What is it?
At the moment when you start a job that offers a pension scheme you have to fill out paperwork to join the scheme. Auto Enrolment means that when you join you will automatically join the pension scheme and if you don’t want to join you will have to fill out paper work.
Why is it being introduced?
Less than 50% of people in this country have a private pension, the idea of this scheme is that it will get more people into pensions. The government are keen on this, they say they are because they want to help people avoid a big drop in income when they retire, that might be the case. But it is more likely or at least a consideration that the state pension is not sustainable.
What’s wrong with state pension?
Currently, 5 people work and pay PRSI for every 1 person that is retired. The government use this PRSI to pay state pensions amongst other things. By the time 2050 comes around there will only be 2 people working for every 1 retired. 2 to 1! How will they pay all the other social welfare benefits like invalidity or job seekers with a ratio of 2 to 1. The state pension, or at least the current social welfare system is simply unsustainable based on our current demographics.
Are we the first to introduce Auto Enrolment?
No, other countries such as the UK have introduced it in recent years and countries like New Zealand have had it for many years. Countries that have it fully implemented have “participation” rates close to 90% versus our current participation rate in pensions which is under 50%.
Is it a good idea?
Anything that gets more people savings for retirement is a good idea, provided the charges are reasonable and the fund choices (where you invest your money) are good.
Are there any downsides?
In my opinion the only downside is that the government get this wrong. They have a blank canvas now and can draw on the experience of other countries to get this right. This could be another opportunity like the smoking ban or plastic bag levy was. Ireland could be the first country in the World to get this right.
Last week the government issued a strawman consultation paper and asked for input from different parties and I have to say there are several things that immediately stuck out to me as serious red flags, for example:
1. Government are planning to run this themselves via a new state Central Processing authority. This is supposed to cut down on costs however the concern I would have immediately is that people will perceive this as just another tax.
2. You will be automatically enrolled if you are over 23 years of age. Why? Do government believe 23 is the optimum time to start investing in pension? I don’t. It is never too late to start a pension but the younger you do the better. This sends a message to every 19 starting work you don’t need a pension yet and you shouldn’t be bothered.
3. You will be automatically enrolled if you earn more than €20,000. Again, Why? So, if you earn €19,500 you don’t need a pension. Maybe that’s because they think state pension is enough, but do we even believe state pension will exist in the future?
4. People will contribute 1% of salary to start off. Come on, really. If you earn €37,600 (average wage) and invest 1% per annum from age 23 to 65 you will only have just over 1 year’s salary saved when you retire (assuming 4% net growth per annum) This is not enough. What’s worse is people will have an attitude “if this is what government have told me to pay it must be enough.” Granted the intention is to increase the % as the years go by but…
5. Eventually after 6 years the contributions increase gradually to 6%…. still not enough.
6. Where is the tax relief gone?… one of the main advantages to the current pension system is that for every €10 a higher rate tax payer pays in they get €4 back (€2 if you are lower rate tax payer). This is complicated, but the system works. Government are now proposing a new 33% rate, why? It is proven the more complex this gets the less attractive it becomes.
7. The proposed fund choices will be low, moderate and medium risk…. Where is the high risk? High risk often means high returns, even the consultation paper says these funds will provide low, moderate and medium returns. Why restrict people? Can they not choose themselves? Any investment professional will tell you that time dramatically dilutes risk with any investment, pension investment like this is one of the longest investments you will ever make.
8. They mention glide path in the paper…. NOOOOOOO! Glide path basically means that a fund turns down the risk of your investment as you approach retirement, this is in an attempt to avoid a big crash just before you retire.
In other words, turn off the risk/return when your pot is at it largest. So, go after big returns at the start when you have no money and then turn of the chasing of big returns when you have the most amount of money, facepalm. Let alone, what do they think people are going to do when they retire? Do they not realise the fund gets invested again? It is a bit like landing a plane safely and then having to take off again immediately.
Auto Enrolment is a positive thing if government can get it right, but they do run the risk of people not having access to the right fund choices and people taking an attitude “that’s done”
Government needs to be very careful with their communication on this to avoid such issues. Recent research from Irish life has found that people who take out pensions themselves pay on average 11%, in other words those people today who have the drive to sort themselves out have calculated that they need to put much more in than what the government are going to tell everyone else to do.
The paper itself can be found here www.welfare.ie/en/downloads/Plain_English_and_Summarised_Version_of_AE_Strawman.pdf
But what should a new type of pension look like? What would attract you to investing in one? and What do you want from it? Leave comments below.