Denis Naughten (Roscommon-Galway, Independent)
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No apologies have been received. Members participating in the meeting remotely are required to do so from within the Leinster House complex only. I ask members and witnesses to please turn off their mobile phones or ensure that they are on silent mode. I ask members participating remotely to use the raise hand function on Microsoft Teams if they wish to contribute.

The meeting has been convened to continue our pre-legislative scrutiny of the automatic enrolment, AE, retirement savings system Bill. We will engage with representatives from Insurance Ireland in a moment.

Automatic enrolment has been discussed for decades in Ireland. We are currently the only OECD country that does not operate an automatic enrolment or similar system as a means of promoting pension savings. The new system is designed to simplify pensions decisions for workers and make it easier for employers to offer a workplace pension. Under the automatic enrolment system, employees will have access to a workplace pension savings scheme which is co-funded by their employers and the State. The decision to implement an automatic enrolment system is consistent with the key recommendation contained within the OECD's review of the Irish pensions system published in 2014. The single greatest goal in Irish pensions policy should be to increase the supplementary pension coverage rate through the introduction of a mandatory, or quasi-mandatory, earnings-related system.

In response, in March 2018 the then Government published a roadmap for pensions reform 2018 to 2023, in which it confirmed an intention to develop and implement a State-sponsored supplementary retirement savings system into which employees would automatically be enrolled. In June 2020, the Programme for Government: Our Shared Future reaffirmed the commitment to introduce an automatic enrolment system. In line with this commitment, the Government approved the final design principles in March 2022. The Government has now approved the general scheme for the automatic enrolment retirement savings systems Bill. It is in this context we are scrutinising the general scheme.

I welcome to the meeting representatives from Insurance Ireland: Ms Moyagh Murdock, CEO; Ms Jacqueline Thornton, director of regulation and policy development; Ms Ruth NicGinneá, advocacy and public affairs manager; and Ms Nadya Lazarova, manager of regulation and policy development.

Before we begin, I will explain some limitations to parliamentary privilege and the practice of the Houses as regards references that may be made to other persons in evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant to both the Constitution and statute by absolute privilege. However, if they are giving evidence remotely from a place outside the parliamentary precincts, they may not benefit from the same level of immunity from legal proceedings as a witness physically present does. Witnesses are reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable, or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if a witness's statement is potentially defamatory in relation to an identifiable person or entity, the witness will be directed to discontinue such remarks. It is imperative that witnesses comply with any such direction.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

I call on Ms Murdock to make her opening statement.

Ms Moyagh Murdock:

As the Chairman has made the introductions, I will go straight to my presentation. Insurance Ireland is the representative body of the Irish insurance industry. We represent 133 members providing cover to more than 25 million customers in more than 110 countries. Our members employ approximately 28,000 people in Ireland and contribute €1.6 billion in tax income per year to the economy. Ireland is the fourth largest market for insurance in the EU and the biggest exporter of insurance services.

Insurance Ireland appreciates the engagement by the committee and its members with its initial submission on this issue in November 2022.

The general scheme of the Bill is a milestone in the joint efforts of all stakeholders to develop an automatic enrolment scheme for workers. Insurance Ireland and its members have supported the development of the system from the beginning and endeavoured to share experiences and learnings from decades of pension scheme provision. The objective of the automatic enrolment scheme is to increase an individual’s pension provision and support all members of society in achieving a good standard of living in retirement. To deliver on this objective, the scheme will need to be inclusive, flexible and future-proofed, as I will set out.

The future automatic enrolment regime needs to include those who need it most. The general scheme assumes a scope of people in formal employment between 23 and 65 years of age and with incomes of more than €20,000 annually. The limitation of access for people of younger age and with lower incomes exposes, in particular, more vulnerable households and individuals. Citizens starting their career immediately after school or college will miss out on important years of contributions and benefits for their retirement. Many reports have shown the benefits that the additional years of saving for retirement have over the lifetime of a pension. Such individuals might also be hit by the €20,000 income threshold, given lower formal qualifications often coincide with lower income levels. Notwithstanding an individual’s age, people with lower incomes in general, such as people working in the care sectors or hospitality, will be the second major group losing out on the scheme.

The third group of people who may be disadvantaged from the current provisions of the general scheme are people who work part time. This will impact especially on people caring for their loved ones such as family members and children, who are more often than not women. The gender pay and pension gap is already a substantial challenge for our society, well known at this point, and while automatic enrolment is not the answer to closing this gap, it should not be allowed to crystallise the issues by excluding the efforts women can take to close the gap for themselves, or indeed for their employers to help them do so. The scheme should support the efforts of women to ensure the adequacy of their pension in retirement and employers seeking to support these efforts. The lack of flexibility on top-ups, transfers or clarity on the State credit while the individual is on periods of maternity or carer's leave is concerning. A new pension regime that requires significant input from taxpayers should neither ignore the social challenges we are already facing nor exacerbate them. The foundations of automatic enrolment will be in place for decades to come, and it should be ensured now that the scheme will be flexible enough to cater to changing working patterns and societal demands over the coming years, not least for these more vulnerable cohorts. While we appreciate automatic enrolment is not designed to eradicate these issues, it should at the very least be in a position to offer the same flexibility to policyholders that is available in defined contribution schemes already in place.

