With more than a year passed since the publication of the Roadmap for Pensions Reform 2018-2023, this article provides readers with an update on progress that has been made since then. This is particularly because the introduction of automatic pension enrolment of employees and the Total Contributions Approach to determining state provided benefit benefits will affect many.
According to the most recent CSO data from 2018, 47% of the working population have supplementary pensions, with an estimated rate of just 35% when considering the private sector alone. The Pensions Roadmap was created to address these low rates and to ensure that future retirees do not experience unwanted reductions in living standards upon reaching retirement. It outlines specific measures under six strands to modernise Ireland’s pension system.
This article takes a look at the current standing of the Pensions Roadmap and other recent Government commentary relating to pensions in Ireland.
As part of the proposed pension reforms, much discussion has been given to the implementation of a supplementary retirement savings system known as automatic enrolment (AE), by 2022. This would involve a transition from the current voluntary system to one which will, subject to certain limits, automatically enrol employees into a retirement savings system to be provided by their employer, with the freedom to opt-out of this should an individual wish to do so. Employees already contributing to supplementary pensions that meet a prescribed minimum standard will not be automatically enrolled.
Even before its inclusion in the Pensions Roadmap, the introduction of AE has been in the pipeline for many years and the question remains as to when will it will be implemented? This will be of significant interest to employers and employees who will be affected by the change.
In November 2019, the Minister for Employment Affairs and Social Protection confirmed that the Government recently approved significant elements of her design of an auto-enrolment retirement savings system. She said that key decisions have now been made regarding the target membership, the contribution rates, the policies in relation to opting-out and re-enrolment, the administrative arrangements and organisational approach and the investment options.
The target membership will consist of employees aged between 23-60, who earn more than €20,000 a year and are not already contributing to a workplace pension. This membership will be automatically enrolled.
The Minister noted that there remain five main areas where work is ongoing in order to produce design options for the Government to consider, which relate to:
Work on legislation for the CPA is expected to commence in 2020. A set of options on the design of a State incentive for Auto-Enrolment will be brought to Government in the first quarter of 2020, as will a set of proposals on the nature and function of the Registered Providers, the wider investment framework for AE and the pay-out phase during retirement.
Regarding the question of whether an early drawdown option for a mortgage deposit would be included in the plans for AE, the Minister stated that the core policy objective of AE is to ensure adequate retirement savings and that facilitating early access to pension savings could potentially compromise overall retirement adequacy. The Government has decided that a limited number of ‘Savings Suspension periods’ will be facilitated in the AE system for members who wish to temporarily cease making contributions. These savings suspension periods could be used when a person wishes to save for a house deposit, for instance. In such cases, employer and State contributions will also cease.
Although there have not been any changes to the maximum personal pension fund limit since 2014, the Government does not appear to have any intention to cut it further for the time being. The current limit in Ireland is €2 million, compared to the UK equivalent which is set at £1,055,000.
In October, the Minister for Finance said that he believes the maximum pension fund limit of €2 million represents an appropriate level at which an individual can provide themselves with an adequate income into their retirement, while deterring individuals from targeting tax relief to over-fund personal pension funds.
Many may be wondering about the introduction date for the Total Contributions Approach to determining eligibility for contributory State pension benefits – first signalled by the Government in 2010 – and if they will be affected by the new regime. A public consultation was carried out in 2018 for the approach to establishing the level of entitlement for all new state pension contributory claims.
The most recent update from the Minister for Employment Affairs and Social Protection is that her Department is now designing the scheme and that she intends to bring a proposal to Government setting out the design in the near future, with the aim of introducing the TCA in the third quarter of 2020.
Currently no amendments are in sight for ARFs as a review of ARFs is bound up in the wider pensions review still under consideration by the Minister for Finance.
The Minister has been asked about his plans to extend the legal framework for ARFs to allow pension schemes to provide ARFs under the regulation of the Pensions Authority, among other suggested changes. In November, the Minister said that the Interdepartmental Pensions Reform and Taxation Group (IDPRTG), which is chaired by his Department, had a review of ARFs included in its draft report on various pension matters, which he intends to carefully consider before making any decisions on changes to ARFs.
KPMG advocates a ‘whole of life’ approach to pension regimes. In our view, there are two aspects of the current pension relief system that require adjustment to achieve whole of life funding for supplementary pension. The first is the age related limits which set maximum allowable amounts which are not aligned with the real cost of funding even a modest level of pension in retirement. In KPMG’s view, the limits should be adjusted to support higher contributions at an early stage in the working life if the individual’s financial resources allow.
Secondly, there is no facility to carry unused relief and this does not support funding contributions in a ‘lumpy fashion’ which is required for workers and entrepreneurs alike who may have different capacity to save for retirement at different stages of their working life. KPMG recommends allowing set back of unused relief for a period of at least 10 years to smooth the deductions for pension contributions across earnings during the whole working life.
Among other KPMG recommendations is the removal of the requirement to pay chargeable excess tax and the removal of anomalies between the treatment of public and private sector benefits for Standard Fund Threshold (SFT) purposes. In KPMG’s view, the one-off tax free lump sum should be preserved and the tax relief at the marginal rate for pension contributions should be retained.
If you would like to learn more about KPMG’s response to the consultation on the Pensions Roadmap, published on 19 October 2018, please see this TaxWatch article, where you can also download our response.
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