members of a pension scheme and who earn more than €20,0000.  Employee contributions will be increased over a ten year period to 6% of earnings and will be matched by employer contributions up to earnings of €80,000.  The State will contribute 2% of employee contributions.

Concurrently with the likely introduction of  an AE scheme, extensive additional regulations for existing pension schemes will be introduced.  These are referred to as IORPS II.

This will lead to an increase in costs especially for smaller pension schemes.

Much greater regulatory requirements and associated  higher costs means that single person pension scheme and small pension schemes will in future be managed by a master trust. Some small  pension schemes may merge with larger schemes.

It is also possible that smaller pension schemes will close and be replaced by an Automatic Enrolment pensions scheme because administration costs and employer contributions will be lower. Although the intention is that the new AE scheme is complementary and not a replacement for existing pension schemes.

There are many advocates for an AE pension scheme in Ireland (See TASC Pensions Forum) and some critics.

The main reasons given by the Pensions Commission for an AE scheme are:-

1. The  unsustainability of the current Social security pension, without substantial reform, and

2. That an AE stem will “introduce a funded component to the pension system and improve retirement income adequacy for future pensioners” (Commission on Pensions, 2021, p. 17).

IBEC state amongst other reasons that an AE system should “encourage and educate individuals to take personal responsibility for their pension savings” (IBEC submission to the Joint Committee on Social Protection, Community and Rural Development and the Islands 25 November 2022

A related view is to see Social Security based pensions as designed as a ”platform for private saving” (https://fabians.org.uk/publication/good-pensions-for-all, p.30).

In contrast  a report prepared for the Committee on Social Protection, Community and Rural Development and the Islands, states:-

“There is little evidence to suggest that private solutions could deliver any more cost-efficient or effective pension solutions for the target groups for automatic enrolment, especially since voluntarism has failed to provide coverage for these groups”. James and Anderson p. 62, Oireachtas scrutiny Report, available here.

1. Irish Automatic Enrolment  versus the UK Automatic Enrolment.

Despite Government statements that the proposed AE scheme aligns the Irish pension system with those in Europe, the proposed system is very different from supplementary systems in other EU countries for example in the way it is funded and in terms of governance.

Rather it is very similar to the UK scheme AE introduced in October 2012 in terms of design for example a funded pension system and in terms of governance using Master Trusts.

Both schemes have opt out provisions. An Oireachtas committee has recommended that these be extended to include “over indebtedness, maternity leave, bereavement, illness, and unpaid caring”.

Both schemes have lower administration costs than other funded pensions schemes at 0.3% in the UK and 0.5% in Ireland.  These costs however do not include trading costs for example the bid-ask spread.

There are however some differences. AE in the UK is organised around a master trust called NEST, which manages the funds and also claims tax relief  (Tax Relief at Source = 20%) on behalf of individual contributors. Individual employers organise the collection and forwarding of contributions to NEST.   They are required to keep detailed records. All employees earning greater than £10,000 but less than £50,000 p.a. are eligible. Employees earning more than 80,000 will no longer be entitled to receive an employers contribution. 

In Ireland the  proposed scheme means a Central Processing Authority (CPA) will undertake all administrative and web based functions including the eventual disbursement of funds. This will be funded by a charge of 0.5% of funds under management . It is unlikely that the charge will be sufficient to cover costs in the  initial stages of the introduction of AE, requiring Government subventions. There will be estimated set up costs of €150 million.

A similar body in the UK, NEST has two charges an annual 0.3% charge on assets under management and a 1.8% charge on each contribution.  NEST was initially funded by a Government loan.

There will be several master trusts in Ireland rather than one.

There are no associated tax credits in Ireland.

2. Will the Proposed AE Scheme be a Success?

Some pension experts consider that this “will be the most fundamental change to the pensions landscape in Ireland since the introduction of the Old Age Pension over a century ago” (Whelan and Hally”, 2023, p.14, available here).

These authors argue that without changes to the current it will fail to make a significant impact. The changes they recommend are designed   to expand the use of the AE scheme  by allowing transfers from existing DB ad DC schemes.  This will be done by equalising tax reliefs to ensure “a level playing field” between an AE system and existing pension arrangements.

As argued later  a transfer into Automatic Enrolment schemes may occur  without tax equalisation because of high future administration costs on existing pension schemes because of existing and future IORP II requirements.

Given the similarity with the UK schemes it is reasonable to expect Automatic Enrolment advocates in Ireland to address some of the issues that that have arisen  in the UK AE scheme.

All would acknowledge the success of the UK scheme in expanding the number and proportion of employees in pension schemes as shown in Table (1) below.

There was an increase in minimum AE contribution rates from 2% to 5%,  in 2018 and to 8% in 2019. In addition by 2016 all employers were required to enrol eligible employees. Coupled with expanding numbers a large  growth in assets per share might be expected, but the amount for March 2023 is surprisingly small at £2465.

These low savings rates may be explained by a high and rising proportion of ‘inactive members’ (60% in March 2023.

Table (1)

N.E.S.T. Assets and members March 2017- March 2023 (millions)

Source:- https://www.nestpensions.org.uk/schemeweb/nest/nestcorporation/library.html

For DC schemes in general in the UK (including AE), average contributions per saver fell from £4520 in 2011 (the year before the introduction of AE)  to £2200 in 2019  and  to £2110 in 2021,  (source Table 3.1 Trends in workplace pension savings).

These low savings rates means that accumulated funds will be insufficient to provide adequate pension income . A report by the Resolution Foundation concludes that “Most workers, and almost all low-paid workers, are saving at rates below the estimated “living pension benchmarks” (https://www.resolutionfoundation.org/app/uploads/2022/07/Living-Pensions.pdf, p. 23).

One reason for the growth in inactive members and fall in contribution to DC schemes is a growth in poverty amongst working age adults, including  those in employment, given in particular that eligibility for membership of the UK AE scheme is income above is low at £10,000 per annum (See https://commonslibrary.parliament.uk/research-briefings/cbp-8585, pp. 5 and 7).

One estimate is that 2 million households in the UK used a food bank in Oct. 2021.

As similar issues are likely to be a feature of any AE pension system introduced in Ireland, It is  unlikely that an Automatic Enrolment pension system will solve issues of pension adequacy and poverty in retirement.

As  AE in Ireland  is a funded scheme, the accumulated lump sum and future pension payments are a direct function of contributions and the return on these contributions net of costs. These returns are subject to considerable uncertainty and hence risk.

These issues will be the subject of a subsequent blog.

Prof Jim Stewart

Dr Jim Stewart is Adjunct Associate Professor at Trinity College Dublin. His research interests include Corporate Finance and Taxation, Pension Funds and financial products, Financial Systems and Economic Development.

He is widely published and his titles include Mutuals and Alternative Banking: A Solution to the Financial and Economic Crisis in Ireland (2013), Choosing Your Future: How to Reform Ireland's Pension System (co-author, 2007) and For Richer, For Poorer: An Investigation of the Irish pension system (2005).