Second, the scheme should be flexible and fair, and the future auto-enrolment regime needs to respond to members’ needs. With the publication of its straw man for automatic enrolment in Ireland in 2018, the then Government had reached a milestone in this project and gained broad support from public and private businesses and organisations. The final design principles, which were published in March, as well as the general scheme of the Bill, which we are discussing today, included a number of material changes to the straw man and the envisioned structure and working of the auto-enrolment system.

These changes have resulted in consequences unforeseen from what was originally proposed, some of which I have touched on, but an additional challenge relates to the broadening of the role of the central processing authority, CPA. The straw man envisaged that the CPA would act as a processing centre to interact with employers and collect contributions, while the pension provision would be delivered through the existing pension infrastructure, with the associated consumer protection and any liabilities of such delivered through regulated pension providers. The design principles, however, propose the creation of a State-run pension provider in the CPA. According to the general scheme, the CPA will make all decisions relating to the pension scheme, including investment choices and the protection of policyholder assets, and will also be responsible for all liabilities. This is a material change and can result only in a significant increase in the cost and time resource compared with the straw man, requiring experienced pension professionals, from board level down through all levels of the organisation, in an already-stretched employment market in this sector.

Third, the scheme should be future-proofed, and it should avoid the creation of a major public organisation and consequential liability. The Irish Fiscal Advisory Council set out in May 2022 that the automatic enrolment fund would potentially accumulate €21 billion in contributions over ten years. Thereby, the CPA will become the largest provider of financial services in Ireland. The design and build of the proposed CPA will be a complex project that, in our view and the experience of our members, is likely to take much longer to be implemented than the timelines provided for in the automatic enrolment design principles suggest. The establishment of the CPA in this role is also in contrast to successfully operating automatic enrolment schemes in other countries. Rather than creating new and unproven structures, we suggest building on the lessons learned in other jurisdictions and leveraging the solutions in place elsewhere.

Finally, the general scheme lacks sufficient detail on what will happen for scheme members on their retirement. The automatic enrolment system expects employees to invest in a pension with no knowledge of how they will be able to access their fund when they need it. Such uncertainty adds to our considerable concerns about the new regime.

Insurance Ireland and its members strongly support the introduction of automatic enrolment and have long called for such a system. Nevertheless, we would appreciate if committee members would reflect on our feedback in order that we can ensure the new regime will be as successful as possible. A “start now and fix it later” approach is not optimal. Major decisions will have to be taken ahead of the introduction and implementation of the scheme. The future regime needs to be not only effective and efficient but also inclusive, flexible and future-proofed to deliver for society.

I thank the Cathaoirleach and members for this opportunity to present our position. I look forward to answering any questions they may have.

Denis Naughten (Roscommon-Galway, Independent)
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I thank Ms Murdock. She pointed out that where people start to pay into their pension before the age of 23, that has a significant impact on the outturn of that fund, and she indicated there are reports to that effect. She might furnish the committee with that evidence, which would be useful.

Ms Moyagh Murdock:

Okay.

Denis Naughten (Roscommon-Galway, Independent)
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Will Mr Murdock or one of her colleagues comment on the €20,000 threshold? It is an issue on which we have heard contrasting views from various witnesses who have come before the committee. The Department has strongly made the case that for anyone earning less than €20,000, the level of payment from the contributory State pension is sufficient to make up their potential loss in income, in line with the intention of the auto-enrolment for people earning more than €20,000. Moreover, it has maintained that rather than people on lower incomes having to put aside additional money for a pension contribution when they are trying to pay grocery bills, the priority should be on supporting them to meet their day-to-day needs.

Ms Murdock might comment on that. Could she also comment on the point she made regarding part-time working? This is a significant issue for people, usually women, who for one reason or another do not work full time or do not work full time at various points in their career. As a result of that, they may have an income below the threshold. The hourly rate might be significantly above it, but the annual rate could be below it. Could she elaborate on the points in that regard and how she thinks auto-enrolment could be adapted to address that cohort of the population, considering that it is possible for someone to voluntarily go into auto-enrolment? One would hope that people earning high hourly rates but perhaps working short time would contribute to that.

Ms Murdock raised flexibility, in particular in respect of top-ups. This issue has come up in evidence on a number of occasions.

In her evidence this morning, Ms Murdock mentioned the CPA being an actual pension fund making decisions on investments. She said it has unproven structures. Ms Murdock can correct me if I am wrong, but throughout the OECD, two approaches in general have been taken. One is where an agent of the state gathers the money and private pension funds make the investment decisions. The alternative model that has been used is where a state pension fund makes the investment. Could she explain the reference to "unproven structure" because this approach has been proven, in particular in some of the Nordic countries? I invite her or some of her colleagues to respond to some of those issues.

Ms Moyagh Murdock:

I will take the first three parts of the question and then I will defer to my colleague, Ms Thornton, on the model itself. Regarding the impact of the lower-income group, we are examining other jurisdictions that have introduced an auto-enrolment scheme, in particular, New Zealand, and even our near neighbours in the UK, which has a threshold of £10,000. We have drawn from their experience. They had a kick-start in New Zealand. They had no threshold, but they added NZ$1,000 to the scheme. They found that was necessary to get the uptake from the cohort of lower-paid workers. The experience we hear from the UK is that if they had to do this scheme again, they would remove the £10,000 threshold and reduce it even further, because it does prove to be a barrier to entry to the scheme.

