Three Necessary Actions Prior to Launch of Ireland’s Auto-Enrolment Retirement Saving Plan

Abstract

The proposed Automatic Enrolment Retirement Saving (AE) Plan will fail to make a significant impact on pensions in Ireland unless three actions precede its introduction. First, we show that the existing tax reliefs for other pension arrangements are considerably more valuable than the 33% subsidy to contributions to the AE Plan for higher rate taxpayers. To create a level playing field for the new AE Plan, we recommend qualifying contribution levels be equalised and that tax relief on contributions to other pension arrangements be abolished, replaced with the common 33% subsidy. Second, a key selling point of the AE Plan is its low charges, considerably lower than individual private plans. However, low charges are not a particularly strong force shaping the pension landscape, even though such efficiencies accumulate to deliver materially higher pensions over the long term of pension savings. We recommend that selling practices of pensions are better aligned to the interests of the pension saver. This can be achieved by banning commission on pension products and by requiring illustrations of the size of the pension fund at retirement to be explicitly compared with that expected from the AE Plan. Third, the new AE Plan has the potential to solve the legacy issues that the run-off of defined benefit schemes poses to the State and to sponsoring employers. We propose that the AE Plan be open to transfers from such schemes, to help manage the contingent liability of the State and to help build a partnership in pensions with employers. Indeed, the AE Plan should be open to transfers from any existing pension arrangement, if it is in the best interest of the individual. While these three reforms will assist in preventing the failure of the AE Plan, alone they may not be sufficient to ensure its success. The introduction of the AE Plan is obviously good for pension savers but it also has the potential for disruptive change in the pension industry, which to date has been successful in resisting reform.