Some points from today's consultation seminar on auto-enrolment

Brendan Burgess

Brendan Burgess

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A very interesting session this morning. Usually at gigs like this, the Minister welcomes everyone and then heads off. But she actually stayed for almost all of the session and in particular the interaction with the attendees.


First, it was repeatedly stressed that this is a straw man. In other words, it's all up for discussion.

1) I raised my proposal that a person's pension account should be allowed to give the member a mortgage. I expressed my surprise that it was not mentioned at all in the document. The response was that they have considered it but if they put it in the document it would have been seen a proposal from them.

They knew that it would be brought up in the submissions.

They are open to a submission on it, but I got the impression that they are not enthusiastic.

2) They don't consider that the draw down of the pension will be taxed.

The current pensions system is EET i.e. tax exempt on contribution, tax exempt on growth, and taxed on drawdown.

They consider the proposed system as TEE. That people are contributing out of taxed income. I found that astonishing as they are getting a 25% tax credit via the 1: 3 matching.

3) They have no insight into the Minister for Finance's proposals on tax exemption on ordinary pensions in the coming budget.

4) These proposals are mainly targeted at about 400,000 people on low incomes i.e. between €20,000 and around €35,000.

5) Some in the industry felt that a provider could not provide what is required for just 0.5% of the fund. In the initial years, they would lose a lot of money on that. They would start to make money only in later years. And then their license would be up for review. Another provider might well sit out the current tender process with a view to taking it over when it's up and running.

6) The guys who drew this up have no understanding of risk and return. They kept saying that equities were high risk. But they admit that they are not investment experts.

They are concerned that if people invest in equities at the start and there is a market crash, people would lose faith in the system.

7) They have found it hard to get input from the self-employed on any systematic basis. So they would particularly welcome submissions on this.
 
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The format was interesting.

After a presentation on the straw man, they put up a series of questions and asked for a show of hands to get a sense of what people thought on each one.

For example:

Question 1
"It is proposed to auto enroll people on salaries over €20,000.
a) Is this about right?
b) Is it too low?
c) Is it too high?"

Question 2.
"It is proposed that employers match their employees' contributions up to 6%.
Is this about right?
Is it too low?
Is it too high?"

A woman in the audience said that this discriminated against women who were more likely to be in low paid and part-time jobs.

So I made the suggestion that employers should have to contribute 6% of their employees' salaries irrespective of their salary or their age.

An employee earning under €20,000 could opt in or out, but the employer's contribution would not be contingent on that.

Otherwise, employers would take on employees on part-time jobs and keep their earnings below €20,000 to avoid the 6%.

By requiring a contribution of 6% on all employees, there would be no artificial disincentives in the system.
 
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Another point which I found interesting was the question

1) Should there be 4 Pension fund providers and no public provider?
2) Should there be a public provider alongside the 4 private companies?
3)Should there be just a public provider and no private provider?

A guy from the industry spoke in favour of Option one saying that no government could be trusted. In time, this would be a huge fund, and a government would grab it. The public would simply not trust a public provider.

The response from the Department was that in their focus groups research, the public did not trust the private sector!

Brendan
 
Brendan Burgess said:
2) They don't consider that the draw down of the pension will be taxed.

The current pensions system is EET i.e. tax exempt on contribution, tax exempt on growth, and taxed on drawdown.

They consider the proposed system as TEE. That people are contributing out of taxed income. I found that astonishing as they are getting a 25% tax credit via the 1: 3 matching.
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I was at the afternoon session, Boss. It is hard to believe that this will be TEE. It’s not just the 1 for 3 top up. The employer’s contribution will effectively be EEE. This blows all existing arrangements up to the €75k max out of the water. At our session the assumption was that drawdown would be conventional i.e. tax free lump sum, annuity and/or ARF. If it is all tax free none of that is relevant. A really big gap in the whole thing, which they admit, is that they have effectively ignored the decumulation phase and yet they state that this phase needs to be sorted out from the beginning.

I don’t think you are right that employers will have to pay 6% on all employees, it is only on those that are in the scheme.
 
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An aside. The presentation shows that we are heading from our current dependency ratio of 1 pensioner to 4.9 of working age to 1 to 2.3. No amount of saving or funding can solve that. And if this is genuinely a TEE arrangement it will only rub salt in the workers wounds if a large section of pensioners are paying no tax.
 
