Not since the introduction of approved retirement funds (ARFs) in 1999 has the Irish supplementary pensions system seen such a shake-up. The launch of the My Future Fund national auto-enrolment (AE) pension scheme will potentially see up to 800,000 people brought into the retirement savings system for the first time.
Irish Life director of workplace markets, employer solutions, Shane O’Farrell describes the introduction of the new scheme as “fantastic and much-needed progress” and says it will “drive a positive and proactive cultural change within Ireland for generations to come, enabling better pension provision and retirement outcomes for all”.
The positive impacts of the scheme are already being felt. “In terms of workplace plans specifically, we are already seeing a boost in membership in anticipation of My Future Fund being launched,” he says. “Many of our corporate clients, particularly larger employers, are endeavouring to use their existing workplace plan to meet AE requirements. So, they are actively encouraging any ‘unpensioned’ workers to join their existing workplace pensions plans to avoid being picked up automatically into My Future Fund.
“In our experience, this is largely driven by employers wanting the best for their people. They know their workplace plans offer better terms than My Future Fund, like flexible contributions, stronger member engagement and advice supports, the ability to optimise with Additional Voluntary Contributions (AVCs), wider fund choice and early retirement options.”
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James Campbell, director of consulting for wealth Europe with Mercer, sees another important benefit. “Its introduction will place a much-needed social spotlight on the importance of saving for retirement and create debate around what constitutes an ‘adequate’ level of retirement income,” he says. “We expect it to be a key driver of increased awareness of, understanding of, and engagement with occupational pensions, which we see as a very positive development.
“My Future Fund will also place a wider lens on the occupational pensions savings alternatives available to consumers, many of which have a far greater range of benefit options and flexible features than will be available under My Future Fund.”
But the new scheme is not without complications. “Many employers already provide occupational pensions to staff,” Campbell explains. “According to CSO statistics, that translates into approximately 1.5 million people currently saving in a workplace plan. The way in which auto-enrolment is being introduced means that all of those employers are going to have to think carefully about if, and to what extent, they want to – or are able to – interact with My Future Fund.
“The two systems differ in some key ways, and there will be next to no interaction between the two. Many employers – and indeed employees – will find this frustrating and, possibly, confusing. For example, transfers of funds between the two systems are not permitted, meaning that it will be impossible to consolidate savings into a single arrangement.”
He also points out that retirement pots accumulated in the State scheme can be drawn down only from the State pension age – 66 at present. “This means anyone who has an existing pension pot in an occupational plan may see their retirement income available at different times, adding complication to financial planning.
“Finally, anyone who is in My Future Fund and who wants to contribute more cannot currently do so unless they set up their own personal arrangement, which just adds unnecessary complexity.”
The differing tax treatments of the two schemes can add to confusion. “Members of occupational pension schemes receive tax relief on their contributions at their marginal rate of either 20 per cent or 40 per cent,” explains Ashling O’Neill, a certified financial planner with Clear Financial. “My Future Fund members, on the other hand, receive a State contribution equal to one third of their contribution, equivalent to 25 per cent tax relief. Employees will need to factor this in when making a choice between My Future Fund and an occupational scheme.”
Most employers will probably not want to run two different plans in parallel for a variety of reasons. “This will be challenging, not just from a resource perspective, but also from an internal relations perspective,” says O’Farrell. “If a significant portion of an employer’s workforce are automatically opted into My Future Fund, they run the risk of those people feeling like they are getting lesser benefits than their colleagues, which could be difficult to navigate.
“This is especially important when it comes to an anchor benefit like their pension. The fact that My Future Fund is so different to existing plans in terms of how it actually works and how it is incentivised means employers will also need two different communications streams and support systems in place. That is no mean feat.”
There are ways around this. “Employers who want to avoid running a dual system are very actively encouraging their people to join the existing workplace plan before the end-November payroll deadline,” O’Farrell explains. “This is not just to avoid running two plans, though; they generally feel it’s the most beneficial option for both their workforce and the organisation, whilst also saving the HR headache.
“Workers are given every opportunity to join the superior plan, and employers avoid the inefficiency of running two separate – and also very different – pension plans at once. In our experience, employers feel it’s a win-win.”
The other issue is one of adequacy, the extent to which an individual’s income, including the State pension and supplementary income from other sources, is sufficient to give them a comfortable retirement.
“The Government has had to prioritise initial affordability and maximising participation,” Campbell notes. “Required contribution rates in My Future Fund will start low, increase on a phased basis, and only reach their maximum level (14 per cent) by year 10. This means an opportunity has been missed to ensure that individuals in this first phase of auto-enrolment are maximising their savings and the eventual benefits available from My Future Fund.”
Having said that, there is virtue to those low initial contribution rates. “It will be very successful in picking up thousands of lower-paid workers who are happy to save at the levels it mandates,” says Campbell. “Smaller employers will enjoy the ease of the central portal and contribution payment mechanisms, and not having to undertake any heavy lifting from an administration perspective.”