The Chair made the point about having to divert income to more pressing matters such as grocery shopping and the like, but for many lower-paid workers, when they get an opportunity to divert money into a pension scheme, it becomes part and parcel of the net income that they are coming out with. It is a very good practice. The early years when people are on lower incomes are important because of the effect of compound interest. We are drawing our experience on the best in class where it has proven to be a barrier to have such a high threshold of income.

The Chairman also stated that it impacts on part-time workers, many of whom may not ever reach the threshold of €20,000, and who are predominantly women in caring roles and working part time when they can fit it in around family demands. It is affecting a smaller cohort of the target audience, but it is negatively impacting the female cohort in particular. We believe that addressing it now at the outset of the new auto-enrolment scheme is the best time to do it. The experience from other jurisdictions is that once it becomes part of legislation, there is little appetite from governments and political parties to go back in again and change the rules of the scheme. We are advocating to get it right first time, to listen to the experience of other jurisdictions and to address the income threshold.

Many lower-paid workers are younger people who are aged under 23 and still living at home. This is a good saving scheme. It brings them into the practice of putting money aside for their long-term financial well-being. They can probably afford it more than we would estimate because they are probably living at home with their parents, and they do not have the demands of a family, mortgage and household bills. We would see it as an opportune time to start a pension scheme, and not something that we should delay until they are in their mid-20s or much older.

In response to the point about the "unproven model", from my own experience as the ex-chief executive of the Road Safety Authority, I know how complex it is to set up a fully functioning and competent body, drawing from resources that the financial services sector already finds difficult to secure. We are suffering from a skilled labour shortage in this sector. We are starting this structure from scratch, and I fear we will have to build quite a large organisation to deliver on what is set out in the Bill. Head 15 sets out almost 20 executive functions for the CPA. I will ask Ms Thornton to elaborate on the point.

Ms Jacqueline Thornton:

I can pick up on the actual structure of the CPA. The Chairman is correct that we have seen two approaches in jurisdictions around the world. Even in those that utilise the existing pension infrastructure, it takes quite a bit of time to set that up. He referenced the Nordic structures, in particular. We have seen in countries such as Sweden, one of the most notable points is the PPM, as it believe it was called, was set up as a fully functioning state body with the administration outsourced. What happened there is the large global infrastructure, the IT provider to which it was outsourced, could not deliver coming up to the deadline and the state had to take it back in-house. The state had to then build from scratch.

Following on from Ms Murdock's point about resource and time, that simply pushes the deadline out. It is our contention that looking at the other countries similar to Ireland such as the UK, for example, utilising existing pension infrastructure is quicker and easier and it has been proven to deliver. Providers have been providing pensions in Ireland for decades. They are quite experienced at providing pensions. They understand how long it takes to tender for these types of contracts and it is our belief that it will take much longer than 1 January to have the outsourced provider in place.

Denis Naughten (Roscommon-Galway, Independent)
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On that point, what I picked up on was the reference to "unproven structure". It is not unproven. It is there and it does work. The evidence that we received is that it takes considerably longer to put it in and the question is about the length of time. I accept there is a challenge, but the evidence this morning is that it is unproven. That is not the case. It is proven and it does work. It is in place in OECD countries. There are challenges with it, but it would be misrepresenting the situation to give evidence before the committee that this approach is unproven. That is not the case. Am I correct in that regard?

Ms Jacqueline Thornton:

There are precedents. There are examples in other jurisdictions where this type of structure does work. They are not overly common, but they do exist. I believe the Department did go to the Nordic countries to review that back in 2018 or 2019, and the approach appears to have changed.

The other point I wish to touch on, in response to some of the questions and to pick up on Ms Murdock's points about the gender pension gap, is a particular issue for us, and we issued a paper last year that the committee was furnished with as well. As we said in our opening statement, we do not expect that auto-enrolment is going to eradicate or mitigate the gender pension gap, but our contention is that we would not like to see auto-enrolment exacerbate it.

The point regarding the lack of flexibility top-ups and clarity about the State credit has been touched on. All those matters remain a challenge to be cleared up.

On the threshold, I will again refer to the UK, where a recent report - I think published at the end of last year - considered the £10,000 threshold. It was quite interesting from a gender perspective because, in respect of volunteering to opt in, it was found, even for those below the threshold, that more men than women volunteered to opt in. As regards a voluntary opt-in, the whole point of automatic enrolment is to leverage inertia and not have active engagement or decisions being made on the part of the individual, which we believe is disadvantageous to those women who are in part-time work or in multiple part-time jobs, for example. According to the general scheme of the Bill, multiple part-time jobs will be taken into account. We just do not know how that will work yet but we will see that as, hopefully, work progresses and the full Bill comes in. Certainly, as regards the £10,000 threshold in the UK, the Legal and General report we looked at set out considerations, including moving down to £6,000 to try to include more women and part-time workers.

Denis Naughten (Roscommon-Galway, Independent)
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I am not aware of the situation regarding the New Zealand system. However, there is a significant difference in both the rate of payment and buying power of the state pension in the UK compared with here. All Oireachtas Members advocate for UK retirees who are legally entitled under our means-tested payment to a top-up here, even though they qualified for a contributory pension in the UK, because of the inadequacy of the UK pension compared with the Irish pension. There is a stark contrast between the State pension provision compared with that of the UK. Is that the same in New Zealand? Is its state pension more comparable to the Irish or UK system? I do not expect Ms Thornton to know that.

