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Pensions Roadmap

  • Ireland
  • General

27-03-2018

Introduction

The Government recently published a very detailed paper setting out a Roadmap for Pensions Reform over the next five years. It contains details of a series of wide ranging reform proposals which, if fully implemented, will have far-reaching implications for the Irish pensions landscape as we know it today.

We have seen a number of previous Governments publish reform proposals for the pensions sector. However, very few of the reforms floated in those previous papers became a reality. We also had a paper from the OECD in 2014 which analysed the Irish pension system in detail and made a variety of recommendations as to how the current system should be reformed.

The Roadmap builds on those previous papers and sets out a timetable for implementing many of the reforms proposed. It is divided into six strands and in this article we summarise some of the key reforms proposed and comment on the legal and other implications which flow from them.

Strand 1 -  Reform of the State Pension

The reform proposals on State pension are focused on adequacy, sustainability and equity objectives.

Proposals to target 34% of average earnings for contributory State pension, and link future increases to CPI and wage levels, are to issue in Q3 2018. This is likely to require changes to the PRSI/USC system and the Government is proposing to introduce annual actuarial reviews to ensure there is greater certainty regarding the affordability of the State pension and future increases to maintain that 34% benchmark.

However, there are no specific steps articulated as to how the long-term affordability of the State pension is to be achieved.

The quantum of State pension payable to an individual will be calculated on the basis of the number of contributions paid over their working life. This “Total Contributions” approach is to replace the existing yearly average system. Credits will be available for those who take time out to perform caring duties. Unemployed will get credits where they have paid a minimum number of contributions. Full State pension will be payable to those who have a full record of 40 years’ contributions. The new regime is to be in place by Q3 2020.

Future changes to State pension age will be linked to life expectancy. The State pension age may rise to 69 in 2035/6, although this is dependent on the outcome of an actuarial assessment to be carried out in 2022 and every five years thereafter.

In addressing the issue of equity, the Roadmap refers to existing pensioners’ “need for a State pension” and their record of contributions made during their working lives.  The Roadmap does not discuss further the “need” aspect.  However, it begs the question as to whether means testing might be brought in for those who qualify for State pension based on a low level of contributions, whilst meeting the current “yearly average” system.

Strand 2 – Building Retirement Readiness

New automatic enrolment saving system

The Government has made some fairly definitive commitments within the Roadmap relating to the introduction of an auto enrolment retirement saving system. This is a proposal that was mooted by previous Governments but no specific timetables were previously given relating to its introduction.

A public consultation on the design of this system is scheduled to take place in Q2 2018.  Although the proposed design is still being finalised, the likely design parameters are outlined in the Roadmap as follows:

• all employees in the private sector over certain age and income thresholds but without  pre-existing private pension provision are to be auto enrolled;

• there will be an opt out facility after a certain defined period for those auto enrolled;

• there will also be an opt in facility for those who are not subject to auto enrolment, such as the self-employed or workers with pre-existing private pension provision;

• on the contribution structure, there is a reference to starting from a modest base with automatic escalation of contributions (similar to what has happened in the UK); and

• consideration is being given to an employee/employer matching contribution structure up to 6% of gross salary with a State contribution representing one third of employee contributions.

Prior to finalising the proposed design, the Government has committed to commissioning an economic impact assessment so that the macro economic effects of introducing this system can be assessed and understood.  That is scheduled to be completed by the end of this year.  The aim then would be to finalise the design of the system by Q1 2019 and move to publish legislation by Q1 2020 with the first enrolments taking place by 2022. 

The firm commitments relating to the design and introduction of this system are to be welcomed.
  
It is interesting to see that the Government is considering the introduction of an SSIA-style State contribution rather than pension contributions attracting tax relief. This would seem to mean that workers would be contributing from their after tax income and pay tax on the benefits they draw down on retirement.  These are points that will need to be clarified as part of the consultation process. 

Overall though, it is good to finally see the Government’s firm commitment to introducing an auto enrolment system to begin to address the longstanding and widely acknowledged gap in pension coverage.  However, the proposed design will not address the adequacy issue.  Therefore, we would hope that auto enrolment does not have the unintended consequence of seeing employers reduce contribution rates to existing schemes, thereby worsening the adequacy problem in the defined contribution sector.


Strand 3 – Improving Governance and Regulation

In their own words, the Government is determined “to provide a more coherent and transparent environment for private pension provision with the goal of delivering a system that is trustworthy, transparent and well managed”. The Roadmap sets forth a number of proposals in this context.

