Crisis in Irish retirement savings has no silver-bullet solution

Cost, complexity, and natural, human “near bias” are among the chief reasons for Ireland’s persistently low level of pension coverage. At present, more than 800,000 Irish workers do not have any supplementary arrangements over and above the State pension. When civil and public servants are removed from the equation, that means around 40 per cent of Irish private sector workers will be solely reliant on the state pension of €13,800 a year for their income in retirement.

This situation has persisted for many years despite generous tax relief and numerous initiatives on the part of the state and the pensions industry. In the late 1990s, the government introduced sweeping reforms to make pension saving more attractive but this had little impact on overall coverage.

Personal retirement savings accounts were introduced in 2002 in an attempt to entice lower-paid and self-employed individuals to make provision for their pension but, again, the effect was disappointing.

More recent reforms have been aimed principally at improving outcomes for scheme members rather than increasing coverage. The coming year will hopefully see the launch of the long-awaited national auto-enrolment pension scheme, with the expectation of it succeeding where previous efforts have failed.

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“A constant reason for pension coverage being low is due to the priorities of members when it comes to basic salary but also the complexity that often surrounds pension schemes,” says Maria Quinlan, head of LifeSight Ireland.

“Making it easier to contribute and easier to understand would go a long way to improving coverage. Making pension benefits automatic, with the option to opt out, would drastically improve pension coverage. Currently many schemes are voluntary, meaning that the onus is on the member to join, which slips down the priority order very quickly.”

Ashling O’Neill, a certified financial planner with Clear Financial, also believes an element of compulsion would help.

“[Low uptake] is potentially because of voluntary participation,” she says. “Private-sector employees are not required by law to participate in pension schemes, unlike the public sector where they are in mandatory pension arrangements. And not all private sector employers in Ireland offer pension plans to their employees. Smaller companies may not have the resources to establish and maintain pension schemes.”

And then there is the near bias: it is difficult to convince the average 20 or 25-year-old to think beyond the next pay-day, let alone to events 40 years away.

“Many private sector employees choose not to start looking after tomorrow’s money as they are focused on today’s immediate financial concerns,” O’Neill adds.

Complexity is another blocker. “We commissioned Red C to carry out research recently and found that 46 per cent of people said they understood pensions – that means 54 per cent don’t,” says Bernard Walsh, head of pensions and investments at Bank of Ireland. “Furthermore, less than two in five said they understood the tax savings offered by pensions.”

Quinlan believes the system could benefit from some simplification. “Reduce the number of pension arrangements and simplify retirement options,” she recommends.

“This is currently being looked at by Government via the Report of the Interdepartmental Pensions Reform and Taxation Group.

“The pensions industry should be encouraged to avoid using technical jargon when engaging with pension scheme members. It should simply be seen as a long-term saving plan – just look at the success of the SSIAs and the simple message that surrounded them.”

The auto-enrolment scheme will help, according to O’Neill. “It is great for lower-rate tax payers to get them creating income for themselves on top of the state pension and will help people who haven’t had access to pension funds before now to create additional wealth at retirement,” she says.

Further detail is urgently needed if employers are to prepare properly for the introduction of the new scheme, says Quinlan.

“Those companies with no current pension scheme should benefit from the ease that auto-enrolment promises in dealing with employees not currently in a pension scheme,” she says. “In addition, giving existing employers an employment contract structure to auto-enrol in existing schemes would be a great boost for member take-up as, at present, it isn’t clear if a revised contract is required.”

The goal should be to create a retirement savings ecosystem that makes it easy, attractive and financially rewarding for people to plan for their retirement

—  Ashling O’Neill, Clear Financial

The differing tax treatment between auto-enrolment and occupational schemes may present difficulties.

“The difference between the tax rate approaches in the two systems will certainly be a consideration for some employers, especially with standard-rate taxpayers,” Quinlan notes. “However, the complication of which option is better for a member will likely lead to some unhelpful confusion and clear direction is required here as many employers will be loath to operate a hybrid approach with some employees in the current scheme and others in the auto-enrolment scheme and so may look to make the existing scheme compulsory for everyone.”

O’Neill agrees: “The current tax relief system may create a situation where individuals paying tax at the 40 per cent rate will be better off opting out of auto-enrolment and making their own pension arrangements.

“At present there is tax relief of up to 40 per cent available to members of occupational schemes while with auto-enrolment there isn’t any tax relief, but the government contribution works out at the equivalent 25 per cent tax relief. This is great for lower-rate payers but not for higher. This could potentially hinder the adoption of auto-enrolment, as it undermines the financial incentive for higher earners. At the same time, any pension is better than no pension.”

No single solution will work, she adds. “Addressing the retirement savings crisis requires a multifaceted approach involving government policies, employer initiatives and individual responsibility. The goal should be to create a retirement savings ecosystem that makes it easy, attractive and financially rewarding for people to plan for their retirement.”