The government’s new auto-enrolment scheme has been described as a ‘once-in-a-generation’ pension policy. Clare O’Sullivan examines how it will change our retirement  landscape.

Andrew Glenn was 20 and an undergraduate studying in Adelaide when the Australian government’s Superannuation Guarantee (SG) came into effect in 1992, making it compulsory for employers to pay a percentage of their employees earnings into a retirement fund.

In the three decades since, Glenn has become “passionate” about the scheme—dubbed the “Super”—which has, he says, created a positive culture around pension savings in Australia.

“I remember when superannuation came in, I had a part-time job at university and, all of a sudden, I had money going into this separate retirement account. It wasn’t coming out of my pay. It was an additional payment, so, straight away, I felt good about it,” says Glenn.

The idea behind the SG was that it would provide income in retirement for as many Australians as possible, substituting or supplementing the government pension.

“There is definitely a mindset here now where people value their Super. It is pervasive throughout Australian culture and it can add up to quite a significant amount of money over time. If you are a home-owner, your Super would tend to be your second biggest asset, so people care about it,” says Glenn.

Although not quite the same as Australia’s SG, the Automatic Enrolment Retirement Savings System announced recently by the Irish government has a similar aim to “build a culture” of saving for retirement, according to Minister for Social Protection, Heather Humphreys.

Speaking in March at the announcement of the final design principles for the auto-enrolment regime, Humphreys described it as a “major reform” of the Irish pensions landscape.

“It is intended not just to get people saving earlier, but to support them in that saving process by simplifying the pension choices and, importantly, by providing for significant employer and State contributions as well,” Humphreys said.

Due to come into effect in 2024, the scheme will see some 750,000 workers enrolled automatically into a new workplace pension scheme with matching employer contributions and a state top-up. For every €3 saved by a worker, a further €4 will be credited to their pension savings account. 

According to the Government, this means that, when the scheme is fully established, a worker earning €35,000 per annum will accumulate a fund (excluding investment returns) of €293,000 over their working life.

Participation in the new scheme will be voluntary, however. Workers will have the ability to opt-out.

Given the success of the Superannuation Guarantee in Australia, and the pension auto-enrolment systems since introduced in other countries, including Britain and New Zealand, the Irish scheme is expected to be a welcome addition to the pension landscape here.

Although welcome, the government’s pension auto-enrolment scheme has been a long time coming, however. 

“This goes back a long way. Pension policy in Ireland was first reviewed about 20 years ago and, today, we are the only OECD country that doesn’t yet operate an auto-enrolment or similar system as a means of promoting pension savings,” says Munro O’Dwyer, Partner, Pension Services, PwC Ireland.

“In countries without such schemes, retirement savings tend to be quite low. In the UK, the introduction of an auto-enrolment system similar to that planned for Ireland doubled the rate of participation in private pension savings. The behavioural change was really quite significant.

“If you dig further into the UK figures, you can see an even higher jump in the number of people in low-pay or low-security employment participating in private pension savings. 

“We will see the same thing happening in Ireland once our auto-enrolment scheme is introduced, so, I think the benefit to society as a whole is really quite positive.”   

Focus so far

To date, much of the focus in Ireland has been on reducing future spending in the area of pensions, rather than working on incentives to increase private pension coverage, according to Miriam Donald, Public Policy Manager, Advocacy and Voice, Chartered Accountants Ireland.

“This isn’t surprising given that the State Pension is the single biggest cost to the State in terms of benefits,” Donald says. Recent figures show that close to €6 billion was spent on the State Pension in 2020. 

“This figure far exceeded the €4.5 billion spent on the COVID-19 Employment Wage Subsidy Scheme in the same year,” Donald says.

Cultural shift

As a result, the government has faced mounting pressure to change the “culture around pensions savings” in Ireland by introducing measures to encourage private pension coverage.

“Recent studies show that life expectancy in Ireland is currently 90 years for men and 92.6 years for women,” says Donald.

“This means workers, on average, will be retired for more than a quarter of their lives, with one third of the population depending solely on the State to fund their later years.”

Figures released last year by the Central Statistics Office, meanwhile, showed that 34 percent of Irish workers had no pension coverage outside the State Pension.

“The existing annual State Pension of some €13,000 might seem reasonable if you have paid off your mortgage, but Ireland’s home ownership rate in 2021 was reported to be 68.7 percent,” says Donald.

“This means that many will pay high rents long after their peers own their own home and, with average annual rents lying north of €15,000 according to the Residential Tenancy Board’s 2021 rent index, sole reliance on the State Pension will not be sustainable.”

Encouraging retirement savings

By introducing auto-enrolment, Donald says the government has taken an important step in encouraging more people to save for their retirement over the course of their working lives.

“At the moment, starting a pension requires taking an active decision to do so. The attraction of auto-enrolment is that, if a worker does nothing, a portion of their pay will automatically go into a pension fund,” she says.

This means that the new scheme will overcome an existing barrier to pension savings whereby people simply overlook the need to put money aside for retirement over the course of their working lives, according to Donald.

“Employees who do opt out after six months of being enrolled will be re-enrolled after two years, meaning private pension coverage could be increased considerably,” she says, “but the scheme also relies on behavioural inertia – i.e. trusting that some people will not get around to opting out of a pension scheme and will simply stay invested.”

Challenges ahead

Overall, Donald sees the introduction of auto-enrolment as a viable solution to increasing private pension coverage in Ireland.

“It incentivises people to save, reduces the risk of people entering poverty in retirement and reduces the reliance on the State pension. Its introduction could even result in long-term savings for the State,” she says.

Getting the scheme up-and-running by early 2024 will be challenging, however, according to Cróna Clohisey, Tax and Public Policy Lead at Chartered Accountants Ireland. 

“A significant amount of work needs to be done—not just to develop the legislation underpinning the scheme, but also to finalise its design, and to establish the various mechanisms that will be required for it to function,” says Clohisey.

As the legislation progresses, the government will need to work closely with businesses to advise and help them prepare for the introduction of automatic enrolment.

Payroll providers, in particular, will face an uphill battle preparing for the planned introduction of the new scheme.

“We know that this is going to be a considerable challenge for payroll providers to implement,” says Clohisey.

“They are telling us that a lead-in time of at least 18 months would be required to properly develop, test, and deploy a fully operational system. 

“January 2024 is not far away, and businesses will need time and guidance to get ready for this change. Sustained momentum will be needed to meet this ambitious timeline.”

Central processing agency

Jerry Moriarty, Chief Executive of the Irish Association of Pensions Funds, agreed that the planned introduction of the new scheme in early 2024 could give rise to significant challenges.

“There is a huge amount to be done in a relatively short period of time, including the setting up of a central processing agency to do the job of auto-enrolling people—getting them on board and then dealing with all the administration that goes with making sure the contributions are passed on to the right investment managers,” he says.

In the government’s favour is the fact that “we’ve been able to learn a lot from what’s happened with similar schemes in other countries,” Moriarty says.

“In the UK, for example, the system focused on auto-enrolling employers rather than employees. That caused a huge problem with payroll systems, so they ended up having to phase in participation, starting with big employers.”

Ireland’s new scheme will, by contrast, focus on auto-enrolling individual employees, Moriarty says.

“It makes more sense because it means employers won’t have to deal with all of this extra admin and that, when people move from one employer to another, they won’t have to switch pension provider.”