Roadmap for Pensions 2018-2023

Clive Slattery, Clive Slattery Ltd

Bio:

Clive established his consultancy practice in 2009, to provide technical advice and staff training for pensions professionals. Before then, Clive was the Principal Officer in charge of Revenue’s Financial Services (Pensions) Business Unit, which involved drafting the pension provisions of many Finance Acts, and Clive also produced the Revenue Pensions Manual. Clive has lectured extensively on pensions for the Irish Tax Institute, Irish Association of Pensions Funds, Association of Pensioneer Trustees of Ireland and National College of Ireland.

This long awaited statement of Government policy arrived in the middle of status red weather warnings and storm Emma. It is disappointing that the Government has kicked a number of hard decisions down the road, it reminds one of Theresa May’s approach to Brexit negotiations. A number of new review groups have been set up, further drafts will be published and time provided for more public consultation. We have heard much of the content in previous documents. Fans of “spot the cliché” will enjoy the overuse of “sustainability, equity, governance, adequacy and transparency.”

Changes to State Pension
Main proposals are:
• Quantum of pension to be calculated using a “Total Contributions Approach”. This idea was previously proposed by the National Pensions Framework in 2010.
• 40 years PRSI contributions will be required to qualify for a full pension, earlier reviews suggested 30 years would be required.
• The Total Contributions Approach will be implemented in Q.3 2020.
• A revised “home caring credit” capped at 20 years contributions.
• Future pension increases to be linked to CPI.
• The State pension will provide a retirement equal to 34% of average earnings.

New Automatic Enrolment System
The key features are:
• By 2022 “begin implementation of a State sponsored supplementary retirement savings system in which workers will be automatically enrolled”.
• Final decisions re. design and operation after completion of a public consultation process.
• Publish a draft design in Q.2 2018.
• All private sector employees over a certain age & income level, (age 23 & €20,000 p.a.?), automatically enrolled.
• All other workers will have facility to opt in.
• Contributions by individuals and employers with a State top up.
• Those automatically enrolled can opt out after 9 months.
• Start with modest contributions and increase to employer 6%, employee 6% and State 2%.
• Payable at same age as State pension.
• Pre-existing pension arrangements can continue.
• State contributions will replace rather than augment existing tax reliefs.

Some comments & questions:
1. Who will operate the Fund?
2. What are the costs?
3. Who will provide the investment advice and what choices will be offered to participants.
4. Will someone earning €20,000 p.a. be able to save 6% of salary?
5. The proposed 2% State contribution is more generous than tax relief provided on the same contribution for a 20% taxpayer but less generous for a 40% taxpayer. Standard rate relief introduced by the back door?
6. Presumably new private sector pension arrangements will continue to be allowed?
7. No option to take benefits prior to State pension age? Fund could be locked in to age 68?
8. Many of the potential recruits to the new scheme have physically demanding jobs, is it reasonable to expect them to work until perhaps age 68?

Improving Governance & Regulation
Most of the content here is linked to the introduction of the IORPS II Directive and was detailed in the Pensions Authority Reform Proposals published in 2016. As the Directive must be implemented by January 2019, we are promised detailed Regulations before the end of 2018.
There is an expressed desire to reduce the number of single member schemes and the usual references to excessive administration costs. The document provides no hard evidence to show that a reduction in the number of single member schemes improves coverage. Indeed there is evidence that where Auto Enrolment is introduced, the number of single member schemes increases. Individuals like to have their own scheme, it works! Any reference to excessive costs is convenient for a politician but has anyone worked out what percentage of fund value is spent on compliance costs? For example: how much will the introduction of General Date Protection Regulation (GDPR) cost pension savers in Ireland?
The proposals confirm increased regulation of scheme trustees by the Pensions Authority.
There will be a new process requiring all new and existing schemes to gain “authorised status from the Pensions Authority to operate and to gain tax relief”.
In Q.4 2018, a “Pensions Reform & Taxation Group”, chaired by the Dept. Finance, will start to meet. It is tasked with:
1. Improve harmonisation of rules to eliminate anomalies between different products.
2. Rationalise the number of pension vehicles.
3. Review the cost (tax reliefs) of funded supplementary pensions.
4. Review need to regulate Approved Retirement Funds.

Support Defined Benefit Schemes
This is a lovely political catchphrase but, sadly, it doesn’t reflect reality. The truth is DB schemes are a relic of a bygone age and nearly all sponsoring employers are not prepared to continue funding. The document quotes some telling statistics:
• The number of DB schemes has dropped from 22,220 in 1996 to 667 in 2016.
• 90% of DB schemes are closed to new entrants.
• 25% of DB schemes don’t meet the Funding Standard.
The Framework promises to legislate to “provide for improved levels of protection for scheme members and beneficiaries”. A laudable concept but how?

Public Sector Pension Reform
The main message here is there have been significant changes to date and very little more needs to be done. I wonder how many private sector employees would agree? Since 1995:
1. Benefits integrated with the State pension.
2. Minimum pension age increased.
3. Career average benefits for new entrants from 1/1/2013.
4. For post 1/1/2013 entrants, retirement age linked to the State pension age.
5. Abatement: Maximum aggregate benefits can’t exceed 40 years service.
The sole proposed change is to convert the existing “pension related deduction” into a permanent “additional superannuation contribution”.

Supporting Fuller Working Lives
This is the most entertaining piece of the document: plenty of platitudes but nothing to it really:
1. Opportunity to defer claiming State pension and get a larger pension in the future. Are you serious?
2. Allow those who don’t qualify for a full State pension to continue making contributions beyond State pension age until date of actual retirement.
3. Consideration to introducing a mandatory retirement age and/or fixed term contracts post NRA. The review to be carried out by the Irish Human Rights and Equality Commission.
4. One major omission is no mention of phased retirement. Should we not facilitate those over age 60 who may wish to draw down some, rather than all benefits, and continue to work on a part time basis?

Make up your own mind and participate in the consultation process.
This note provides a brief overview of the main proposals in the Roadmap document. Please do consider the proposals and consider how implementation will impact on you and your clients. After forming a view, get involved in whatever association you are a member to ensure that your voice is heard. I believe there are four main areas we should focus on:
1. Simplicity: will implementation add to or reduce current complexities? Could we encourage more pension savings by changes to the existing PRSI system?
2. Tax reliefs: we need to ensure all existing reliefs are maintained. Beware of attempts to extend an SSIA style State support as it’s really a switch to standard rate tax relief on personal contributions.
3. Single Member Schemes: resist any attempt to abolish these. Ireland is not required to impose the IORPS II Directive on single member schemes.
4. Focus on a comparison of public and private sector scheme benefits, do you accept that no further changes to public sector schemes are required?