Ms Jacqueline Thornton:

It might be a matter for me to take away.

Denis Naughten (Roscommon-Galway, Independent)
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Ms Thornton might come back to us on that. The UK is not a good example as regards the lower threshold. Is New Zealand a good example relative to the rate of pay that is paid out through the state pension there? Is it comparable to the Irish system?

Ms Jacqueline Thornton:

We can certainly take that offline and double-check it. As Ms Murdock said, the important point is to make sure that the system is available for individuals to increase their adequacy in retirement, where they can do so. The earlier people start into a pension, the more years they will have for investment growth and compounded growth, which makes a difference at the end. For example, topping up a pension at the start of its life compared with topping up when an individual is near retirement makes a significant difference because that person has all those years of investment growth in the meantime.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I have reservations about all this, especially at the lower income end. None of us can really quantify, but things we cannot quantify still exist. Futures that cannot be quantified still exist. Much of what is quantified is wrongly quantified. We had a classic case of this. The Minister for Social Protection appeared before the committee last week. She admitted that the 2017 PRSI projections on deficits were way off the mark and were in surplus rather than deficit. Even five-year projections are more fiction than fact.

This goes to the nub of where we put our people's money. The great thing about the pay-as-you-go system for the State pension is that it is a levelling-up pension. In other words, people on high incomes pay in much more money than those on low incomes but everybody gets the same State pension, if they have made enough contributions. In other words, the system only counts the number of contributions and there is no relativity to what is paid in. That is a great leveller-up in this society. This relates to the point made by our Chairperson, namely, do politicians concentrate particularly on the people on low incomes, and on putting their effort, money and the State's money into assisting those people? It should be remembered, whether it is through tax relief or the 25% top-up, that the State is a significant contributor to pensions. Is it better doing it that way or putting it into the pay-as-you-go system? The pay-as-you-go system is the ultimate one. For example, women working part-time and earning €38 a week get their full contribution, as does the person earning €200,000 a year and paying PRSI, and the whole way up. They all get the exact same pension. The challenge is, in making sure everyone has got this pension, are we actually tempting future politicians to state that since everyone has this private pension - which they will not have - they can then dispense with being very generous and make the basic State pension much less? That is not something the witnesses can quantify, but it is something that we can bring our political heads to.

As I said, the pay-as-you-go system is the greatest leveller of the gender pay gap. I often think about the gender pay gap. In some situations, it is largely irrelevant for those in couples because they work on the basis of what is yours is mine and what is mine is yours. Whether the man or woman has a higher income is irrelevant because contributions go into a common pot. In other cases, it is a massive, practical, day-to-day issue. It is very hard for us to find out which in any individual case. I am not sure whether any state ever had women earning, on average over the course of their careers, the same average - I am talking about averages - as men. If not, we need other mechanisms to level off the gap, especially when securing old age. That is where the State pension comes in. We undoubtedly have a huge challenge. The choices of individuals, couples and families, and all sorts of things come into play here, as we know as politicians who sit with real people who make real decisions.

I will go off on a totally different tack for a minute. I raised this issue previously. We are a very small, open economy. It was mentioned that €21 billion would be in this fund. From the experience of the insurance industry, how much of that would be invested in this economy? How much, on average, of all that money put in by people in this economy, including the State, which would be a quarter shareholder in that fund with €5 billion, do insurance funds, pension funds and so on in this country invest in foreign bonds, foreign equities and so on? How much would be retained in the economy?

Ms Moyagh Murdock:

I will come back on that. I acknowledge what the Deputy talked about in respect of the challenge of the gender pension gap that exists. While the automatic enrolment scheme will certainly go some way to address the coverage, it is a fact, and a recent Economic and Social Research Institute, ESRI, report highlighted this, that on retirement women are retiring on 35% less than their male counterparts. As it is set up under its current design principles, the automatic enrolment scheme will not permit closure of that gap. It is a fact that women live longer than men. That 35%, on average, is approximately €150 a week. We need to get our heads around this perception that women can afford to live on a lot less than their male counterparts when they retire, when up to retirement they were probably earning equal amounts in many cases. Due to all the gaps and interruptions to their earning capacity over the course of their careers, they end up with much less. While Ireland has pension equity as regards the State pension at retirement, I argue it is not adequate. We all recognise it is a growing liability and a growing problem. We believe that addressing the design principles now will certainly allow women to make the decisions they want to make for their own financial independence on retirement, and they will be able to put aside the money they believe they can independently afford.

I acknowledge that there is a combined pool of money in households and, traditionally, the male earner was the major earner but lifestyles have changed and households have changed. We need to come up with a scheme that will allow us to adapt to that new working environment and ensure women have an adequate pension on retirement. I would be pushing to say we must do as much as we can now to close that gap and not put it on the long finger and say we will fix it down the line. That would not serve women well at all and we need to fix it now.

