Auto-enrolment could deliver retirement income of €15,000 a year

[TheJackal]

Auto-enrolment could deliver retirement income of €15,000 a year

Willis Towers Watson crunches pension numbers but advises that most workers will benefit more in a company scheme if one is available

www.irishtimes.com

Auto-enrolment will substantially improve the retirement income of workers, according to an assessment by benefits consultants Willis Towers Watson.

A young worker on the average industrial wage signing up to the mandatory workplace pension when it comes into force next year could expect to retire on income that amounts to 60 per cent of what they were earning in work, Brian Mulcair, head of corporate consulting at Willis Towers Watson says.

But if their employer has an existing occupational pension scheme that they have not yet signed up for, they would do even better opting for that — with a likely pension equivalent to 68 per cent of earnings.

The figures in “current day” terms allow comparison between a projected pension and current earnings. The Willis Towers Watson team worked off the basis of Central Statistics Office data that show average earnings in the second quarter of this year were €50,084, which the analysis rounded down to €50,000.

They also include the State pension — now €14,420 — in their earnings calculations.

As of now, any of the roughly 800,000 workers between the ages of 23 and 60 with earnings above €20,000 who have no occupational pension could expect to retire on that State pension. It amounts to just under 29 per cent of average earnings.

The analysis is based on someone contributing 1.5 per cent of their income from the time auto-enrolment comes into force, rising to 3 per cent from the start of year four, 4.5 per cent from the start of year seven and 6 per cent from year 10.

On that basis, a 23-year-old on national average earnings could expect income from auto-enrolment of €15,200 a year from the age of 66. Alongside the State pension, that would see them with retirement income of €29,620 — or 59 per cent of national average earnings.

Those benefits are less for people who are older when auto-enrolment kicks in. The €15,200 figure drops to €9,200 a year for someone aged 36 when auto-enrolment starts and to €5,200 if they are 46, bringing the replacement income in retirement down to a more modest 39 per cent.

Older workers will fare worst as there is less time for their auto-enrolment pension pot to grow and they will not even have hit the 6 per cent contribution rate when they retire. A worker aged 56 when the system kicks in will get a projected annual income of just €1,800. Added to the State pension, their retirement income will be just 32 per cent of average national earnings.

Those same 56-year-olds would likely secure an additional €1,100 a year in income by joining an existing occupational pension scheme if their employer has one, said Willis Towers Watson. That is based on them making the same contributions as under auto-enrolment with the employer contributing the average among such plans in the State — 7 per cent.

If single or widowed, they will benefit from greater tax relief under an occupational scheme at average national earnings.

Auto-enrolment is due to come into force from the start of next year. While that now seems overly ambitious, Mr Mulcair says employers should plan on the basis that it will go live sometime during next year, not least because a lot of work will be required by businesses to prepare for it.

 

[Towger]

Wait until private pension is taken into account for calculating your State Pension Contributory amount. They started doing this in Australia a few years ago.

 

[Protocol]

The State Pension in AUS is means-tested social assistance.

The main State Pension here is based on social insurance.

 

[Greenleaf]

Wait until private pension is taken into account for calculating your State Pension Contributory amount. They started doing this in Australia a few years ago.

I think the state pension will be means tested within ten years. Why else would auto enrolment be implemented.

 

[Sarenco]

I think the state pension will be means tested within ten years.

I think that is highly unlikely but I guess time will tell.

 

[Protocol]

There are two main State Pensions:

A = social insurance = contributory SP
B = social assistance = means-tested = non-con SP


How can A become B?

How can pension scheme A be means-tested?

It's either social insurance, or it's not.


If you are saying that A will be abolished, over the long run, okay fair enough, but then the PRSI cont rate will also have to be cut, because most of PRSI is used to finance the pension A.

 

[Dr Strangelove]

Arguing with people who think the contributory state pension will be abolished is like arguing with a Flat Earther.

 

[Towger]

Arguing with people who think the contributory state pension will be abolished is like arguing with a Flat Earther.

Not abolished, but means tested and paid out on a sliding scale. Certainly not as 'generous' as now.

 

[Dr Strangelove]

but means tested

So like the non-contributory state pension? ‍

 

[faketales]

Arguing with people who think the contributory state pension will be abolished is like arguing with a Flat Earther.

Its clear that the demographic will not look after themselves.

Something will have to happen that will be somewhere in between current situation and no state pension for anyone.

 

[Dr Strangelove]

Something will have to happen that will be somewhere in between current situation and no state pension for anyone.

I fully agree. I predict that both contributory and non-contributory will decline in inflation-adjusted terms.

Neither will be abolished though.