OPINION | Ireland is in the process of establishing a universal pension scheme and its policymakers are looking to learn from more developed systems, like Australia’s. One of the key lessons is not to relegate the retirement phase to an afterthought.
It is now nearly 25 years since Australia mandated compulsory superannuation for workers. Despite having one of the most advanced retirement savings policies in the world, we are still working on significant policy changes like articulating super’s purpose and adding some structure to the retirement phase.
Meanwhile Ireland is starting from scratch. More than half of all Irish workers lack any form of private pension (superannuation) and its government needs to address a looming retirement funding gap.
It is a massive challenge for a nation that has in recent years had to deal with a difficult economy. Ireland’s banks were hit hard and its unemployment rate spiked to as high as 15 per cent in the wake of the 2008 global financial crisis.
However, as a late arrival to the universal pension savings game, Ireland’s one big advantage is that it can learn from other systems already in place.
I was recently invited to participate in the Irish Pension Reform Summit, hosted by the country’s insurance industry association, Insurance Ireland. Delegates from around the world discussed what is, and isn’t, working well in other relevant countries.
Enormous challenge
Ireland has a coverage problem. In 2013, the Organisation for Economic Co-operation and Development recommended it address this by introducing a universal defined contribution (DC) pension model. Since then, various parties have been working on making this a reality.
To put the magnitude of the challenge they face into perspective, imagine what Australia would look like without the DC super system introduced by the Keating government in 1992.
Imagine we had a well-developed pension, funds and insurance sector with a wide range of products, but most Australian workers were not using it to save for retirement. That is what Ireland looks like today.
The Irish pensions industry has more than enough skill and capacity to provide a 21st century DC pension product, but it can’t get the necessary uptake or coverage.
From a regulatory perspective, establishing a universal pension system over the top of existing state and non-universal private pension arrangements is far from straightforward. That’s part of the reason why compulsory systems like Australia’s remains relatively rare globally.
Suffice to say, the conversation in Ireland is all about auto-enrolment, whereas the name suggests, you are automatically signed up when you start a job, but can opt-out if you wish. This is how New Zealand’s KiwiSaver scheme works.
Auto-enrolment
Insurance Ireland has called the proposal ‘MySaver’. One can’t help note the hat tip to the Australian MySuper and New Zealand’s KiwiSaver.
I told the Irish summit participants not to get too hung up on compulsion. It is not essential to get started and there are examples of successful auto-enrolment models in other countries, such as New Zealand and the United Kingdom.
There is also a movement to adopt an auto-enrolment scheme in the United States.
When thinking about establishing an auto-enrolment system, intelligent design is key. What do the defaults look like? What shape does the governance take in systems where not all pension products are in a trust framework?
An auto-enrolment product like the proposed Irish MySaver would focus principally on those workers who currently have no pension, rather than upsetting existing arrangements, such as defined benefit (DB) pensions.
While opting out is allowable, the experience from systems such as those in New Zealand indicate that any opt-out parameters should be relatively restrictive. This is not only for the sake of encouraging citizens to save, but also to reduce the burden on trustees and administrators.
The ability to opt out adds complexity to the system, especially if it can be actioned any later than the first few weeks of starting employment. Auto-enrolling countries are talking about tightening the windows around opting out and some have mechanisms that allow workers to opt back in later.
Contribution rates
Ireland is setting some ambitious objectives for its new MySaver scheme.
In terms of coverage, the target is to include 90 per cent of the workforce within seven years. As to the question of adequacy, the long-term goal is to target a 50 per cent replacement rate of income in retirement.
If these goals aren’t achieved, Ireland might reconsider mandating pension contributions.
However, something similar to the “perfect storm” of politics, industrial consensus and economic conditions that existed in Australia in the early 90s might be required to pull that off.
With any pension system design, adequacy is a key metric. What does this look like? There is always talk of replacement rates and coverage rates, but the figures have to be meaningful and achievable for the system in the long-term.
What about contribution rates? A universal pension typically starts small. As we all remember, Australia started with 3 per cent employer contributions. In 2016 that is sitting at 9.5 per cent with plans still in train to get to 12 per cent by 2020.
Ireland is proposing a starting point where every employee has to contribute 1 per cent of earnings, matched by a 1 per cent contribution from their employer.
Contribution rates for both employers and employees would increase by 1 per cent each year for five years, until the workers were accumulating at a total contribution rate of 10 per cent.
Luck of the Irish
The UK is still only at 2 per cent, seven years after first implementing auto-enrolment, aiming to get to 8 per cent (3 per cent employee and 5 per cent employer) by 2019.
Time will tell whether Ireland can achieve its aggressive target.
Most importantly for Ireland, if it is to succeed where many other DC systems have failed, it must build a universal pension that incorporates a meaningful retirement proposition.
Ireland cannot afford to fall into the same trap as other DC systems around the world, including until recently, ours, of focusing solely on the accumulation phase.
Luckily for the Irish, they already have a range of retirement income providers and products that strike the balance between access, liquidity and risk management.
Ireland’s new private pension system also has a chance to get its back office systems right.
Solutions such as unique identifiers help, as we have already seen in Australia. The rules around eligibility and limits on participation should be simple. Governments need to resist the temptation to tinker with the rules; a temptation that has proved too hard to resist in New Zealand. KiwiSaver has been subject to a number of flip-flops on key aspects of the scheme.
Lessons can also be drawn from the experience of the UK’s National Employment Savings Trust (NEST). But Ireland’s universal pension will have to fit with its demographics, workforce and welfare system. Ireland’s workers are predominately young and employed in small-to-medium enterprises, so the system will have to orient itself around this sort of workforce.
This is Ireland’s opportunity to ensure that the system integrates retirement thinking from the start, rather than tacking it on later. What might emerge is a synthesis of world’s best practice, tailored for Ireland’s conditions. If I had to call it, this might look like KiwiSaver with a CIPR option in the retirement phase.
Jeremy Cooper is chairman for retirement income at ASX-listed financial services firm Challenger. He authored the government’s 2010 Super System Review and was previously Australian Securities and Investments Commission deputy chairman.
This article first appeared in the November print edition of Investment Magazine. To subscribe and have the magazine delivered CLICK HERE. To sign-up for our free regular email newsletters CLICK HERE.