Regarding the investment of the funds, whether they are in Ireland, or in bonds or other investment products abroad, that will be a decision for the CPA under the current design principles. There will be some choice but there will be a default for members to pick what might be called the safest option. They will be able to make more risk-based decisions on where their pot goes, as is the case with any pension investment product, including private pensions, where people can work with their adviser on where they want those investments to go. I would not be able to predict what the investment strategy might be but €21 billion in ten years is a significant investment fund. That would be taken into consideration as to where best to put it and get the best return for the members of the schemes. I am sure the wisest decisions will be made to bring the correct return for the scheme itself and make it a viable scheme. That is what pension providers in Ireland do for all their private pension and occupational pension schemes. They have to be accountable to the trustees. Under this scheme, I presume the master trust will also have an overseeing role in that regard. It is a considerable responsibility for both the board of the CPA and the CPA executives responsible for this function.

Éamon Ó Cuív (Galway West, Fianna Fail)
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That was not the question I asked. Is there a breakdown of how much of Irish pension funds are currently invested here and abroad? My understanding is that in the last ten years as we start going towards retirement, the investment strategy gets more conservative. It was also my understanding, and this might have changed in the last ten years that in Ireland they tend to go for German state bonds rather than Irish state bonds even though the yield from an Irish bond is greater than a German bond because some risk is perceived there. Could the witnesses maybe fill in what is happening at the moment? Presumably any body that is set up, whether it is independent or part of the industry, will follow the same model.

Ms Moyagh Murdock:

I will come back to the Deputy on that. We need to do a bit of a survey of members. They may all have different profiles of members and that would result in a different sort of investment strategy there.

Ms Jacqueline Thornton:

We do a publication in insurance called Factfile. We look at how much is invested and we look at policies. There are basically statistics around the life and pensions as well as the general insurance market. We have a breakdown of underlying investments that are invested in Irish equities and underlying investments that are invested in the rest of the EU and globally. While we may not be able to pinpoint it as closely as pension funds versus investment funds or those held outside the pension, we can certainly provide some data from the past few years on the split between investments in Irish equities, fixed interest securities in the rest of the EU and abroad.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Can that be broken down between equities and more secure investments such as government bonds?

Ms Jacqueline Thornton:

Yes. We split it into bonds, equities, property funds, etc., so we will have a split. Our most recent one is 2020 and we should be able to get that to the Deputy fairly quickly.

He made the interesting point that a lot of households make the decision that the pension is a household pension and what is mine is yours and what is yours is mine. That is great and all well and good until perhaps further down the line and things break down. In a divorce situation, what happens to the pension? They might say, "What is mine is yours and yours is mine", but it is in one person's name. It is incredibly important to bear that in mind in cases of divorce because, frequently, the pension can be the second largest financial asset after the family home. More frequently, the family home is the topic of discussion. We must remember that there is functionality there for the remaining spouse, the spouse who stayed at home, for example, and forewent the contributions to their pension. There is a mechanism there to ensure the main pension is split legally under a pension adjustment order. That is very important, particularly for the gender pension gap and for women in retirement who perhaps did not get the opportunity to put as many pension contributions in during the accumulation period. They have that open to them as well.

Éamon Ó Cuív (Galway West, Fianna Fail)
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That is fine but I think Ms Thornton is missing the point I was making. The only pension that does something dramatic for the gender pay gap is the State pension. It is ruthless in what it does and it does it for the pay gap in general and for the gender pay gap. It rewards all workers equally in terms of cash. What I am afraid of, because I have been around this side of the shop a while, is that in time the system will use leverage to start depressing the State pension, which is the good one for tackling the gender pay gap and the income pay gap between those who had good employment, in favour of this system. We will then have three systems, namely, private pensions, this pension and the State pension, which is the one that is most ruthless in defending those on low incomes or the gender pay gap. Nobody can quantify that but what I do know is that a lot of times in my career we have been told a thing will not happen in the future or will not have those consequences but it has.

Ms Jacqueline Thornton:

If that is the case, if that risk exists, should we not make sure the foundations of the auto-enrolment system now are as fair and equitable as possible, if there is a risk in the future?

Denis Naughten (Roscommon-Galway, Independent)
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We are getting into a very technical debate here and it is one the committee will be considering in greater detail. Deputy Kerrane wants to come in with some questions.

Claire Kerrane (Roscommon-Galway, Sinn Fein)
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I thank the witnesses for coming in and for their opening statements and submissions. They have examined this in great detail so I thank them for that. A number of my questions have been asked and, therefore, I will not repeat them. In her opening statement, Ms Murdock referred to the significant input from taxpayers. We are in a situation now, particularly for young people starting out, where there are a lot of difficulties as regards renting and trying to save for a deposit for a house. For some, it is going to seem totally alien to have to take away part of their salary, with the cost of living and everything rising and the difficulties they face, particularly in housing, to set aside for a pension. Ms Murdock talked about the need for the same flexibility to be offered as in the likes of the defined contribution schemes. Could she comment a little further on that? What kind of flexibility is she referring to and what needs to be in place to ensure that flexibility?

Regarding the apparent changes between the initial straw man proposal that was published and the design of the proposed scheme now, do the witnesses have any feelings around why this was changed and why we have seen the apparent differences from when the straw man proposal was first published? Do they have a view as to how those changes came about?

The question of what happens to scheme members at their retirement and the end of this scheme has been raised previously at the committee. That is important because people need to know what they are going to get at the end of this, or at least have some rough idea to provide that certainty at retirement. Do the witnesses have concerns about the outcome for participants of the scheme and what the return for them could be? I know it is difficult to answer that. I imagine there are immediate concerns given there is so little detail in the first place in the general scheme. I ask them to elaborate on that.

