Let's forget about the SSIA style top-up

D

Duke of Marmalade

Registered User
Messages
4,695
Let's forget the Peoples Angelus.
Only joking.
Let's forget this 1 for 3 top-up figary.
I'm not joking even though it has almost achieved sacred cow status.

The internal paper (attached) which Woods and Fagan obtained under FOI delivered a devastating, in effect show-stopping, critique of having two parallel systems of State incentive with one 33% better than the other for standard rate taxpayers and the other 100% better than the first for higher rate taxpayers.
At the very same time the DSP was publishing a summary of the strawman consultations. In this summary they presented that on the one hand the target population and consumer groups greatly favoured this DSP brainchild whilst professional and industry sources warned of the problems with two different systems running in parallel. Was there a hint of dog whistle here, that commercial self interests were raining on the parade?
Then 3 years later the JOC, god luv their cotton socks, tried to reconcile the two views by suggesting that everyone should get the best of both incentive systems irrespective of whether they were AE or conventional and explaining how this could be implemented. Certainly resolved the issues but did they miss that this "best of both worlds" solution would inevitably involve all standard tax rate members of existing schemes getting a 33% top up to their tax relief, possibly following a feeding frenzy for advisors whilst the anomaly remained unresolved?
Whatever way you look at this the DSP brainchild would lead to a massive unplanned extra burden on the Exchequer and, if not addressed upfront, an unnecessary bonanza for the advice industry.
And then at the aforementioned JOC the ESRI simply argued that this novel different approach was entirely unnecessary, there was mandatory enrolment for crissake - forget about it. What? scrap the Peoples Angelus:eek:

There is a rubric in poker that says "you should know when to fold 'em". Maybe the inordinate delay in launching AE will have the blessing that we can recognise the busted flush that the DSP's brainchild is and pretend it never happened.
 

Attachments

  • FOI - Financial incentives and AE_Revised.docx
    160 KB · Views: 24
Last edited:
ClubMan said:
I'm struggling to find the needle of your point in the haystack of words that you posted...
Click to expand...
Apologies my dear @ClubMan I have assumed a fair bit of background knowledge in the OP.
Basically this SSIA type approach (1 for 3 match) to the AE State incentive was the great reveal of the AE strawman roll-out in 2018 (yes that long ago). The "people" loved it - those 40% tax-payer fat cats were getting a totally unfair boost in the conventional tax relief on contributions approach. The Minister, when speaking in the Dáil or Seanad never missed an opportunity to drop the magic SSIA word. It had become the sacred cow, the untouchable, the sine qua non. Mercer in their submission to the strawman consultation expressed the resigned attitude of those who knew better very well -
If the Government is absolutely set on a top-up system replacing tax relief, the top up should be set at a level that matches the value of the higher rate tax relief.
The DSP (at least some elements of) saw it in social revolutionary terms. This is what their rep said at the Joint Oireachtas Committee set up to consider the draft AE legislation.
As I said at the beginning, and maybe the Deputy [O'Cuív] missed this, you either buy the premise that people should be treated equally in terms of incentivisation and that every man’s euro is as valuable as another’s. If you do not, then you will definitely be in the tax relief camp. If you do, you cannot be in the tax relief camp. That is what it boils down to.

But clearly the DSP was not completely in agreement with what their rep was saying at JOC. The internal paper attached to OP (Section 6 the most stark 3 pages) gave a devastating critique of the implications of having two such distinctly different State incentive systems running in parallel.
There were overwhelming calls from the profession and industry submissions to the strawman consultation along the Mercer lines - if you really must have this SSIA approach make sure that both systems are brought into line in terms of the quantum of incentive - otherwise mayhem will ensue as advisers milk the arbitrage between the two systems.

So we are faced with a stark choice, but thankfully there is still time to make the right choice.
EITHER:
Humour whichever wing of the DSP is ideologically wedded to this completely novel (in international terms) SSIA approach but ensure that the two systems are brought into line on the quantum of State incentive. This, by definition, will lead to a very significant additional unplanned burden on the public finances. And just to stress my earlier point. Even if this issue is not addressed upfront, market forces will implement a convergence of the two systems by what would be a chaotic exploitation of the "arbitrage" opportunities. "Arbitrage" is how the DSP paper describes the situation. (This is the current track that the AE train is on.)
OR
Do the bleeding obvious as Basil Fawlty might say or as the ESRI did say at JOC. Forget about this populist gimmick and simply let tax relief apply as is the case other pension arrangements and with similar international AE systems.
 
Last edited:
Dr Strangelove said:
But @Duke of Marmalade you’d really improve your posts by running them through the free versions of Perplexity or Chat GPT.
Click to expand...
Sorry @Dr Strangelove, English was never my strong point (I had to look up "solecism").
Let me put it in more simple terms.
We are on a train and it is heading for a crash.
If the DOF acts upfront and equalises the State incentives (between the existing system and the new kid on the block) from the beginning it will be a sudden crash and we just live with the fall out. JOC showed how to achieve this in their report.
Much more likely, it will be a slow and painful crash as the market seeks to do what the DOF should have done from the beginning; close the arbitrage. That's what markets do at nice pickings for themselves.
This is a crash which has no positive redeeming feature whatsoever except that it spares the narcissistic sensibilities of some senior DSP personnel.
 