Duke of Marmalade said:
I don’t think you are right that employers will have to pay 6% on all employees, it is only on those that are in the scheme.
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Hi Duke

The Straw-Man says that employers will pay the 6% only on those who are in the scheme.
So they won't have to pay it for
  • people earning less than €20,000
  • people aged 23
  • people who are auto-enrolled but opt out.
  • people who take a contributions break

My suggestion is that employers should pay the 6% on all employees irrespective of whether the employee is contributing or not.

Brendan
 
Duke of Marmalade said:
he presentation shows that we are heading from our current dependency ratio of 1 pensioner to 4.9 of working age to 1 to 2.3. N
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Yes, I was struck by that as well.

The only way to solve that is to force people to save for their own retirement and to contribute more now.

Brendan
 
I was at the IAPF Conference today and heard that the benefits emerging from the proposed Auto Enrollment scheme will be paid tax-free, so no Income Tax on the pension income. I was surprised at this, since the State contribution (2% after 6 years) is a form of tax relief (even if not marginal relief).
With a total contribution of 14% after 6 years (6%+6%+2%) this represents a decent level of DC input. If the resulting income was to be tax-free, that further enhances the pension value. I will be surprised if the Dept of Finance follow through on this. This potentially creates a divergence between the Auto Enrollment system and the current Occupational Pension system, which may lead to confusion.
It will be essential that the decumulation (post retirement) phase is clarified at the start, as otherwise it might encourage a higher level of opt-out.
 
Conan said:
I was at the IAPF Conference today and heard that the benefits emerging from the proposed Auto Enrollment scheme will be paid tax-free, so no Income Tax on the pension income. I was surprised at this, since the State contribution (2% after 6 years) is a form of tax relief (even if not marginal relief).
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Hi Conan

That was one of the points I mentioned in the first post:

Brendan Burgess said:
2) They don't consider that the draw down of the pension will be taxed.

The current pensions system is EET i.e. tax exempt on contribution, tax exempt on growth, and taxed on drawdown.

They consider the proposed system as TEE. That people are contributing out of taxed income. I found that astonishing as they are getting a 25% tax credit via the 1: 3 matching.
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This is wrong on so many levels. It won't survive the consultation.

Brendan
 
The UK NEST workplace pension public provider charges as follows:

1.8% contribution
0.3% AMC
 
Brendan Burgess said:
5) Some in the industry felt that a provider could not provide what is required for just 0.5% of the fund. In the initial years, they would lose a lot of money on that. They would start to make money only in later years. And then their license would be up for review. Another provider might well sit out the current tender process with a view to taking it over when it's up and running.
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My thoughts exactly when I read the consultation paper. The IT infrastructure costs would be huge for something like this and they'd get pennies back for years from low level contributions. You could see a lot of providers opting out of it.

Brendan Burgess said:
A woman in the audience said that this discriminated against women who were more likely to be in low paid and part-time jobs.
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The reason for those earning less than €20,000 are excluded is because the State pension provides an income of 64% of salary of someone on €20,000. They shouldn't need to fund for a private pension. And it is unlikely they have the spare cash to do so (unless they are doing a part time job while their other half earns the big bucks). But if they want to get the benefit of employer and State contributions, they should have to contribute the same % as everyone else.


I think overall, it appears that they really haven't thought this through very much before issuing the paper. To have a different tax regime for auto enrollment is madness. People will get confused and stay away.


Steven
www.bluewaterfp.ie
 
The reason for those earning less than €20,000 are excluded is because the State pension provides an income of 64% of salary of someone on €20,000.

Steve
The state contributary pension is not defined benefit ,

with the proposed changes to the contributions having to be paid for 40 to get full pension,

Are you suggesting making it defined benefit for every year someone earns less than 20000 euro bench marking @ 33% of average industrial wages ,
Most People earning under 20000 cannot afford to contribute
Brendan suggestion of making Employer pay 6% looks like the way to go,
 
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The tax treatment is really weird. I won't dismiss it out of hand but the current system is that all pensions including the state pension are taxable. Under this regime AE pensions are non taxable and in effect all AE pension pots are a tax free lump sum. So all AE folk are faced with a big tax free lump sum, and nothing else, which they have to manage in retirement. Given the target audience is this reasonable? They really need to think out the decumulation phase.
 
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