Ms Jacqueline Thornton:

I can run through that. It might be worth looking at a little of what we call pension lifecycle to see where the need for flexibility comes in. Say you start taking out a pension at 18, 19, 20 years, if we are in an ideal world, and you start saving, there is not a huge need for flexibility at that point. What you are doing then is putting money aside and letting it grow. You have a cheap and cheerful pension so it is low cost, low investment availability and low investment options are all fine for that cohort. That is obviously in line with the auto-enrolment principles. As you go through your career and life, your circumstances change. When you get to age 31 or 32 years, say, your circumstances change and you will be looking to buy a house and perhaps start a family or you might be cohabiting or getting married and you might be looking at your pension then. Hopefully at that stage you are earning a little bit more so that you have a little bit more to put into your pension. Then you might say that in order to promote the adequacy of your pension in retirement you will top up your contributions. You cannot do that with the auto-enrolment system. You cannot top up and make extra provision for your adequacy in retirement and neither can your employer. If your employer wants to make contributions and say, for instance, that an employee is very good and the employer wants to keep them so that they will increase the employer contributions, they cannot do that. We keep coming back to it but this especially affects women who are taking breaks for maternity or carer's leave and who want to shore up the adequacy of their pension by making additional contributions; they cannot do that. Some of our members provide benefits for their female employees who come back after maternity leave where they back pay or overpay for a year to shore up the hole in the pension savings that would have happened due to maternity leave. They cannot do that with the auto-enrolment scheme. You might look at your pot and move your pension savings into a defined contribution scheme that does offer that kind of flexibility but unfortunately you cannot do that either because once you start in the auto-enrolment system your money has to stay in the auto-enrolment system. Once your pot grows to allow you the flexibility you need to stop-start or overpay or underpay, then there are issues with the proposed auto-enrolment. Those flexible options already exist in the defined contribution world and that is what we are saying. We are saying that auto-enrolment should be at least as flexible as what is there in private pension provision.

The changes to the strawman proposals are quite interesting. We do not know what might have brought them about. I mentioned that the Department would have been doing quite a lot of research on international comparisons and would have looked at them at some point between when the strawman proposals were published in 2018 and the publication of the design principles last March. The central processing authority was broadened out and became a bigger structure and a bigger authority. In effect, it is becoming a pension provider. You can see that in the general scheme because it will be regulated as an investor relations, IR, so it will be a regulated pension provider. Unfortunately, I cannot hazard reasons as to why that has changed. We have done some research and looking at some of the feedback we received on the strawman proposals, the suggestion was made that rather than having a central processing authority to use something like Revenue, for example, because Revenue has all the details. I believe the National Treasury Management Agency, NTMA, was also suggested. We have not seen anything about broadening out the central processing authority. We could not really answer for that one.

On retirement, the question about decumulation has come up. The OECD has published a document on best practices in auto-enrolment which ranked what it regards as the most important things when a country is considering bringing in an auto-enrolment structure. Decumulation and being clear on the decumulation options at retirement were ranked as high. That is something we do not have here. As we understand it, the position is that at retirement the existing decumulation options at the time will apply. Obviously we do not know what they will be. We are going through a period of what has been called pension simplification. The interdepartmental pensions reform and taxation group, IPRTG, has made suggestions some of which are to change the decumulation options. Currently, with this auto-enrolment scheme, we are asking individuals to start investing into a pension at 23 years with no sight of how they will access their fund. How much they will get in retirement is a different issue because obviously there are very strict rules around projections and how much you have to disclose to people who are taking out a pension on how much their income in retirement is likely to be. They are required and mandated on that and there are quite strict rules about how to do it. However, at this point we have no sight on how, whether it will be an annuity, an accrued retirement fund or something else altogether?

Ms Jacqueline Thornton:

I would ask the Senator not to volunteer Insurance Ireland for that, please. I mentioned earlier that there is a very robust and highly regulated pensions environment already in place. It is providing occupational schemes and is very experienced in doing that. It has learned over decades and the structure is already there. The original strawman proposal which saw the central processing authority as a processing centre that would collect contributions and give them out to the private pension providers seemed to work quite well because you would leverage the existing infrastructure; the auto-enrolment could be set up relatively quickly because you are not building a State body to deal with it and as I said, you are dealing with very experienced pension providers and are going back to a very highly-regulated environment. There are a lot of consumer protections there, solvency requirements and an onus on responsibility to the consumer that has already been built in. Looking at the UK or Australia, for example, those systems seem to work quite well. Nothing is perfect. Even the Nordic structures are not perfect. There are issues with all of them but I think that all stakeholders are agreed that auto-enrolment structures should be set up as quickly as possible, and we definitely want to see it delivered, so let us do that in the most cost-efficient and resource-efficient way possible.

Ms Jacqueline Thornton:

That depends. Take, for example, investing through your occupational scheme at the moment, you will be putting money into a pension which will be invested in an asset mix that you have set out. You might say that you want your pension invested in property and fixed interest securities, etc. If you do not make a choice, then generally you will go into a default mix of assets within which there is quite a diversified bucket of investments. That allows for the €20 a week to be split into a number of different funds.

Ms Jacqueline Thornton:

The Senator is suggesting that the State would make the investment decisions and the pension holder, personally, would not.

