As the Department of Social Protection and Pensions Authority have been reminded many times, most recently at the consultation on pensions simplification in 2015, nobody in the pensions industry believes that yet another structure is needed to accommodate mandatory retirement savings; the current system can accommodate auto-enrolment and the proposals contained in the Government’s Roadmap for Pensions Reform is mainly a distraction.
Most commentators point to the PRSA as the obvious vehicle to accommodate such savings. When it was launched in 2002, the PRSA was intended for this purpose. A few tweaks will have to be made, mainly to drive down the cost of it, but, by and large, the PRSA remains a modern vehicle eminently suited for auto-enrolment.
However, this advice is not being heeded. A couple of days ago the Department launched a proposal for yet another pension vehicle for auto-enrolment. They call it “Straw man”.
Straw man will have rules on participation, contributions, tax relief and benefits which are significantly different from the rules which apply to the system which we have known for the past 30 years. And it is structured to miss a significant, and growing, proportion of the under-pensioned market – the self-employed.
Whilst these shortcomings are enormous – and extremely worrying - they are not the most vital issue. The whole project allows us to lose focus on the most pertinent question in relation to auto-enrolment which is, who is going to pay for it? With focus on structure, there will be less attention on getting agreement with participants in the labour market as to who is contributing and how much.
The costs arise under a number of different headings:
1. The alternative form of tax relief being proposed.
2. The need to integrate this new pension system into payroll and tax systems.
3. The development of new products and services to service this market
4. Training and development of staff
5. Sales and marketing efforts
6. Advisory costs for clients in dealing with the increased complexity
Bear in mind that the original National Pension Policy Initiative (NPPI) report estimated that 30% of the working population got an adequate replacement income from Social Welfare pensions. So, the target of this expensive experiment is the 20% of workers, namely those who are not already adequately covered by the State Pension or who already have a pension.
In the next blog in this series, we will examine the road forward for pensions simplification.
Author: Tommy Nielsen
*Please note this content is the view of the author and not of Independent Trustee Company