Government must hold its nerve and deliver on pension-reform agenda
As published in the Irish Independent, Thursday, February 2, 2023
Dublin, 02 February 2023
Progress on pensions reform is vital this year. Developments are likely on a number of fronts with significant implications for employers and generations of workers, both present and future. The priority for policy makers is the introduction of a landmark auto-enrolment retirement savings system. While the Social Protection Minister maintains that the targeted 2024 introduction date is realistic, progress remains frustratingly slow. Worryingly, Department of Finance officials have recently referred to the plans as “ambitious” given the scale of what remains to be completed. While disappointing, this is not entirely unexpected given that several industry experts, including Mercer, have highlighted core issues that still need to be addressed to ensure the new system is fit for purpose.
The case for auto-enrolment remains strong with evidence from other countries demonstrating dramatic increases in pension saving as a result of such initiatives. In fact, the Government estimates it will deliver an additional 750,000 new pension savers here. For now, Ireland remains the only OECD country that does not operate some form of auto-enrolment, and this is a key reason why our overall pension system continues to rank poorly on sustainability relative to those countries where such arrangements are in place.
There has also been much discussion about the timing of auto-enrolment as the current cost-of-living crisis squeezes incomes and inevitably affects retirement saving. Clearly a balance must be struck between the short term needs of today’s workers and the longer-term needs of tomorrow’s pensioners. Further delays will have serious repercussions for the adequacy of future pensions with an increased reliance on the State pension as the primary source of retirement income. Given what is at stake it is vital the Government holds its nerve and keeps to its timetable. In the meantime, employers will need to be ready for when auto-enrolment does arrive and should spend time this year understanding what it will mean for them, including the financial implications. There are just two options to choose from. Employees will need to be enrolled either in the State’s central system or in an occupational pension plan that meets certain minimum standards, but they will still have to consider which of these options will suit them best.
Hundreds of employers already operate occupational pension plans, and so will need to understand how these might need to be adapted. Given the strength of the existing Irish occupational pension system, it is particularly concerning that the Government has yet to provide the detail on the planned minimum standards.
While auto-enrolment is expected to remain the hot pensions topic of this year, there are plenty of other developments that will also need employers’ attention. Many are still grappling with the implications of the new “IORP II” regime, a raft of wide-ranging new rules designed to raise the standards for occupational pension plans. The heavier compliance burden, and associated expense, is forcing many employers to seek alternative ways of providing benefits and as a result, we will continue to see more considering the use of Master Trusts. These fully-outsourced and professionally-run savings vehicles take on the regulatory and operational responsibilities allowing employers to take advantage of the economies of scale that they bring. Master Trusts were already the vehicle of choice for nearly all employers setting up new pension plans, but they are now also being widely adopted as the standard defined contribution solution for existing employer plans too. The effects of regulatory change and indeed the Government’s own objectives to reduce and consolidate the number of individual plans should see this trend continue at pace throughout this year.
Progress is also expected on the wider state pension reform agenda, drawing from recommendations made in the 2021 Pensions Commission report. Most notably, the Government is taking steps to create a more flexible retirement environment.
From the beginning of next year, employees are to be given new rights to continue in employment until their State pension begins at age 66. If they carry on working they can defer their State pension until age 70 in return for a higher pension. This is an important development. Not only does it acknowledge how working practices are changing, but it will be a vital new option for the growing cohort of employees who need to work later in life because of cost of living and retirement affordability concerns.
Employers will also need to think about how they respond to, and accommodate older employees looking to exercise new rights to continue in employment, covering a range of issues from staff policies and benefit plan design to insurance and workforce management. 2023 needs to be a year of progress on pensions, not least for the Government in delivering auto-enrolment. Employers will need to plan ahead and consider the implications of the upcoming pension reforms on their employees, benefits, policies and practices.