Ms Jacqueline Thornton:

It strikes me that that is similar to what is being proposed. The State will collect all the pension money and pool all the contributions together so the Senator's €20 a week will be pooled in with everyone else's. Then the central processing authority will decide, according to the Senator's attitude to risk, whether it sits in the cautious, moderate or adventurous fund mixes. It will decide where to put all that pooled money. If it goes into the adventurous fund, it might put it into equities, start-ups, etc. If it is put into a cautious fund it will tend to go into fixed-interest securities and also the lower-risk funds. That is what is being proposed at the moment. The Senator will have no say about where the money goes. That decision and the liability for that decision, whether it is a positive or negative one, sits with the State and with the central processing authority. All the responsibility for making sure that the Senator's investment is made on time so that he does not lose out will sit with the new central processing authority. Does that answer the question?

Ms Jacqueline Thornton:

We see problems with a few bits of it. The main problem we have is the element around flexibility because it does not allow for individuals to make their own decisions over and above the contribution levels.

With regard to a central processing agency, CPA, we are looking at a State-run body, which would carry all the liabilities of a pension provider with those decisions around the operational risk, the market risk, and the insolvency risk. They would also be regulated as a pension provider.

Ms Moyagh Murdock:

Perhaps I could come in on that. Our concern is that this State-run body is going to have to replicate and mirror all of the infrastructure resources that are currently already in place with the pension providers in Ireland who have been doing this for decades. I believe they have served their customers very well. They are very experienced. It is a very complex and highly skilled function. Our concern is that it is unnecessary to start from scratch and to replicate a body to take on those responsibilities. It will add a significant overhead and additional cost, and it will delay the implementation of an auto enrolment scheme. It may divert resources into having to run the system as opposed to availing of the existing infrastructure that is already there.

Ms Jacqueline Thornton:

One of the things we are still waiting for and have not seen is an impact assessment of that. What is the cost-benefit analysis to the State in running this system? How much will it cost to run? What risks are being taken on and how will they be adequately mitigated and protected?

Ms Jacqueline Thornton:

The Senator has hit on a very important point there.

Ms Jacqueline Thornton:

For the person who is paying the €20 per week, the point the Senator has hit on very well is the need for advice. The Senator is quite right. If my boiler breaks down I will not fix it, I will call a plumber because they know what they are doing. I would not be any good to fix the boiler. So, we go to a financial adviser who is well versed in this and who looks at all of the different providers, who understands me, who gets to know me and my attitude to risk and my risk profile, and what I am looking to get out of it. The adviser then advises me on the decisions I need to make.

Ms Jacqueline Thornton:

Yes, and the pension infrastructure is in place. We believe that the structures are already in place to deliver auto-enrolment. Certainly this is what was originally suggested in the straw man proposal. I apologise as I have been corrected by my colleague about Deputy Kerrane's question - it was a European Commission report on the best practices of auto-enrolment, not an OECD report.

Denis Naughten (Roscommon-Galway, Independent)
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If I could come back to the witness and the point being made. From the evidence we have got, regardless of whether one has the view of principle that it should be State-run or run by the financial industry, the main argument being put forward in evidence that we have received is that one could establish an operational fund far quicker if it is piggybacked on the existing industry rather than establish a mechanism. Everybody agrees that if it is a State entity being established to invest the funds, there is going to be a time lag involved in it.

Ms Moyagh Murdock:

It is important to point out that it is a highly regulated industry, under the jurisdiction of the Pensions Authority. None of that would change. All of the accountability would be there. The scrutiny is already there for the private pension and occupational pensions that are there. We have the approved retirement fund, ARF, system in place and the master trust. It would be no diminution of that regulation and oversight that is already in place. It would be a more streamlined approach to it.

Denis Naughten (Roscommon-Galway, Independent)
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It is clear from the general scheme that this new fund must comply with the existing law, both domestic and international law. Based on the witness's view of what has happened elsewhere, what is the time differential? What is the genuine timeline to establish this piggybacking on the existing industry? What is a genuine estimate in relation to it? People have said that this can be done in 12 months. I do not believe that realistically, on 1 January 2024 - regardless of what approach is taken- that this can be effectively up and running. What is a genuine estimate the industry would see for those timelines to be delivered?

My second question is being thrown back at Ms Thornton in the context of her question about the change in approach following the publication of the straw man report. Would that have anything to do with some of the reports that we have had from Charlie Weston, and the legislation that has been accepted on Second Stage from Deputy Ged Nash around the lack of transparency on fees? One headline in the Irish Independentsays "Six in every ten euro in a pension pot being consumed by charges". There is a lack of transparency in relation to charges and there is a concern that there would be an agent of the State gathering money that would be going to fund the fees of the pension industry. May this have been the reason for the change in approach, leaving aside the fact that in the general scheme of the Bill there is a cap on fees? Does Insurance Ireland believe that this may have been a factor for the change in approach?

