Minister’s Speech from Financial Broker Conference

Wed Feb 20 2019

Minister for Employment Affairs and Social Protection

Regina Doherty, T.D.

Brokers Ireland was delighted to welcome Minister for Employment Affairs and Social Protection, Regina Doherty, TD to the Financial Broker conference on Thursday 14 February 2019 in Carton House.  Minister Doherty officiated in opening the event delivering an address on auto-enrolment and pension reform in the Irish marketplace.

The extract below is the speech that Minister Doherty’s delivered to Financial Brokers who attended the conference.

Speech Start

Good morning ladies and gentlemen. I am delighted to joinyou here at today’s conference.  I would like to thank Brokers Ireland for inviting me to speak with you on the issue of pension provision and my plans for Automatic Enrolment.

Pension Reform

The idea behind pensions is simple – save now to spend later. However, there are many systemic challenges facing our pensions including:

  • the sustainability of the wider pensions system over the longer term,
  • our very welcome increase in life expectancy,
  • the complexity of the system,
  • the low level of supplementary pension’s coverage and the adequacy of that coverage.

Too many people find it difficult to save what they need for retirement. This is reflected in the fact that just 47% of all employees, and 35% of private sector employees, have a supplementary pension.

For these reasons, pensions reform is a Government priority and a specific goal of mine. My plans to deliver reform were set out in the Roadmap for Pensions Reform 2018-2023, which the Government published in February of last year.  My primary aim is to develop a system that greatly improves supplementary coverage and adequacy, whilst also preserving a strong State pension as the bedrock of the Irish pension system.

The Roadmap details specific measures presented under six strands that, taken together, will modernise our pension system while continuing to target resources at those most in need.  These are:

  • Reform of the State Pension – including the introduction of a Total Contributions Approach;
  • A New Automatic Enrolment Savings System;
  • Improved Governance and Regulation through the transposition of the EU Pensions Directive ‘IORP II’;
  • Measures to Support the Operation of Defined Benefit Schemes;
  • Some Public Service Pensions Reforms; and
  • A range of Measures to Support Fuller Working Lives.

The measure I will concentrate on today, and perhaps the most fundamental reform contained in the plan, is the Government’s intention to develop Automatic Enrolment (or AE).  AE will see, by 2022, a new supplementary retirement savings system for employees without pension’s coverage.

Before we move on to AE, I would like to re-iterate that the Government is determined that the State pension is, and will remain, the bedrock of the pension system.

To this end the pensions Roadmap confirmed our long intention to maintain over the long term the State pension at 34% of average wages.  This will ensure the State pension continues to deliver on its core objective which is to protect our older people against poverty

This commitment will also benefit individuals by providing greater levels of transparency in their financial planning and improve confidence about the level of any private retirement savings required to supplement the State pension.

However, it is clear many people are not setting aside personal savings to meet their own income expectations for when they retire (relative to the income they enjoyed while employed).

With the welcome increases in life expectancy this ‘retirement savings gap’ means that, without action, large numbers of people will face significant and unwanted reductions in their living standards in their retirement years.

Over the last 20 years, in a period where the policy objective has been to increase this overall rate (to around 70%), the level of supplementary pensions coverage has remained stubbornly low.  Clearly, and despite the considerable efforts of Government and the pensions industry to promote and incentivise participation in supplementary pensions, the marginal changes in coverage over the last 20 years indicates that the purely voluntary and market driven approach to participation has not achieved the desired goal of increasing coverage to an appropriate level.

Government Decisions

Ireland is one of only two OECD countries without a mandatory earnings related element to retirement saving.  The need for action to address barriers to saving was supported in the outcome of the Citizens’ Assembly deliberations with 87% of members agreeing that the Government should introduce some form of mandatory pension system to supplement the State pension.

Having examined the options and looked at international experience, the Government decided that a system of Automatic Enrolment is the best approach to take.

To this end the Government has decided that:

  • AE will be available and operational by the end of 2022.
  • AE will not be a substitute for existing pension provision – it will supplement the existing State Pension and complement, rather than replace, existing private pension provision.
  • AE will be an earnings related workplace savings system where enrolled employees will retain the freedom to opt-out if they so choose.
  • AE will entail a Defined Contribution (DC) model with personal accounts.
  • Members will have the option to choose from a range of retirement savings products.
  • For the first time, Employees, Employers and the State will each be required to make a contribution to the member’s account.

In summary, AE will see a transition from the current and purely voluntary supplementary pension system to one which will, subject to certain parameters, automatically enrol employees into a quality assured retirement savings system.

We know based on international evidence, that if the system is designed well and in the best interest of members, the significant majority will choose to remain in the system and       avail of the benefits it provides.

In this way, AE will socialise a long term savings behaviour and increase the wellbeing, financial security and independence of future retirees.

Minister Doherty Speaking at the Financial Broker Conference. PHOTO CREDIT: dak photography

Strawman proposal

As I have already mentioned, and has been often highlighted in the media, the introduction of AE in some form has been a long standing public policy goal in Ireland.  Past Governments have consistently flagged the necessity of such a reform.  For various reasons, not least of which was the economic crash of 2007/08 and its aftermath, events have to date conspired to prevent its progress.

