Auto enrolment… the much-heralded big initiative that will address the looming pensions challenge facing this country. Will it affect you?
The short answer is, we really don’t know yet as there is still a huge amount of detail to be clarified. But we can give you our thoughts as they are now.
It is estimated that just 35% of private sector workers have a pension*, currently they are heading in the direction of living off their state pension only. This is not great when you consider a pensioner is currently paid only €265.30 per week – it’s going to deliver a very frugal lifestyle. However the clouds get even darker when we look at Irish demographics. There is an expected sharp fall over the next 20-30 years in the number of workers in proportion to pensioners. This will mean less people paying into the system (via PRSI contributions), with more pensioners dependent on the system. This will place even these miserly levels of state pension under pressure
This is the initiative that is proposed by the Department of Social Protection to deal with Ireland’s “pensions timebomb”. To reduce the reliance in retirement on only the state system, it is proposed that every employee will be automatically included in a pension scheme, which will be funded by equal contributions from both the employer and employee along with a state contribution too. As has been seen with similar schemes in other countries, the expectation is that inertia will take over to a large degree – once people are automatically included, very few will take up the (limited) opportunities to exit the scheme. As a result, pension coverage will rise.
There isn’t really a problem, just a lack of clarity. As we write, a key Oireachtas committee is proposing a raft of changes to the forthcoming legislation, that will further delay the implementation of auto enrolment. **
And while the Minister wishes to set up the auto-enrolment system by the end of 2023, with enrolments beginning in 2024, the committee are proposing a minimum lead-in period of two years to help businesses prepare. Our humble thinking is that we are a long way from helping businesses prepare for auto-enrolment. First of all, the detail needs to be worked out – there is uncertainty still over many important aspects including entry ages, if there is a minimum salary level to apply and the investment option that might apply, among other issues. Then the auto enrolment system needs to be built. From our experience in the pensions industry, this is a very significant task that typically take a lot of time to establish.
If you are one of the wise / lucky people who are already funding for your retirement, it won’t really impact you. However, if you are an employee and currently have no retirement funding in place, then yes – it will impact you. However, while this will reduce your take home pay due to your personal contribution, you should view this as a positive. After all, you will also receive the benefit of a retirement contribution from your employer and the state. And could you really live on €265.30 per week?
Article first produced on PPS Monthly July 2023 Newsletter.