Adapting Ireland's pension system for a sustainable future

Ireland’s pension system stands at a critical juncture driven by evolving market conditions and demographic shifts. Rav Vithaldas delves into the details

The pension market in Ireland is characterised by a growing shift towards defined contribution (DC) schemes, consolidation and regulatory compliance.

Our pension system comprises a basic state pension, employer-provided occupational schemes and private personal plans, all incentivised with tax benefits and options for voluntary contributions.

According to the Central Bank of Ireland (CBI), the total assets of the Irish pension fund sector increased by 2.4 percent in the third quarter of 2024 to total €142 billion.

The most prominent pension funds among our occupational pension schemes include master trusts, designed to provide a governance structure that allows multiple employers to participate in a single, centrally administered, pension arrangement.

This can be particularly beneficial for small and medium-sized enterprises (SMEs) that may not have the resources to manage their own standalone pension schemes.

The introduction of master trusts is part of a broader trend towards pension consolidation and is in line with the EU’s Institutions for Occupational Retirement Provision (IORP) II Directive, which aims to improve the governance and transparency of occupational pension schemes.

Challenges in the Irish pension system

Ireland’s pension system faces two challenges: rising occupational pension coverage and consolidating DC funds.

Auto-enrolment is the main strategy employed to expand coverage, targeting about 800,000 workers without employer pensions, but its implementation has been delayed.

With auto-enrolment on the horizon, master trusts are expected to manage more assets in the coming years, largely driven by regulatory changes.

Initially, SMEs were the ones transitioning to master trusts, but as trust in this market strengthens, larger entities are also increasingly opting for master trusts.

Consolidation is also progressing, driven by the IORP II Directive, which reduced the number of defined benefit (DB) schemes from 766 to 480 within a year. The industry goal to reduce group DC schemes to 500 or fewer indicates that about 12,000 schemes are yet to be consolidated.

Age of retirement

Along with these structural changes, the Irish pension market is increasingly integrating environmental, social and governance factors, driven by regulatory compliance and a desire to align with beneficiary values.

Pension funds are updating policies, conducting ESG analyses, practising active stewardship and applying exclusionary screens.

They are also investing in ESG assets, exploring impact investments, focusing on enhanced transparency and education, and participating in global initiatives like Principles for Responsible Investment (PRI).

Despite these trends, Ireland continues to grapple with challenges arising from the absence of a legally mandated retirement age.

This situation has led to issues such as a lack of clarity regarding retirement timing, inconsistent retirement ages in different companies (complicating the prediction of pension liabilities and funding), the potential for age-based discrimination and challenges for trustees managing delayed benefit payouts.

In 2025 and beyond, Ireland's pension sector will likely be shaped by several key themes:

1. Auto-enrolment rollout: From 30 September 2025, employers will be required to integrate auto-enrolment systems, which will require careful planning for compliance and a smooth transition.
2. State pension sustainability: With demographic changes, there will be more focus on the financial sustainability of state pensions and retirement age policies, necessitating vigilance and flexibility.
3. Flexible retirement: Employers and trustees must accommodate varying retirement preferences while adhering to regulations.
4. DB scheme challenges: Financial pressures and solvency requirements for DB Schemes demand proactive risk management and member protection.
5. Governance and investment strategies: Evolving market conditions and changes to the Standard Fund Threshold call for improved governance and investment strategies, with a growing emphasis on ESG factors.
6. Digital resilience: Cybersecurity and data protection will become more critical, requiring ongoing investment in technology and strict operational standards.
7. AI in pension administration: Artificial intelligence will bring process enhancements to pension administration but must be implemented with careful ethical and regulatory considerations to maintain trust and integrity.

While these new trends in the Irish pension market address challenges arising from the lack of a statutory minimum retirement age, our perspective on Ireland’s pension system is that it currently stands at a critical juncture whereby:

• An ageing population necessitates reforms for better pension coverage and retiree adequacy;
• The shift from DB to DC schemes offers flexibility and improved risk management;
• Auto-enrolment pension schemes aim to boost participation and secure retirement for more workers;
• Master trust consolidation in Ireland indicates a move towards more efficient and professional pension management, driven by regulatory changes, cost pressures and a push for better governance; and
• Sustainable investing within pension funds showcases a commitment to ESG, aligning with responsible investing trends and mitigating ESG risks.

Overall, these developments reflect a proactive approach to evolving market conditions and demographic shifts, aiming to ensure the sustainability and adequacy of retirement provisions for Irish citizens.