I intend to be the Minister who breaks this impasse.  Therefore, in August last, I was very happy to publish a substantive document which, for the first time, detailed what we believe to be the right strategic direction for AE in Ireland.

The Strawman Proposal, relying on extensive domestic research and our analysis of systems internationally,  detailed a realistically plausible approach to delivering Automatic Enrolment in Ireland.  It provided the basis for a wide ranging national public consultation process on the optimum operational structure and design of the system.

The Strawman detailed a range of potential design parameters including:

  • The preferred operational structure and governance of the system;
  • The target membership – in other words who will be automatically enrolled into the scheme;
  • The financial incentives that may be provided by the State;
  • The contribution rates that may be required of employees and employers;
  • The savings and investment options including default processes for those members who feel unable or unwilling to make a choice;
  • And the conditions relating to opting out of AE.

Brokers Ireland and its members will be innately aware that savings and investment options provided will be critically important to the success of any pension system.  They will also be a high priority in designing AE.

Our design considerations should be based on the policy objective we have set ourselves for AE i.e., to help predominantly middle and lower income workers begin to save and avoid significant reductions in their living standards at retirement.

To do this we must ensure that the AE system is designed in the best interests of members and members alone, and this is where our focus will lie.

I am mindful of the current and extensive infrastructure available to consumers seeking to obtain financial advice.   Government will continue to encourage individuals to engage in their own financial future.  We recognise the value that good financial advice provides in helping consumers make more informed financial decisions.

However, Government must also be mindful that AE is a system which is, by definition, designed to accommodate the needs of the disengaged.

Again, our research has indicated that many who will be enrolled in AE will feel unwilling or unable to make a choice and will not take advice. Therefore, the AE system must be designed to encourage and facilitate choice.  It will support the utilisation of sound financial advice.  However, this should not be a condition of the system.  Suitable, well designed, default ‘auto pilot’ options must be put in place for the disengaged.

Consultation Process

I have made it clear that the Strawman should not, in any way, be construed as a confirmation of what form Automatic Enrolment will ultimately take.  It is a high level draft intended to generate and prompt discussion and improve ideas.

As the OECD and colleagues internationally have cautioned, AE is a very complex policy reform and it requires extensive analysis and consideration to develop the best approach.

 

In publishing the Stawman proposal, our goal was to help interested parties conceptualise plausible approaches to AE and to facilitate a focused debate around key design issues and how to address income adequacy for our retirees.

I am pleased to report that there has been very encouraging support and real engagement from stakeholders during our consultation process.

By November there were in excess of one hundred written submissions received from a diverse range of interest groups including employer and employee representatives, pension industry bodies, advocacy groups, academics and interested individuals.

In addition to the written submissions, a series of regional public consultation seminars was held in Dublin, Galway and Cork.  Participants at these seminars were also invited to take part in an on-line survey on the structure and design of the system.

My officials also provided a dedicated briefing session for members of the Oireachtas and also attended a special meeting of the Joint Oireachtas Committee on Employment Affairs and Social Protection to discuss Automatic Enrolment.

I know that Brokers Ireland, and indeed many of its members, made both written submissions in response to the Strawman and attended the consultation seminars.   I would like to highlight my appreciation for the support and constructive analysis you have offered.

Given the volume of material gathered during the consultation process, officials in my Department are currently busy collating and analysing the information. Whilst, as a general principle, we have identified a unanimous consensus on the need for increased retirement savings, this is combined with a diverse range of views on the preferred manner and means of delivering the AE solution.

 

The feedback received during the consultation process will be used to inform Government decisions on the framework design of the preferred operational structure for AE so that the new system is available and ready to enrol its first members in 2022.

In working towards this commitment, consultation with stakeholders will continue and will be vital in building consensus across all sectors of society so as to decide how the new system will be best delivered.

 

Conclusion

As you know pensions require long term planning. Changes to the pension system must be brought about prudently following careful consideration.  Appropriate reform of our pension system now will benefit the future generations to come.

The introduction of the AE pensions system will be one of the biggest changes in the pension sector since the introduction of the State pension over a hundred years ago.

Such deep and far reaching pension reform is only possible with a broad social and political consensus. Over the coming months the Government will be working closely with the pensions industry and other stakeholders, such as employer and union representatives, on these reforms.

The new system will, when implemented, enable people to save and accumulate sufficient assets to maintain personal living standards in their retirement.

 

In this way, the combined use of public pensions and private   retirement savings will allow employees, employers and the State to each play a part in addressing the provision of improved retirement incomes.

I would like to thank you all for taking the time to listen to me today.  I know everybody here today is working hard to ensure the best outcomes for those saving for retirement.

The major pension reforms that will take place in the next few years mean that it will be a very interesting period to be involved in the sector.

Thank you and I hope you have an enjoyable and fruitful day.

Speech End


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