Ireland is entering a pivotal phase of transformational pensions change that should have a positive impact on individual retirement savers. The good news is that many of the necessary foundations for change are already in place - all that remains is a commitment to prioritising the rollout.
The first development has now arrived with the long overdue implementation last week of the EU’s IORP II Directive. This slightly indigestible-sounding piece of legislation will govern the private retirement savings and benefit entitlements of nearly one million pension savers, and even more retirees, in Ireland.
The Directive comes at an important time in the evolution of company pensions here as most people are now members of defined contribution rather than defined benefit schemes. This means that guaranteed pensions based on a percentage of salary have become an enviable exception.
For most of today’s pension savers, having sufficient funds at retirement will largely depend on the quality and timing of their investment decisions, the information received to make those choices, and the standards of governance of the vehicles to which they entrust their hard-earned money.
IORP II will provide better protection by requiring schemes to have enhanced general governance and risk management, and provide clearer and more frequent information to scheme members.
Notwithstanding negative reactions in some quarters to the potential administrative burden and increased costs for some schemes, it’s clear that implementing IORP II is a hugely positive step in the right direction for individuals saving for retirement.
The next important change on the horizon is the introduction of a system of automatic pension enrolment, currently planned for 2023 at the earliest. We already know from the UK experience that auto-enrolment can be a massive success in improving pensions coverage levels, encouraging greater saving and improving pension adequacy. For these compelling reasons, and following on from years of delay, the Government must not miss this opportunity or allow it to drift any further.
In planning for the implementation of an auto-enrolment system, the Government must also ensure it is introduced with an inexpensive and straightforward fee structure. This kind of transparency will be crucial to instil greater confidence and to assuage some of the negative market commentary on fees in relation to some retail pension arrangements.
Elsewhere, the Interdepartmental Pensions Reform and Taxation Group report, issued at the end of 2020, set out key proposals for large-scale simplification of the supplementary pensions landscape.
The report advocates reducing the number of available retirement savings products, greater flexibility in retirement benefit options for individuals, particularly after retirement, and – crucially – a retention of our existing system of tax reliefs, without which the incentive for citizens to do the responsible thing and take a long-term view of their savings will be hard to sustain. The hope is that the Government immediately takes the necessary steps to bring these proposals to fruition.
We are all aware of the increasing financial burden on the state of providing adequate retirement support to citizens, and the current and future reforms to private pensions are intrinsically linked to this issue. Some of the key ways to ensure state pension sustainability are to increase supplementary pension coverage, improve benefit security, incentivise saving and – above all – ensure the trust of savers in the entire system. With this in mind, the recent creation of a Pensions Commission and the associated public consultation on state pension reform proposals is to be welcomed.
Finally, amidst all of these important and necessary steps, it is vital that the Government considers tackling some of the inflexibilities in the current system to respond to the changing needs of pension savers.
For example, the Government should urgently consider ways in which earlier limited access to savings could be permitted to help those in financial difficulty as a result of the pandemic. This could be expanded to include other significant life events and act as an incentive to encourage more people to save for their retirement. Such access is a feature of retirement savings in some other countries. Likewise, for those whose personal savings have actually increased during the pandemic, there is an immediate opportunity for the Government to relax the rules allowing them to direct those surplus savings into their retirement funds on a tax-relieved basis, thus helping to improve pension adequacy for this cohort. These are all simple changes that could make a genuine difference to people’s lives.
But while Ireland finally seems headed in the right direction on pensions, the need to take action becomes more urgent day by day. We have already seen too much delay: IORP II has come two years past its due date; it is 15 years since auto-enrolment was first considered for Ireland; and it is over 30 years since we saw substantive reform to occupational pensions here. The talking needs to stop. It is time for our lawmakers to set aside short-term political considerations and to act.
CEO, Mercer Ireland