There has been the first elements of coverage of private sector pensions’ legislation reform in Ireland in the national media over the last number of weeks on the back of the Minister for Social Protection’s announcement of the formation of an expert working group (Universal Retirement Savings Group) on the matter to discuss a framework for how something like this might be rolled out in Ireland, but what is it all about and why should Irish SME’s keep an eye on developments?
What is it?
Firstly it is very important to state that nothing has yet been decided in terms of what it is and how it will work, but, there is legislation in place already (for enactment when economic conditions are more favourable) to introduce a means by which private sector employers are compelled to offer pension schemes to all employees. Essentially any scheme will ensure that employees have a means of saving for retirement regardless of who their employer is.
Why is it important, why now?
In order to future proof people’s standard of living in retirement it is important that there is not a sole dependence on state pension schemes. The reliance on state pensions’ schemes and the change in demographics, with increasingly ageing populations, means that where currently there is a ratio of 2 retired citizens for every employed person, within the next 40-50 years this will move to a ratio of 5 retired people to each working person. This demographic shift and accompanying much increased reliance on state pension schemes is often referred to as the pensions’ timebomb and effectively it refers to the state’s ability to service the increased volume of pensions’ contributions in the future. This is not a uniquely Irish challenge, indeed Ireland has a little breathing room in terms of the implementation of a solution due to its slightly younger average population than other jurisdictions but this does not mean that the issue can be avoided indefinitely…
What has been done elsewhere?
In many other jurisdictions mandatory or soft mandatory private sector pensions’ schemes have been introduced in recent years such as Australia, New Zealand, Canada and Sweden but most recently in the UK, a scheme, known as Automatic Enrolment, has begun to be introduced, starting with large businesses and being rolled out on a phased basis to all businesses over a 3 year period. The scheme compels employers that do not already offer a pension to provide a scheme to their employees by strict deadlines, with fines for non-compliance. Under the scheme, there is a mandatory requirement to enrol employee in the provided scheme (unless they have fit a very specific set of criteria that opts them out), make deductions and contributions on their behalf to the pension schemes and administer the accompanying paperwork that goes with the pension scheme for the employee.
But what are the time and cost implications for business?
Obviously the cost and time implications for business will be a function of how any scheme is deployed in this jurisdiction however from looking at how these types of schemes have been deployed elsewhere the kinds of considerations are as follow.
Preparation: Companies will need to (perhaps choose) and certainly setup the pension scheme with the provider. In the UK for example a variety of providers are present offering slight variations of the solution including a National Employment Savings Trust, which was specifically setup to ensure acceptance of employees to schemes that might not necessarily be attractive to commercial pensions providers. The requirement in terms of data to be collected, data to be transferred and how funds are transferred all needs to be considered in terms of internal business process design change.
Administration: Typically pensions’ deductions are taken at source (ie from the gross pay of the employees of a business). From a practical perspective this means that the payroll operator in the business needs to also become the person that administers the pension scheme and its associated deductions. Again, subject to how the scheme is setup this may add significantly in terms of effort / workload to the person administering the payroll and pensions in a business.
Cost: Again, it is impossible for us to pre-empt how any system will be designed but from the phrasing used about when and how this scheme will be rolled out by government it would appear that there will be a degree of direct cost implication for the businesses rolling out these schemes.
Direct incremental cost for businesses will come in the form of any contributions that they may be obliged to provide to employee pensions (typically a percentage of salary – under the Australian Superannuation scheme this will soon be 12%!), indirect cost will come in form of increase administration overhead in managing the schemes. Additionally a consideration may be the impact that employee contributions will have in terms of reducing net take home pay and resulting pressures for upward reviews of salary arrangements.
When is this likely to come into force?
Although legislation has been in place for a number of years at this point in time, its enactment has been on hold and the introduction of some sort of work place pensions’ reform has been conditional on better economic conditions being prevalent in order to allow businesses breathing room to support it financially.
However, there would appear to be support for the introduction of such a scheme across the political spectrum; the initial statement of intent came from a document created by the previous administration, has been moved along by the current government and has been criticised for its slow rollout by opposition parties. This is not a question of “If?” but “When?”!
The Minister for Social Protection has initiated the setup of a Universal Retirement Savings Group within the Department of Social Protection to examine and report back on how such as a scheme may be rolled out. It is probably safe to expect that this group will report back within the next 6-12 months with any rollout / implementation likely to take a couple of years thereafter.
Any process such as this is likely to introduce a level of incremental administrative overhead for your business, and whilst the likely implementation timelines are not 100% clear at this point in time, it is important to begin planning forward as best as possible in terms of what that might look like for your business and also perhaps examine some models in terms of what the impacts of introducing a pensions scheme might be for your long term business planning in terms of business overhead and Cashflow.
Additionally, if your business is not currently providing a pensions scheme for your employees it would be a good time to begin considering this. With GDP growth continuing to be strong and unemployment declining, it is important for businesses that are seeking to recruit to be in a position to offer the best range of benefits possible to attract and retain talent in an ever more competitive marketplace. Sage Micropay is ideally setup to help you manage the administrative overhead of pensions’ deductions for a variety of schemes in place today and we will continue to provide best in class product, service and advice on any implications of the introduction of any reformed private pensions schemes for business going forward.