Tuesday, 28 November 2006

Mandatory pensions

I was at an interesting pensions workshop last week, hosted by Eagle Star with a handful of other brokers. The topic was mandatory pensions and it's likely to be something we'll all be hearing plenty more of.

Hard mandatory pensions are one option - where everyone simply has no choice but to be part of a pension plan of some sort. I don't see this as a viable option. Apart from anything else, it's opponents would easily torpedo the idea as being simply an increase in taxation. If the Government is introducing legislation that says that you and/or your employer must hand over extra money, even if it's for your own future benefit, it would be hard to claim it wasn't a form of tax. If it walks like a duck...

Clearly, soft mandatory pensions are a preferable solution. The idea here is that everybody is automatically enrolled in a pension scheme, but they then can choose to opt out. I reckon that would be a huge success. Inertia is still rife in the Irish financial services world - why else would many people still be paying uncompetitive Standard Variable mortgage rates when they can switch to better rates for free? This inertia would be to the advantage of Soft mandatory pensions - many people would simply not bother opting out.

It would also have the advantage that if someone is automatically enrolled in a pension scheme at the start of their employment, they won't get used to having the extra money. As we all know, if you never had it, you won't miss it.

I would say that it would be important that the Government introduces strict controls on the type of pension scheme that would be available under a Soft mandatory system. It would be an embarrassment if people were automatically enrolled in a pension scheme by Government decree and the scheme they were enrolled in turned out to be a rip-off. As such, Standard PRSAs would seem tailor-made for the job - with statutory caps on charges and a Default Investment Strategy for those who don't want (or don't have sufficient information) to choose their own funds.

Brendan Johnson, Pensions Director of Eagle Star, made an interesting point about ways to increase pension coverage. It wouldn't be sufficient to simply introduce a tax credit system and hope that the simpler structure alone would encourage more people to sign up, although it would certainly be a help. Many people believe the current system of tax relief on pensions is too complicated and should be replaced by a SSIA-style creidt system, where people can see clearly the benefit of the tax and PRSI relief as a top-up to their pension fund. But although the SSIA scheme is touted as proof that such a simple scheme would work, approximately half of all SSIAs were taken out in the final month of the scheme. What does that tell us? That all these people would never have gotten aroun to taking out a SSIA if it wasn't for the deadline, regardless of how attractive or simple it was.

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