A look at the Roadmap for Pensions Reform 2018 – 2023

On the 28th of February 2018 the government launched “A Roadmap for Pensions Reform 2018 – 2023” document which outlined 6 strands to Pensions Reform:

Strand 1: Reform of the State Pension – Including the total contributions approach

Strand 2: Building Retirement Readiness – A New Automation Enrolment Savings Scheme

Strand 3: Improving Governance and Regulation – including the EU Pensions Directive ‘IORP II’

Strand 4: Measures to Support the Operation of Defined Benefit Scheme

Strand 5: Public Service Pensions Reform

Strand 6: Supporting Fuller Working Lives

Strand 1: Reform of the State Pension – Including the total contributions approach

The paper outlines the use of a multi-pillar system as an accepted model for pension system design, this consists of the State Pension; Occupational Pensions; Private and Individual Pension Plans.

The State Pension or first pillars key objectives are Adequacy, Sustainability and Equity.

The paper refers to previous studies stating that the State contributory pension should be set at 34/35% of average earnings, in Ireland this is already the case. At the moment the State Pension operates on a pay as you go basis, meaning that payments to Pensioners today are coming from the taxes of the current workforce with is about 4 or more to 1. However, over the next 40 years this is due to fall to a ratio of 3:1, forecasting an accumulative deficit of approximately €400billion over the next 50 years.

Two areas of inequity with the current state pension are highlighted within the paper; the first is the difference in pension payments to individuals not justified by their history of contributions and secondly is the intergenerational issue linked to the issue of sustainability.

From 2020 the method of calculating the State Pension Contributory will be done on a ‘Total Contributions Approach’ (TCA) which directly relates pension payments to the number of contributions paid over a person’s working life. It will also give significant credits to those who have taken time out of the workforce to provide caring duties.

In the paper the government commit to bring forward a proposal for the TCA in Q2, 2018, finalise design by Q4, 2018 and implement by Q3, 2020. There will also be an option for pensioners who retired post 2012 on a reduced rate option to get their entitlements assessed under the new TCA from March 2018 with payments from Q1, 2019.

It has already been agreed that the State Pension age in Ireland will increase to 68 in 2028. In the paper the government commit to, not increasing the state pension age until 2035 except for the changes already scheduled to take place in 2021 and 2028. Any changes to the increase in the State Pension age will be directly linked to Life expectancy, this will begin with an assessment in 2022 with a notice period of no less than 13 years to be given for any potential change. Thereafter a similar assessment will take place every 5 years.

The document highlights that social insurance rates will need to be adjusted to ensure that the government can finance the payment of pensions under the new framework. The Government are therefore proposing that the social insurance contribution rates and contribution classes are actuarially reviewed on an annual basis to determine any changes required to fund benchmarked increases in payment rates. To this end the government will progress work to consider and present options for the amalgamation of USC and PRSI by Q2, 2018 and to publish a consultation paper on rate setting/funding approach for social insurance fund by the end of Q4, 2018.

The State Pension Contributory will not provide enough to adequately replace 50/60% of an individual’s pre-retirement income and therefor there is a need for occupations pensions and/or personal pensions.

Ireland has 160,000 occupational pension schemes and just 1% of the EU population which makes Ireland home to 50% of all pension schemes in the EU. However, those with supplementary pension schemes is low (35%) in comparison to other countries that have a mandatory or quasi-mandatory system.

If pensioners are not funded sufficiently in retirement it will reduce consumer spending in the economy and therefore will not only have a negative impact on the economy but will also create a macro-economic risk.

The three key challenges facing supplementary pension coverage were outlined as follows:

Low level of supplementary pension coverage
The disproportionate high number of schemes – which they attribute to increasing administrative costs and diminishing funds available
Increasing longevity and the continuing trend of low interest rates which increase the cost of annuities and undermining the sustainability of DB schemes.

To address the challenges the government are proposing to develop an Auto Enrolment Retirement Savings System to supplement the State pension, Reform and Simplify the existing structures for current supplementary pension savers and legislate for measures to support DB scheme sustainability.

Strand 2: Building Retirement Readiness – A New Automation Enrolment Savings Scheme

The Citizens Assembly saw 87% of members vote in favour of the government introducing a mandatory or quasi-mandatory pension scheme to supplement the state pension.

By 2022, the government proposes to develop and begin implementation of a state sponsored supplementary retirement savings scheme in which employees will be automatically enrolled.

The Government are due to make a final decision regarding operational and design characteristics for auto enrolment after a public consultation is carried out in Q2. 2018.

While the consultation is currently being finalised, the main parameters to be offered for consultation are likely to be:

All employees in the private sector over identified age and income threshold and without existing private pension provision will be automatically enrolled
Workers on lower salaries, self-employed and workers with existing provisions may be able to opt-in
Contributions into the system will be made by both workers, employers and the state will top up contributions
Workers who are enrolled will be able to opt-out, following a minimum period of participation and any contributions made by the worker during this period will be refunded
The exact level of contributions will be decided during the design phase, starting at a modest base and increasing at scheduled periods over time. Employers may be asked to match worker contributions. The state might match worker contributions on a 1:3 basis but any contribution by the state will replace rather than augment existing tax reliefs.
Retirement benefits accrued will be paid at the same time as the State pension is paid
Workers with pre-existing personal or occupational arrangements will be able to retain them

Prior to deciding upon the system design the government will undertake an economic impact assessment of introducing auto enrolment in Ireland.

