In Ciarán Hancock’s recent (10 May) Irish Times article Time for the Government to Introduce Pension Auto-enrolment, he makes a welcome call for the government to accelerate their plans for pension reform. Referring to it as a ‘no-brainer’ he argues that bringing in auto-enrolment means that future retirees with their own pensions would be less financially dependent on the state in their dotage. I agree with his argument that reform is required to place Ireland on a path of sustainable adequate and equitable pension provision for future generations. However, any argument supporting auto-enrolment into privately managed defined contribution pensions overlooks some crucial elements that make it less than ideal.
Let’s start with gender. Any pension reform argument is flawed if it overlooks the problematic nature of linking pensions to work, without recognising the different ways men and women participate in paid and unpaid work over their lifetimes. While women can have long periods of full-time employment, it is more typical for women to combine periods of full-time, part-time, and time out of the formal labour market, to meet a range of caring responsibilities. This leaves them at a disadvantage in pay and pensions, as debates about gender pay and gender pension gaps seek to highlight. Depending on the terms of auto-enrolment workers are likely to be excluded if they are working part-time or in poorly paid employment. More women than men fall into these categories. The pension debate must place women’s patterns of work and care at the centre of analysis to ensure as far as possible that everyone can equally establish an entitlement to an adequate pension. Auto-enrolment alone will not do this. As the OECD recognised in their 2014 report on the Irish pension system, structural reform of the state pension to include a universal basic pension scheme could provide a flat-rate benefit for the entire population, regardless of their lifetime work or contribution status.
It is widely recognised that adequate future pensions require individuals to contribute towards their pensions over their working lives. Private pensions are paid for by employer and employee contributions, and are subsidised by the state through tax reliefs. Since the turn of the century defined contribution pensions has largely replaced defined benefit. Privately managed defined contribution is the model envisaged for auto-enrolment. Defined contribution leaves the individual responsible for investment decisions when they are unlikely to understand the risks. Their future pension income is dependent on contributions paid by them and their employer; the investment decisions made by themselves (and by trustees in the default investment strategy option offered in occupational pension plans); asset allocation and stock selection decisions by investment managers; and market performance. Members of Irish pension funds have recent first-hand experience of fluctuating investment performance. The companies managing Irish pension funds were identified by the OECD during the 2008 financial crisis as losing 37.5 per cent of the value of the pension fund assets they were managing; “the worst performance for private pensions in the 30 OECD countries”[i]. The OECD cited the reason as being “because of the share of equities in pension fund portfolios: around two-thirds of assets before the crisis hit compared to an average of 36 per cent in the 20 OECD countries where data are available”.
It is true that auto-enrolment has the capacity to increase retirement income, as recent research by the pensions industry in the UK has argued[ii]. However, in addition to the gendered nature of likely outcomes from an increased emphasis on participation in paid work, the auto-enrolment addition to the pension system holds no guarantee of future adequate income. Adequacy may not be problematic if employers continued to contribute to defined contribution arrangements at the average level required for defined benefit schemes. Data from the pensions industry strongly suggests that this is not the case. The average employer contribution to defined contribution schemes in 2014 was 5.7 per cent of pensionable salaries (IAPF 2014)[iii], compared to the average employer contribution to defined benefit schemes prior to the 2008 financial crisis of 16.8% (Mercer 2006)[iv].
Much of what is written about pensions concentrates on the long-term sustainability of the state pension. However, the state also makes a substantial contribution to private pensions through tax reliefs in a traditional Exempt Exempt Taxed (EET) approach. Employees get tax relief at their marginal rate of tax, subject to overall limits. Employer contributions are deductible in corporation tax calculations. The income and capital gains of pension funds are exempt from tax. Certain lump sums payable on retirement and death are tax free. Tax is paid on pensions in payment. Tax support for private pensions peaked at 1.9% of GNP in 2006, which was not far short of public support for state pensions at 2.1% of GNP (Hughes and Maher 2016)[v]. Tax subsidisation of private pensions has proven to be ineffective at encouraging individuals to voluntarily save in a pension plan (hence the quasi-mandatory approach by auto-enrolment). It is not unreasonable to suggest that they are equally unlikely to work at encouraging employees to save more than any minimum set. The prevalence of tax-free lump sums, corporation and capital gains reliefs, and the lower amount of pension relative to salary, make the government tax subsidy unlikely to be recovered in full from the tax on pensions in payment. Yet sustainability of the tax subsidy is absent from arguments for auto-enrolment which is surprising given that a significant increase in tax expenditure is likely if auto-enrolment proceeds.
The distribution of the tax subsidy is also problematic with research demonstrating that it is heavily skewed towards the highest earnings quintile (Collins and Hughes 2016)[vi]. Those outside the tax net do not receive any subsidy towards their pension.
The current public/private architecture of the Irish pension system has prevailed since the abandonment of plans for a state income-related tier in the early 1980s. The trajectory of reform has concentrated on strengthening private pensions through the introduction of PRSAs and the recommendations for auto-enrolment in the National Pensions Framework. Yet it is the public state pension that has the proven track record at lifting older people out of being at risk of poverty, is efficiently managed, and currently delivers the bulk of pensioner income. If employees are being asked to save more for their pensions through auto-enrolment, then gender; taxation and the value the government are getting in return for subsidising private pensions; and the positive attributes of public management of pensions must all be part of the debate. To frame the discourse without these missing elements is to follow rather than challenge conventional thinking about reform of the Irish pension system.
[i] OECD. 2009. Ireland. Highlights from OECD Pensions at a Glance. Paris:OECD
[ii] Pensions and Lifetime Savings association. 2016. Retirement Income Adequacy: Generation by Generation (www.plsa.co.uk).
[iii] IAPF. 2014. DC Contribution Rate Survey (www.iapf.ie).
[iv] Mercer. 2006. Defined Benefit Survey 2006.
[v] Hughes, Gerard and Michelle Maher. 2016. Redistribution in the Irish Pension System: Upside down? Pp. 93-118 in The Irish Welfare State in the Twenty-First Century. Challenges and Change. Edited by Mary P. Murphy and Fiona Dukelow. Basingstoke: Palgrave Macmillan.
[vi] Collins, Micheál and Gerard Hughes. 2016. ‘Tax Exemptions on Occupational Pensions in Ireland, Cost and Distribution.’ Nevin Institute Research Seminar, Dublin, 28th September.
Dr Michelle Maher @michelemcginley
Dr Michelle Maher completed her PhD on the Irish pension system in 2016 at Maynooth University. She is active in both Irish and international pension research networks as a council member of the Pension Policy Research Group at Trinity College Dublin, a member of the European Network of Research in Supplementary Pensions, and is an affiliate researcher at the Pension Policy Center in Washington DC. She currently works as a researcher at both Maynooth University and at NUI Galway as a member of the European Commission funded FairTax project.