Improved Regulation

The Government states that it will develop and publish legislation by the end of Q3 2018 that will transpose the IORP II Directive into Irish law with effect from 2019. The extent to which such implementing legislation will utilise the available opt outs and derogations in the Directive, for instance for smaller schemes, is not commented upon. Nevertheless, it would appear from the overall tone of the Roadmap that any such derogations are likely to be  limited.

New Powers for the Pensions Authority (the “Authority”)

The Government believes that the Authority should be able “to take a prospective ‘risk based’ approach to actively oversee scheme compliance with regulatory requirements and to enforce minimum standards with regard to the ‘fitness and probity’/governance of schemes, including the make-up of boards of trustees and the qualifications of trustees themselves.”

A number of additional regulatory powers and requirements are therefore proposed to be introduced:

• all new and existing schemes must gain “authorised status” from the Authority in order to carry out activities and to obtain tax relief;

• a fitness and probity benchmark is proposed for trustees and the Authority will be granted power to remove a trustee who does not meet the new benchmarks;

• new governance codes and standards will be published by the Authority relating to remuneration, systems of internal control, key function holders, outsourcing and depositary arrangements, conflicts of interest, risk management and internal audit policies and procedures.

The Department of Employment Affairs and Social Protection will also be charged with “identifying further powers/measures to enable the Pensions Authority to take pre-emptive action to address shortcomings identified on a prospective, prudential and risk based basis”.
 
The Government has laid out a plan for the Authority to assume a much more proactive role within the Irish pensions industry. It will be interesting to see if this is what develops in practice but the new scheme authorisation process has the potential to have far reaching consequences for the existing pensions scheme landscape.

A push to professionalise trusteeship

The Roadmap contains a number of proposals which will increase significantly the regulatory requirements associated with being a pension trustee:

• new “professional” standards are to be created to ensure that trustees possess the appropriate knowledge and experience, and will include continuous professional development requirements;

• trustee boards must consist of at least two trustees, where at least one has a mandatory minimum trustee qualification and another trustee would have at least two years’ trusteeship experience;

• corporate trustees, when acting as a sole trustee, will be required to have a  minimum of two directors, one with a mandatory trustee qualification and another who meets the prescribed criteria for trustee experience.

The latter proposal in particular could have significant implications for those sole professional trustees who operate their business through a limited company. If this measure is implemented, such persons may either have to merge with other professional corporate trustees or alternatively act on trustee boards in an individual capacity.
 
The Government is clearly focused upon concentrating the trusteeship of occupational pension schemes within a pool of experienced people who are either professional trustees by profession or are dedicated long standing lay trustees who are prepared to upskill in order to continue as trustees. These proposals dovetail to some extent with another of the Government’s strategic aims concerning the consolidation of the overall number of Irish pension arrangements.

Reducing the number of pension arrangements

The Government believes that reducing the very large number of pension arrangements will improve overall standards of governance and reduce overall pension costs and risk. The Roadmap states that supporting this rationalisation process will include “developing the environment for multi-employer pension structures for employees of unrelated employers”, ie master trusts.
 
In addition, the Roadmap is vague in terms of how this reduction in the number of pension schemes is to be achieved or indeed when it is to be achieved by.  The scheme authorisation process may become relevant in this context.

The difficulty here is that the Government quotes statistics that seem to include a large number of death benefit only schemes, frozen schemes and single member schemes that are not occupational pension schemes in any real sense.  So the Government may be trying to address a problem that doesn’t exist to the extent they think it does.

Harmonising tax rules/improving access to Approved Retirement Funds (“ARFs”)

The Interdepartmental Pensions Reform and Taxation Group (the “Group”) have been tasked with identifying and progressing measures to improve the harmonisation of rules in the treatment of different retirement arrangements, including taxation treatment.
 
Interestingly, the Group is also tasked with reviewing the “cost of funded supplementary pensions to the Exchequer” to assist inform decisions relating to financial incentives for retirement savings and to underpin the development of auto enrolment.

The cost of pensions tax relief was an issue that came on the agenda following the financial crisis but the then Government shied away from any radical reforms to the existing tax incentives for pension saving. However, it seems that auto enrolment has brought this issue back onto the Department of Finance’s agenda.

It would be disappointing if the goal of improving pension coverage had the knock-on effect of diminishing pension adequacy. If existing tax incentives were reformed in any radical way this is what may very well happen. Employees may simply choose not to put after tax income into pension saving if they are also going to be taxed at their marginal rates on any pension they drawdown when they retire.

