The Irish government’s decision to reverse the increase in the state pension age from 66 to 67, effective 1 January 2021, has firmly put the topic of retirement planning back on the agenda. The Irish government had come under pressure from various sources to review the planned increase in the state pension age and have opted to establish a pensions commission. The government will consider the commission’s report “in due course.”
Background
The state pension needs to adapt to a future in which one in five young professionals may live to be 100, and where there will ultimately be only two workers to support each of them in retirement. The Irish state pension, payable from age 66, is EUR 12,911.60, which is well below the average Irish industrial wage. Private pension funding is vital to supplement the state benefit. The government recognizes the need for private pension funding and there have been many initiatives through the years, which started with the establishment of the Pensions Authority. The Pensions Authority is a statutory body set up under the Pensions Act, 1990, to supervise compliance with the Pensions Act by trustees of occupational pension plans and Personal Retirement Savings Account (PRSA) providers.
Occupational pension plans
Occupational pension plans, offered by employers as a traditional means of retirement savings, generally include employer and employee contributions and are offered either as:
- Defined benefit: Salary and service calculation used to determine retirement benefits
- Defined contribution: Retirement fund dependent on contributions plus investment return less charges
Personal Retirement Savings accounts (PRSA)
Established in 2002 by the Irish government, a PRSA is a retirement savings mechanism option that must be offered to employees by an employer who does not provide an occupational pension plan. Neither contributions by the employer nor employee are required. This remains the only requirement for employers to date.
Despite the initiatives, only half of all private sector workers are currently contributing to an occupational or private pension.
IORP II
“Irish occupational pensions are about to undergo the most significant changes in at least a generation”
– Pensions Authority, 12 August 2020
Institutions for Occupational Retirement Provision, or IORP II, is an EU Directive first published in December 2016 that is expected to be transposed into Irish law by 31 December 2020. The overall goals of IORP II are to greatly enhance scheme governance and the consumer protection of pensioners, members and future members. It aims to achieve this through a range of new requirements concerning governance, management standards in schemes, safekeeping of assets and the need for clear and relevant information to members. It also provides for greater supervisory powers for the effective oversight of occupational pensions. The operating cost of operating an occupational pension plan may increase for the employer due to enhanced standards and governance.
Proposed mandatory automatic enrollment
The Irish government has again reiterated its commitment to introduce an automatic enrollment scheme. Under the proposed system, current and new employees aged 23 to 60 who are not already paying into a private pension will be automatically enrolled in a pension scheme where their earnings exceed EUR 20,000 per annum, with no waiting period. Those in that age category earning below EUR 20,000 per annum will have the option to join voluntarily.
Contributions
Contributions into the system will be made by both workers and employers and the state will top-up contributions. The minimum employee contribution rate is 1.5% of gross earnings with a 1.5% increase every three years until it reaches 6% of gross earnings. Employers will be required to match employee contributions capped at an earning threshold of EUR 75,000.
Opt-out policies
Employees will be able to opt out after a six-month window starting at the beginning of the seventh month until the end of the eighth month. Additional opt-out windows would be available six months after each contribution increase. If members decide to opt out, they will be automatically re-enrolled after three years with new opt-out windows. Refund of personal contributions paid during the opt-out window will be paid to members who opt out.
Employees who change jobs will have their contributions fund transferred to their new employer. Fund management charges will be capped at 0.5% of the funds available. Workers with preexisting personal or occupational pension arrangements will be able to retain those arrangements. In addition, a Central Processing Authority (CPA) will be established to approve providers and collect and distribute contributions.
The auto-enrollment scheme has been earmarked for 2022, but the pension industry believes this to be ambitious and implementation is not expected until 2025 at the earliest. Some concerns exist such as:
- Determining the state contribution rate
- Determining contribution level adequacy
- Reviewing the status of death benefits within this structure
- Defining the operations of the Central Processing Authority (CPA)
- Determining and setting minimum standards imposed on existing schemes
In this ever-changing pension landscape combined with increasing requests to work beyond normal retirement age, the onus is on all stakeholders to promote higher levels of pension benefit adequacy; to offer employees access to higher quality pension and investment solutions, enhanced support, education and flexibility both before and at retirement age; and to enable those employees to make sound decisions that support their evolving retirement needs. Employers, trustees and members who start planning now will be well-placed to navigate confidently through this changing environment.
-Barry Lawler – Acumen & Trust