Strand 3: Improving Governance and Regulation – including the EU Pensions Directive ‘IORP II’

Arising from the National Consultation Process on Reform the Pensions Authority made a number of recommendations to the Minister for Employment Affairs and Social Protection which was echoed by the Citizens Assembly around the rationalisation of private pension schemes and greater transparency in relation to fees on pensions.

The Government have committed to the following action points:

Develop and Publish legislation by the end of Q3, 2018 to transpose IOPR II into Irish Law with effect from 2019.
Develop a new process for new and existing schemes to gain ‘authorised status’ with the Pensions Authority
Introduction of a new personal fitness and probity benchmark for trustees to be introduced in Q1, 2019.
Introduce a new set of personal standards for Trustees
New membership rules for trustees that will require a minimum of two trustees, one with trustee qualifications at level 7 of the NFQ and the other with at least two years’ experience
The Pensions Authority will be granted power to remove a trustee
Corporate trustees, when acting as a sole trustee to a scheme, will be required to have a minimum of two Directors, one with a mandatory trustee qualification and one who meets the prescribed criteria for experience.
New standards for trustee development will be proposed whereby all trustees will be required to undertake a prescribed level of annual Continuous Professional Development.
The Pensions Authority will publish new governance codes and standards
The Interdepartmental Pensions Reform and Taxation Group will identify and progress measures to improve the harmonisation of rules to eliminate anomalies in the treatment of different retirement arrangements including taxation treatment. Q4 2018
Identify the options and develop recommendations to coherently rationalise the number of individual pension vehicles which exist at present. Q2 2020
Review the cost of funded supplementary pensions to the Exchequer.
Undertake a broad review of the utilisation of the ARF option and consider whether regulatory oversight of this product is fit for purpose.

Strand 4: Measures to Support the Operation of Defined Benefit Scheme

The number of funded defined benefit schemes has dropped from 2,220 in 1996 to 667 in 2016.

It is estimated that, at present, over 90% of DB schemes are closed to new entrants. However, while in decline, approximately 102,000 pensioners, 111,000 active and 415,00012 deferred scheme members draw, or will draw, retirement income from these schemes. The defined benefit sector has assets under management of over €62 billion.

The Government has committed to the following actions in relation to the Defined Benefit Scheme sector:

(i) Advance the Social Welfare, Pensions and Civil Registration Bill 2017 and implement measures to respond to the ongoing difficulties in defined benefit schemes and provide for improved levels of protection for scheme members and beneficiaries.

(ii) Identify and investigate other potential regulatory measures to improve effective oversight and transparency in the financial status of DB schemes.

The nature of these measures, if any, has not yet been determined, but they could include;

Requiring more frequent provision of information to the Pensions Authority to allow for closer monitoring and scrutiny of schemes funding
Require that employers provide information more frequently to trustees to allow them to plan for future viability of schemes
Introduce early notification to the Pensions Authority of any scheme difficulties or changes in the sponsoring employer that will affect the scheme.
Give increased powers to the Pensions Authority to take action to direct schemes and sponsoring employers to develop proposals that allow schemes to survive or put in place well-funded alternatives.

Strand 5: Public Service Pensions Reform

The Government indicated that in order to ensure the sustainability of pension liabilities whilst safeguarding the delivery of retirement benefits promised and to provide greater flexibility in the retirement decision to public servants who may wish to extend their working lives, the Government confirms that it will implement the following reforms to public service pension provisions.

Introduce legislation to increase the compulsory retirement age for the public service workforce to 70 for those recruited before the 1st of April 2004.

Beginning on 1st January 2019, the Pension Related Deduction will be converted into a permanent Additional Superannuation Contributions (ASC) for public servants.

Strand 6: Supporting Fuller Working Lives

The Government have indicated in the document that to allow those who wish to work longer they are putting in place the following action plan, to encourage them to do so:

An Interdepartmental Group chaired by the Department of Employment Affairs and Social Protection will be convened to review mandatory retirement age practices. The Group’s remit will be to review the current legislation governing the various ages at which pensions can be drawn down together with any apparent variances arising in the treatment of different retirement arrangements with a view to a standardised upper age limit
The recently published ‘Actuarial Review of the Social Insurance Fund 2015’ will be used to inform the preparation of a paper to allow for the deferral of the State pension contributory on an annual basis to include actuarial increases in payment
Consideration will be given to allowing those without a full Social Insurance contribution record increase their retirement provision by choosing to continue to make PRSI contributions beyond State pension age and up to the actual date of retirement
The Government will undertake a communication campaign targeting employers and employees outlining the financial incentives available to those who may wish to continue working in in their later years.

To read the full document go to http://www.welfare.ie/en/pressoffice/pdf/PensionsRoadmap.pdf