The Group will also undertake a broad review of the utilisation of the ARF option and consider whether regulatory oversight in this area is fit for purpose. This will include a review of ARF criteria set out in tax legislation and an assessment of the potential to facilitate group ARF products or in-scheme drawdown.

This review of the ARF area is to be welcomed as the current system poses many challenges for both trustees and scheme members alike. 
 
Most members will have little experience of the retail investment sector and, while trustees are keen to support members, they cannot make decisions for them when it comes to selecting an ARF provider.


Strand 4 – Supporting the Operation of Defined Benefit (“DB”) Schemes

The Government has emphasised its commitment to ensuring that the regulatory regime applicable to DB schemes provides an appropriate balance between the need to protect scheme members and the need to support the sustainability of existing DB schemes.

With this objective in mind, the Roadmap sets out a number of specific actions.

Social Welfare, Pensions and Civil Registration Bill, 2017 (the “Bill”)

The Roadmap states that the Government intends to provide for “improved levels of protection for scheme members and beneficiaries”, although it is unclear what form such protections might ultimately take.

The Government’s initial focus is to progress the Bill which is currently still at committee stage.  However, it remains to be seen whether the employer debt provisions and the introduction of a mandatory notice period for employers seeking to cease contributions to a DB scheme will be included in the final form of the Bill. These measures had been dropped from the published form of the Bill despite being included in the General Scheme of the Bill published last May.

The Roadmap’s stated timeline of Q2 2018 for advancing the Bill is to be welcomed.  The sooner the continuing uncertainty regarding the employer debt issue is brought to an end the better as it is causing unnecessary strain on trustee-employer relations across many DB schemes.

Additional Regulatory Measures

The Government also intends to consider the introduction of regulatory measures designed to improve the effective oversight and transparency in the financial status of DB schemes.

Although the nature of any such measures is yet to be determined, the Roadmap sets out a number of potential options that could be considered:

• requiring more frequent provision of information to the Authority to allow for closer monitoring of schemes’ funding positions;
• requiring employers to provide information more regularly to scheme trustees to allow them to plan for the future viability of their scheme;
• providing for the early notification to the Authority of any scheme difficulties or changes involving the scheme sponsor that will affect the scheme; and
• providing the Authority with increased powers to direct schemes and sponsoring employers to develop proposals to allow schemes in difficulty to survive.

Funding Standard Reform

Finally, the Government has also committed to launching a consultation with sectoral representatives to identify any appropriate reform options for the funding standard.  This is intended to build on the review already conducted by the Authority in early 2017 with the aim being to identify potential alternative approaches which might provide a better ability to accommodate scheme specific considerations without compromising the core role of ensuring adequate advance funding and regulatory oversight.

Although the Roadmap does not provide any precise insight into the Government’s thinking in terms of the future of the funding standard, the overall commitment to continuing to work with relevant stakeholders in relation to reform should be welcomed.  We will have to wait to see if the stated timeline of Q4 2018 for the launch of the consultation will be delivered upon.

Strand 5 - Public Service Pension Reform

The Roadmap summarises previous public service reforms which arose during the last 25 years, such as integrating from 1995 public service pensions with the contributory State pension (with post-1995 entrants paying full rates of PRSI), and the introduction in 2013 of a career average DB scheme (the new scheme) for new entrants to the public sector from 2013. Broadly, changes are proposed to enable public service workers work longer should they wish to, up to age 70.

The minimum retirement age for those in the new scheme is linked to State pension age. A compulsory retirement age of 70 also applies for those in the new scheme.

Those who joined the sector before 2004 have a retirement age of 65/66. Depending on the age of the individual, they may reach retirement age before becoming entitled to State pension. Changes are proposed to introduce age 70 as a compulsory retirement age for those recruited before 1 April 2004. Also, those with a retirement age of 65 are currently permitted to be rehired from retirement age until the State pension age.

A Pension Related Deduction was introduced as part of the Financial Emergency legislation in 2009. It is proposed that this is to be converted into a permanent Additional Superannuation Deduction, as a measure to improve the sustainability of public sector pensions.

The Roadmap recognises the important role public servants play, whilst noting the need that their pay reflect the State’s ability to finance pay and pensions, the arrangements that apply to private sector workers and the competitive external environment faced by Ireland.

The Roadmap notes that in 2014 the OECD reported  that, by international comparison, Ireland has undertaken significant reforms in public service pensions and belongs to the group of more advanced countries in this area.

