The Government’s ‘Roadmap’ document on pensions reform (Roadmap), which was launched in March 2018, outlines an action plan for radical reform of pensions in Ireland during the five year period of 2018 to 2023. The Roadmap will seek to table a range of reforms, from even higher state pension ages to mandatory retirement and changes to pension’s tax relief.
The Roadmap details specific measures presented under six strands that, taken together, will aim “to modernise our pension system while continuing to target resources at those most in need.” This article will provide a brief overview of each of the six strands and in particular, the specific measures presented under each.
Reform of the State pension
The Roadmap states that the State pension system “will be reformed to improve its transparency, fairness and sustainability” and that these reforms will:
- ensure a more equitable basis for the calculation of contributory pensions,
- deliver clarity regarding the age at which State pensions can be drawn down, and
- provide greater confidence regarding pension value over the long term
To this end, there is reference in the Roadmap to instituting a process by the end of 2018 whereby future changes in pension rates will be linked to changes in the consumer price index and average wages. Moreover, from 2035 onwards, future changes to the state pension age will be linked to changes in life expectancy. Finally, this strand provides for the use of the new ‘Total Contributions Approach’ with the aim of creating a closer link between social insurance contributions and pension entitlement.
Building retirement readiness: A new automatic enrolment savings system
By 2022, the Government proposes to develop and begin implementation of a State-sponsored supplementary retirement savings system in which workers will be automatically enrolled.
An Interdepartmental Automatic Enrolment Programme Board will be established to provide strategic direction and to ensure that this timeline can be adhered to. In preparation for this, a draft automatic enrolment system design is to be published for public consultation in Q2 of 2018.
The main design parameters of the draft auto-enrolment system appear to be:
- all workers in the private sector over certain age and income thresholds will be automatically enrolled in the system
- workers can opt out of membership after a certain period of participation e.g. 9 months
- workers, employers and the State will make contributions based on an as yet unknown ratio
- workers with pre-existing pension arrangements can retain those benefits
- benefits accrued in the system must be taken at the same time that the state pension benefits become payable.
Improving governance and regulation – implementing the EU pensions directive IORP II
This strand lists fourteen specific actions. Of specific note are the following points:
- The Government will develop and publish legislation by the end of Q3 2018 to transpose the IORP II Directive into Irish law with effect from 2019
- By Q2 2020, options and recommendations are to be identified to rationalise the number of individual pension vehicles which exist at present
- In Q3 of this year, there is to be a review of the cost of funded supplementary pensions to the Exchequer
- By Q4 of this year, the Government will undertake a broad review of the utilisation of the Approved Retirement Fund (ARF) option, considering in particular whether regulatory oversight of this product is fit for purpose
Measures to support the operation of defined benefit schemes
There is Government recognition that at present, the Defined Benefit sector, with assets under management of over €62 billion, “still forms a very important part of retirement provision in Ireland”.
Therefore, according to the Roadmap, in Q2 of this year, the Government plans to advance the Social Welfare, Pensions and Civil Registration Bill 2017 to give effect to new controls in relation to the funding of Defined Benefit Schemes.
In practice, the Government will be looking at:
- Requiring the provision of more frequent information from pension schemes
- Requiring employers to provide trustees of DB schemes with more frequent information
- Requiring early notification to the Pensions Authority of any difficulties or changes with the sponsoring employer that may affect the scheme
- Increasing the powers of the Pensions Authority to take action to direct DB pension schemes
Public service pensions reform
Under this strand, legislation is to be introduced to increase the compulsory retirement age for the public service workforce to 70 for public servants recruited before 1 April 2004.
Moreover, by Q1 2019 and in accordance with the Public Service Pay and Pensions Act 2017 and the Public Service Stability Agreement 2018-2020, the Pension Related Deduction that was introduced during the recession will be converted into a permanent Additional Superannuation Contribution (ASC) for public servants beginning on 1 January 2019.
Supporting fuller working lives
This strand deals with a variety of initiatives and plans such as:
- The Irish Human Rights and Equality Commission will now prepare and publish guidance material for employers on the use of fixed-term contracts beyond normal retirement age
- Over the next year, an Interdepartmental Group will be convened to review mandatory retirement age practices
- At the end of the current year, a communication campaign is to be undertaken targeting employers and employees outlining the financial incentives available to those who may wish to continue working into their later years, and
- In accordance with the recently published ‘Actuarial Review of the Social Insurance Fund 2015’, an options paper is to be compiled to provide for the deferral of the State Pension Contributory on an annual basis to include actuarial increases in payments attached to such deferral.
The Roadmap contains some very interesting concepts and it will be interesting to see how much of the Roadmap moves from blueprint to final design.
It has the potential to lead to massive changes in the pensions landscape in Ireland, which is what all parties agree, must happen in order for the implementation of an effective retirement planning system.
For more information on the likely impact of the proposed reforms on the Irish pensions industry, contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.