In just over three weeks’ time, the first opt-out window for pension auto-enrolment (AE) will open, meaning that those who signed up to the scheme in January can opt out in July and August if they so wish.
As this opt-out window approaches, a key question for the near 770,000 workers who have been signed up to AE so far is: can they rely on a State-backed initiative to deliver for them in retirement? Given the delays with the launch of AE and some of the teething problems encountered with the scheme, perhaps not.
AE, known as My Future Fund, represents the biggest reform to the Irish pension system in decades.
For many people, AE might be their only opportunity to save into a pension scheme and to build up a pension pot for retirement. A report published prior to the roll-out of AE found more than half of the workers who were not saving for a pension were in that position because membership of a company pension scheme was not an option for them.
READ MORE
That same report also found that a third of workers have no pension coverage outside the State pension. It is for these people that AE is likely to prove most valuable.
However, AE is not a panacea for all our retirement ills and it is not a one-size-fits-all solution. For many of the workers who have been enrolled to AE, this scheme will be a good fit. But for others, particularly those with different income levels, career paths or retirement goals, AE could fall short of delivering the retirement they’re expecting.
It is crucial that workers signed up to AE get advice to determine whether AE is truly the right vehicle for their retirement needs, or whether the roll-out is just the prompt they need to take action around their financial plans for the future.
AE was originally planned for 2023 – so the Government was three years late launching the scheme. The delays in the launch of the scheme made many sceptical about AE ever getting off the ground – and this in turn may have contributed to the situation that unfolded last November, whereby many employers and employees were caught off guard by a November 30th deadline, which marked the cut-off date for employers to determine who was eligible for AE.
[ Few workers think pension auto-enrolment scheme will see them through retirementOpens in new window ]
Many employers were not prepared, and this led to many businesses, particularly SMEs, scrambling to understand what AE meant and to meet the deadline. Had the Government better engaged and communicated with employers, this last-minute scramble could have been avoided.
November also saw the Department of Social Protection issue a warning that some employers were trying to avoid AE by forcing employees to join less favourable pension schemes. The department in turn made a commitment to set out in regulation minimum standards on employer contributions into existing pension schemes and other matters to ensure employees exempt from AE were not being shortchanged.
While the department lived up to this commitment, the last-minute way it did so – whereby it introduced the regulatory change to pension contribution requirements on Christmas Eve – left much to be desired. The new minimum contribution standards altered the compliance position for thousands of employers who believed they were already meeting the required standards.
The timing forced business owners into rushed calculations over a holiday period, ahead of a fixed January deadline. While the department’s rationale – that is, to close a loophole where “token” pension arrangements were used to avoid AE – was laudable, the manner in which it did so disrupted businesses over the Christmas holidays and led to alarm in business and employer circles.
Another reason why people need to be careful about relying on a State-backed initiative to provide for them financially is its track record in this regard. One recent case in point is the State’s management of the Future Ireland Fund, which was set up to harness budget surpluses for long-term investment in a way that would support State expenditure in the future.
[ Should I opt out of auto-enrolment and stick with my personal PRSA pension?Opens in new window ]
The logic was sound: invest today’s excess funds for tomorrow’s needs. In practice, a significant portion of these surpluses remained uninvested for long stretches, even as markets rallied. The result was not a regulatory breach or accounting quirk but a material opportunity cost – estimated in the hundreds of millions – for taxpayers who, in effect, funded capital that produced no return.
So, while AE is off the ground and the heavy lifting on it appears to be done, it’s important that the workers signed up to the scheme don’t rest on their laurels. Instead, the priority of these workers should now be to get the right advice so they can carefully weigh up the scheme and decide if it’s going to form part of their long-term plans or not, or indeed, if they need to supplement AE with other pensions savings. The investment performance of contributions to My Future Fund will also need to be monitored as, ultimately, this will have a big bearing on how well AE will deliver for people come retirement.
Workers signed up to AE can opt out of the scheme if they wish as long as they do so within the opt-out window, which is between six months and eight months from the date they were automatically enrolled. The first of these opt-out windows, which will be for those who signed up in January, falls in July and August. Any decision to opt out should not be taken lightly, particularly if AE is a worker’s only opportunity to join a pension scheme.
While State pensions and AE help address gaps in pension coverage and put in place minimum standards for retirement savings, workers need to be wary of relying solely on the State to provide for them in retirement.
It’s up to workers themselves to take steps, and to get the right advice, to ensure their retirement income will be up to scratch.
Keith Butler is chief executive of Ask Acorn