The OECD report also suggested that more could be done to ensure equity between public and private sector workers. It noted that the cost savings effect of the new scheme will take a long time to materialise.  It also discussed extending any auto enrolment to new public sector entrants instead of the new scheme, which is a DB arrangement.

The Roadmap does not take account of these aspects of the equity issue in the OECD’s report.  However, it does look to preserve on a more permanent basis the higher employee contribution rates introduced across the public sector following the financial crisis.  This goes some way to recognising the high cost of DB pension provision compared to the defined contribution model that has started to dominate the private sector.
 

Strand 6 – Supporting Fuller Working Lives

One of the Government’s stated ambitions in reforming the pension system is to reflect the reality that many people wish to continue working to an older age.

In order to meet this ambition, the Government intends to introduce changes aimed at providing greater flexibility for people wishing to work beyond their traditional ‘normal’ retirement age.  The Roadmap sets out a number of potential changes which the Government intends to bring about during the course of the next two years.

Deferral of State Pension

The Government intends to modernise the State pension by developing a scheme to allow individuals reaching State pension age to defer the drawdown of their contributory pension in return for an actuarial increase to their pension once drawn down.

The Roadmap does not contain any specifics in terms of how such a system might be structured.  An options paper, based on the recent Actuarial Review of the Social Insurance Fund, is due to be prepared by Q4 2018 setting out potential approaches.  The intention is that legislation would then be drafted and brought through the Oireachtas next year to implement any necessary changes.

This deferral option is something that is already available to people approaching retirement in the UK where the rate of an individual’s pension can be increased by up to 5.8% per annum for each year of deferral.  However, it appears we will have to wait until the publication of the options paper at the end of the year before we have an idea of how the Government might structure such a scheme in Ireland.

Mandatory Retirement Ages

The Government also intends to keep employment practices in the context of mandatory retirement ages under close review in the short term to ensure that the Roadmap’s proposals achieve their intended aim of supporting people working into their later years.  Should it appear that this objective is not being met, the Roadmap states that the Government will, by the end of 2018, consider “the merits of restricting the capacity to use mandatory retirement provisions relative to the prevailing State pension age”.

This seems to indicate that rather than looking to abolish the use of mandatory retirement ages entirely, as has been suggested by a number of politicians in recent years, the Government would lean more toward linking retirement ages to State pension age.  This will be an interesting item to track as the overall reform project progresses, although it may be some time before we see any concrete proposals aimed at addressing this issue.

In the meantime, the Irish Human Rights and Equality Commission will be tasked with preparing guidance materials by Q2 2018 for employers in relation to the use of fixed-term contracts beyond normal retirement age.  The Roadmap commits to convening an Interdepartmental Group chaired by the Department of Social Affairs and Social Protection during Q4 2018 – Q1 2019 to review mandatory retirement age practices.

Other Actions

In addition to the actions outlined above, the Roadmap also sets out a number of other actions which the Government intend to take in order to encourage and support people who wish to continue working past normal retirement age:

• consider allowing individuals without a full history of social insurance contributions to increase their retirement provisions through PRSI contributions beyond State pension age and up to their actual date of retirement;

• review the tax treatment of different pension arrangements with a view to providing a more standardised approach to drawdown rules so as to eliminate some of the anomalies that have arisen in the treatment of the various pension arrangements currently available; and

• launch a communications campaign by Q4 of 2018 aimed at increasing awareness amongst both employers and employees of the various financial incentives available to those who continue working in their later years.

Overall, these intended actions should be viewed as broadly positive developments as it is clear that many employees are unhappy with the “cliff-edge” transition to retirement in most workplaces.

If the various reforms are introduced, it will be interesting to see if they have the desired effect of facilitating people who wish to work beyond normal retirement age and encouraging employers to develop more flexible work practices for older workers.

Conclusion

The Roadmap provides us with a useful insight into the Government’s long-term strategy regarding the reform of the pensions sector. It is good to see firm commitments being made and that proposals, such as auto-enrolment, are now being actively considered and pursued.
 
It is also encouraging to see the Taoiseach putting his name to the Roadmap.  Hopefully, this indicates the level of seriousness with which the Government is approaching pension reform. However, the Roadmap itself is in many ways only a signpost regarding the various reforms proposed.  Detailed proposals will need to be formulated and published before stakeholders can fully gauge the potential implications of these reforms for the Irish pensions industry.   

 

 


 

For more information contact

Peter Fahy, Partner
Ian Devlin, Partner
Fiona Thornton, Consultant

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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