Charting a course to a brighter pensions future

Jun 01, 2018

Rose Leonard of Zurich warns employers of the implications of Ireland’s recent pension reform roadmap.

Earlier this year, the government announced wide-ranging changes to pensions in Ireland in its Roadmap for Pensions Reform 2018-2023. The roadmap comprised six separate strands, several of which will have implications for employers, according to Zurich’s Head of Corporate Distribution & Customer Relationships, Rose Leonard.
The six strands include reform of the State scheme; building “Retirement Readiness” – the introduction of a new auto-enrolment retirement savings system in 2022; improvements in pension scheme governance and regulation; measures to improve the operation of defined benefit schemes; public service pensions reform; and greater individual flexibility to offer support for fuller working lives in both public and private sector employment.

State scheme reform 

“The reform of the State scheme involves examining proposals to explicitly link future changes in pension rates of payment to changes in the consumer price index and to life expectancy. It also introduces the Total Contributions Approach (TCA) for the State Contributory Pension. The TCA would be a new method for calculating entitlement to the State contributory pension whereby the level of pension would be directly proportionate to the number of social insurance contributions made by a person over his or her working life.” 

Significant credits would be granted to people who have taken time out of the workplace to perform caring duties. “The TCA would result in a fairer system for people who have left employment for periods during their lives to care for others, including their own children,” says Leonard. “All contributions will be taken into account under the proposed system. Any change to the State pension age after 2035 will take increases in life expectancy into account. This may result in further increases in the State pension age, but 13 years notice will be given of any change. The Government also plans to address the sustainability of the scheme possibly by looking at amalgamating PRSI and USC.”

Retirement readiness

The second strand is about building retirement readiness. “This is the strand that will affect employers most as it involves the introduction of a mandatory auto-enrolment pension scheme,” Leonard points out. “The ambition is for employers to match employee contributions euro for euro up to a maximum level of 6% each. The State would contribute at a ratio of one third of the employee contribution.”

There are clear benefits to the introduction of an auto-enrolment system, as demonstrated by the  successful introduction of such a scheme in the UK some years ago. “It could certainly encourage some of the two-thirds of private sector workers who aren’t currently covered by a pension scheme into the long-term savings habit,” she says. “That’s the positive side. However, 14% contributions between employer, employee and the State will not produce an adequate pension unless the person starts contributing very early in his or her working life. People need to start contributing to pension schemes once they commence employment.”

 “One of the issues to be considered is the lack of trust in the State to deliver its benefits in the long-term”, Leonard adds. “Look what happened to the National Pensions Reserve Fund which was diverted to the banks during the financial crash. Also, people who remember getting more generous benefits from PRSI contributions back in the 1980s and 1990s than they get today may not have much confidence in the Government to maintain promised benefits in this instance.”

Those confidence issues apart, Leonard also believes the proposed rate of government contribution presents another risk factor. At one-third of the employee contribution, the government contribution is worth significantly less than the current tax relief on pension contributions, which is available at the top marginal rate. This may inadvertently act as a disincentive to mid-to-higher earners who suffer the greatest earnings gap when they come to retire. 

For employers, a key issue will be the required alterations to payroll systems.

“Employers will need to have payroll systems that will interact with pension contribution administration systems,” she notes. Zurich already offers a Group Payroll Management System which facilitates the transfer of monthly pension contribution data directly onto the Zurich pension administration system from employers. It is straightforward, secure and easy for employers to use. Employees will want to see the value of their pension and the value of their contributions in real time whenever they choose,” says Leonard. 

Governance and regulation

The third strand addresses the improvement of governance and regulation. This involves delivering on Ireland’s obligations to transpose the provisions of the EU IORPS II Directive. It will also entail the introduction of measures to provide for the rationalisation of pension schemes along with improved pension scheme governance and trustee standards, and an enhanced regulatory framework.

“The Pensions Authority has placed a lot of emphasis on defined contribution pension scheme governance since mid-2016,” Leonard points out. “There are codes in place which are not mandatory, but are aimed at getting people to think more about governance. Ultimately, better governance leads to better outcomes for members when it comes to areas like value for money and investment decisions.”

A key question for smaller companies under this strand is whether they need a separate scheme at all. “If the scheme is just for four or five people, is there really a need to have separate trust and all the costs associated with that? Wouldn’t they be better off in a more cost-effective master trust structure or, indeed, a simple insured contract?” Leonard asks.

Defined benefit schemes

The fourth strand looks at the rights and legitimate expectations of defined benefit scheme pensioners and members, and how they can be protected while also protecting the solvency of the sponsoring employer and the employment of existing workers. “Many of these schemes have now closed owing to increased costs associated with prolonged periods of low interest rates, increased life expectancy and indeed the burden of onerous regulation. The Government is looking to see what measures can be introduced to help the schemes that remain.”

Public service pensions reform

Under the heading of public service pensions reform, proposals include making permanent the existing pension-related deduction and raising the mandatory retirement age from 65 to 70 for those public servants who were recruited before 1 April 2004.

Working flexibility support 

The sixth and final strand aims to support a positive ageing environment where older people are provided with greater flexibility to work to, and beyond, what is considered normal retirement, should they so wish.

“Employers will need to look at their existing contractual arrangements with employees in this light,” Leonard advises. “There is also consideration of offering individuals the option of deferring their State pension for a period and enjoying an increased rate when they do draw it down. Employers should also look at the lifestyle strategies in their existing defined contribution pension schemes to ensure that they reflect these altered realities. Zurich has already introduced the RetireRight post-retirement lifestyle strategy to meet changes in people’s needs.”