The announcement follows around a year of consultation with the industry over the finer details. It’s clear that the Irish government was keen to learn lessons from similar experience in the UK, as well as incorporate some of the better aspects of the Australian “Super” system.
Pot Follows Member
When the UK first consulted on auto-enrolment, the DWP commissioned detailed forecasts on growth of pension pots. The results predicted a proliferation of small and uneconomic pension pots, with an estimated 50 million dormant pots by 2050, around 12 million of which would be valued at under £2,000. The Government nonetheless pushed on with setting up NEST, without designing-in measures to prevent this becoming reality. The worry was that “pot follows member” would disadvantage some savers by moving them to schemes with higher charges.
The new Irish scheme borrows from Australia, where employees get to choose their provider, and can port their pension with them when they change jobs. Employees who do not choose a scheme will have one chosen for them from the panel of authorised providers, and will have their contributions invested in the default fund. Excessive charges will not be an issue either, with a 0.5% charge cap (already proven to be commercially viable in the UK).
Central Processing Authority
Facilitating this selection of schemes will be a Central Processing Authority (CPA), which will also set scheme standards and manage the tendering and periodic re-tendering process. In the UK, the Government had low expectations of private provision, which was the rationale for setting up NEST as provider of last resort for the “uneconomic” members. In reality, the market was over-run with new (and sub-scale) master trusts, and the Pensions Regulator had to legislate retrospectively to increase standards and capital adequacy.
The CPA will limit the number of authorised pension providers, thus avoiding the entry of sub-scale providers and mitigating the risk of schemes folding.
It’s not clear from the Irish announcement whether the CPA will also operate as the contributions and transfers hub; in Australia, this job is done by one of 8 privately-run Gateway providers.
Realistic contributions, shared fairly
I’m getting bored of writing (and reading) about the need for increasing the minimum UK auto-enrolment contribution rate. It’s clear that 8% will not be enough for a comfortable retirement for anyone. Given that it took 8 years from the Turner Commission to the first auto-enrolment and a further 6 to reach 8%, new regulation is becoming urgent.
Ireland have again learned from the UK (and Australia, where mandated employer contributions are 9.5% and rising to 12% by 2025). The new scheme will start with 3% contributions, matched 50:50 between employee and employer, and increase every 3 years to reach 12%. The perception of fairness is key here – a common criticism of the UK’s 5%/3% mix.
No waiting period with minimum lock-in time
Unique to Irish auto-enrolment, I believe, is the concept that workers must pay into the scheme for 6 months before being able to opt out. Re-enrolment of opt-out members will be every 3 years as in the UK, but members can temporarily suspend their contributions at any time.
A minimum 6-month membership may be long enough to reinforce the inertia effect of automatic enrolment, and lead to opt-out rates below even the low levels experienced in the UK.
More to do
Design work continues, but the early signs are promising. This looks like a fully-formed and joined-up system. Some detailed aspects are not mentioned in the announcement but may be yet to come. When they do, I’m hoping Ireland will avoid some of the other mistakes the UK made, such as launching without a common data standard for payroll, a real missed opportunity.
And speaking of missed opportunities, might it not be time for the UK government to reopen the case for “pot follows member”?
Article first published in Mallowstreet on 8th November 2019.