Last edited:
Having two ways of doing the same thing is inefficient, and confusing for all involved. On top of that, it's the punter who ends up paying for the additional complexity. I echo your thoughts that the right approach to auto-enrolment is 'auto-enrolment'.

Having said that, the issue now is, having opened pandora's box, can they really close it?

It looks to me that the DSP attempted to solve a whole host of other issues connected to pensions all at once with AE, including how to give people who pay no tax a benefit. If I recall you had mentioned the idea of a negative tax credit, or words to that effect, in previous posts on this topic. Can you refresh my memory on how that would work?
 
nest egg said:
Having said that, the issue now is, having opened pandora's box, can they really close it?
Click to expand...
This is the point that I am making. It almost seems unthinkable to abandon the SSIA approach, easier to get the toothpaste back in the tube. But the only objection is the immense amount of egg that will land on some faces. Besides that it is simplicity itself.
nest egg said:
including how to give people who pay no tax a benefit.
Click to expand...
Yes, that is a positive which a complete rejection of the matching approach would negate. But with a 20k entry point let's not overplay that one, besides surely there are more surgical ways to meet that requirement, without endangering the whole body.
 
Last edited:
Of course one way round the issues of having two systems would be to make AE compulsory. Come to think of it, if it were compulsory the case for a level incentive rather than one which increases for higher earners would be compelling. This is where the designers of this made their mistake, they saw it in a completely stand alone context.
(This is just a thought experiment as of course "compulsory" would open up a completely different can of worms regarding exempting existing conventional schemes.)
 
Last edited:
At the rate/way things are going the I would not be surprised if AE is cancelled/kicked down the road. The government is getting worried.

The government think that SSIA is a easy way to explain AE to the punter. Yet the bulk of the AE cohort are too young to know what it is or never had enough money invest in one.

The 'equal playing field' is AE Stage 2. They will look at existing pension payers and if their pension contributions are less than the current AE Pension (+ topup etc) they will be also AEed on a blended contribution rate. Equality for all.

Long term our generous State Pension is not sustainable. So while AE would/will cost the exchequer now, it is offsetting future costs.
 
Last edited:
Dr Strangelove said:
Traditionally pensions policy has been set by DoF and implemented by Revenue.
Click to expand...
Good point. There is strong evidence of a silo type breakdown here. The DSP rep even at times at JOC answers that something is outside his remit and up to the DOF. Fintan O'Toole had written in general about silo mentality in the last coalitions administration.
 
What about this quote from the Executive Summary of the FOI report attached to OP?
"As a further illustration, under the AE matching contribution approach, a person would be required to contribute €75, matched by a State contribution of €25, to accumulate €100 in to their pension pot. This amount would be the same irrespective of whether they were a higher rate or a standard rate taxpayer. However, under the AE matching contribution approach, contributions are made after income tax, making retirement savings accounts similar to regular savings accounts, which are not subject to withdrawal taxes."
Unbelievable! They really did mean a second coming of the SSIA, with benefits outside the tax net. That's why they didn't even mention taxation of benefits in the strawman, they took it as read that identifying the initiative with the SSIA meant tax free benefits. The FOI paper goes on to list two of the downsides of the proposal, which result from this SSIA approach, as follows:
  • Particular complexity in relation to how the two systems may operate at drawdown;
  • Compromising the State’s income smoothing objective due to a loss of revenue in the future in the face of demographic projections
In the consultations, non practitioners presumably assumed there would be no tax on the benefits. Practitioners presumably assumed the opposite though Mercer made the following comment:
– we assume here retention of taxation as applied to benefits [as] it would be unwise to move to a different system”

In paraphrase of Monty Python, but what else did they do wrong?
Well the strawman envisaged that the 95% who would not express an investment choice would be but on a "carousel" (their word) to pick one of the four providers to apply to them.

They fixed that one, what else?
Yeah, but shows they are completely out of their depth.
They said the fees would be capped at 0.5% but have quietly dropped that impossible commitment with rumours they are considering flat charges as well - we haven't a clue and the fuse has already been lit?

Yes, but what else?
They didn't follow the NEST example of having quasi integration (£6k is exempt from AE over there), with lower paid employees now targeted to have in excess of 100% replacement.

Yes, but what else?
Enrolment is compulsory from day one. This is at variance with most conventional schemes which have a probation period. In any case we have no idea at all how schemes are going to be exempted from their AE responsibilities.

Yes, but what else?
Well the default strategy is the so called "lifestyling" approach. Ok, ok, not the only ones at that. But what about this bizarre variation? 15 years from retirement there is a 100% move from High risk to Medium risk and 5 years from retirement 100% move from Medium risk to Low risk. Hardly a glide path, more of a twin crash landing, though why land at all, three parts the way through your journey? (but that's another OP's work).

A chimpanzee in front of a laptop with ChatGPT would have done a better job of this!
 
Last edited:
You must log in or register to reply here.
Back
Top