By Maxime Bercholz, Adele Bergin, Tim Callan, Abian Garcia Rodriguez, Claire Keane

Like many other countries, Ireland faces challenges in relation to the adequacy and sustainability of pensions. These challenges have been examined in detail in a series of reports (Government of Ireland, 2007; OECD, 2014; Government of Ireland, 2018a). All of these reports identify pension coverage in the private sector as a key issue. Burke and Gilhawley (2018) estimate that only 30% of the private sector in Ireland had a supplementary pension1 in 2017. As the State Contributory Pension (SCP) is paid at a flat rate, almost 70% of private sector workers are therefore set to retire without an earnings-related pension. For many of them, this will result in a sharp fall in living standards, as confirmed in our analysis. With the ageing of the Irish population, over time, pensioners will account for a greater proportion of the population and such income losses would represent a further macroeconomic risk of a fall in aggregate consumer spending (Government of Ireland, 2018a, p. 15).

Almost all OECD countries have some form of a mandatory earnings-related component to their pension systems. 2 The review of Ireland’s pension system by OECD (2014) identified an urgent need to increase pension coverage, through the introduction of a mandatory or quasi-mandatory scheme or by improving financial incentives, or both. Existing levels and patterns of pension coverage incorporate the impact of substantial existing tax reliefs, which provide greater financial incentives for those on the high rate of income tax. The Government has turned towards auto-enrolment as having greater potential efficacy in raising pension coverage from existing levels, particularly for those on the standard rate of income tax. Evidence from Cribb and Emmerson (2016) tends to support that view, with strong increases in coverage and pension savings arising from the UK’s auto-enrolment scheme.

The Government’s roadmap for pension reform (Government of Ireland, 2018a) provides for the introduction of a new auto-enrolment retirement savings system by 2022. There are many important decisions to be made in the design of such a scheme, including the minimum income level at which auto-enrolment would begin and the contribution rates. In order to facilitate the design and development of a system for Ireland the Government published a draft or ‘Strawman’ proposal for an automatic enrolment retirement saving system as the basis for a public consultation process (Government of Ireland, 2018b). Under this proposal employees aged between 23 and 60, who earn over €20,000 a year and do not already contribute to a supplementary pension would be auto-enrolled into the retirement savings system. It is proposed that members will initially contribute a minimum of 1% of gross earnings, rising to 6% after six years. Employers will match these contributions up to an eventual maximum of 6%, and the State will contribute €1 for every €3 saved by the member. Automatic Enrolment will be a ‘quasi-mandatory’ scheme where eligible employees will be enrolled but may choose to opt out (and forfeit employer and State contributions) within a two-month period after 6 months of mandatory participation.

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