Ms Jacqueline Thornton:

I will take the Chairman's last question first. I would hope that that headline was not behind a change in public policy. I would hope that the legislators and the Department are able to look beyond that and look at the evidence that is actually presented when they actually review the information in the private pension market. I do not recognise that €6 in every €10 is going in charges. Our members do not recognise that and we were clear about that at the time. That is not a fee we recognise. I have seen some of those headlines and I have seen some of the reports. We have looked at the evidence in it and at the evidence from our own members. It looks as though some of those figures - if I can phrase this correctly - are based on assuming the maximum available fees for everything involved in a pension, be that the advice on the pension, the asset under management charge, policy fees, contribution charges or investment charges. It seems to assume that the maximum charge possible permitted under the regulations is taken. We have a very competitive private pension market in Ireland. I do not believe I have ever seen, and if I have it is very rare, maximum fees being taken on a pension. The fees that are taken on a pension are commensurate with the services that are provided for that pension. That will differ widely across what the individual or what the employer wants. For a standard occupational scheme, with a default choice and with the employer doing most of the information and meeting most of their obligations, one can expect the charges to be quite low. In some instances, the reduction in yields, which is what is used to measure the impact of pension charges on a product, can be lower than what the proposed caps on auto-enrolment are. This is particularly relevant for very large schemes. It is like everything, however, that the more services provided by the pension provider, the more cost is involved with that and the more there is an impact in the reduction in yield of the pension. That gets to be agreed. For an occupational scheme it is agreed between the employer and the pension provider. For a personal scheme it is agreed between the individual and the pension provider as to what they are going to do for the services.

On the Chairman's point on transparency, I do not believe one would meet anybody who works in pensions who would disagree that more transparency is needed in that area. It is widely acknowledged. It is very complicated. The way the reduction in yields is relayed to an individual is through the statement of reasonable projection, the SORP. These are very complicated actuarial calculations. They are very difficult to understand even for those of us who work in the pensions environment. I am not an actuary. I read my pension summary and go "Oh, okay, I will come back to it later". We would definitely agree that there are some measures needed to make pensions more understandable. The information needs to be clearer. There is a lot of disclosure that goes to a person when he or she takes out a pension. I am sure that members will know that it is a lot of information and much of it is quite legalistic because it has to be. There is a lot of work to be done on disclosure and making information about pensions clearer to individuals. There is also a lot of work to be done around financial education for all, in order to understand a pension is, how it works, and the fact that the person is actually paying himself or herself. On the point about auto-enrolment, there are individuals who will see this as an extra tax or about losing income, when actually it is not about that. At the end of the day it is about the person paying his or her future self. It is about people making sure that when they get to the end of their working life they have a standard of living in retirement that does not drop when they stop working.

The Chairman's first question was about timelines, which is an interesting question. We are all aware that the setting up does involve significant cost. Even if the general scheme changes and we do go to piggyback on the existing pension infrastructure, there will be changes that need to be done. Ultimately, that would depend upon what the final legislation says.

When the SSIA savings plan was in place, some of our members did provide access to an investment-based SSIA plan. Some of our members may well have the functionality in their system already and others may have to build it. Ultimately, however, the timeline will depend on what the final requirements are so it would be disingenuous for me to sit here and say it will be done in two years or in 12 months because we do not know until we see the final rules what the build is going to take.

Ms Moyagh Murdock:

It is important to draw on the experience of our neighbours in the UK with the National Employment Savings Trust, NEST, auto-enrolment scheme, which took approximately five years to establish. That is understandable when one has to build a competent team and go out through the public appointments system to recruit, train and establish the organisational structures. It is a very ambitious timeline. We are all chasing a finite number of experienced pension professionals and we have to have the competency in the organisation to deliver on the mandate and deliver as set out in the Bill all the executive functions and responsibilities of the central processing agency, CPA. That is not a small undertaking and it will require time and resources to do that.

Marc Ó Cathasaigh (Waterford, Green Party)
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Given where I am in regard to this discussion and the more general discussion, I will be synopsising in asking my questions and the witnesses can come back to me on this. The central themes in the presentation seem to be around the age limits and the income limits, which were addressed first, and then, by inference, the gender implications because it is suggested it will predominately be women who will be engaged in that part-time work or below that income level.

The CPA issue is interesting because we have heard a range of evidence to suggest that the CPA as envisaged in the general scheme is far larger than was envisaged in the straw man, in terms of Revenue having a potential role with regard to gathering contributions and then the role of the CPA in managing the investment. It seems there are two things at play here. There is a practicality and expediency issue in terms of how quickly something can be put in place but there is also an ideological viewpoint as to whether pensions of this type should be managed on a private basis or whether there should be larger public involvement. There is the question of which does better and which acts more in the interests of the individual, as Senator Burke, Deputy Ó Cuív and I have been suggesting, and which works better in the interests of the State in terms of the investment decisions that are made in the longer term. It would be for this committee to go back to the Department to ask those questions. Somebody along the line made a decision to substantially alter the structure of the CPA as presented in the straw man versus the structure of the CPA as we see it within this general scheme. It is for us, as a committee, to ask the question as to why, because I think it balances a practicality and an ideological viewpoint in making that decision.

I am concerned that we do not have a good line of sight in terms of what happens to pensions at the end of this process. I understand the rationale that it is a while away yet but, certainly, when we are asking people to make investment decisions, they need that line of sight. I would question the idea of how engaged people are going to be in managing their pension provision because the exact cohort we are targeting are people who are not actively engaged in their pension provision. I would have to say from my own personal experience that I am not good at it. We all think “I am never going to be old so I don't need to worry about that now, and the lads need new shoes.” We all make those decisions all of the time. I am not sure it is reasonable to suggest that the people who are being specifically targeted by auto-enrolment are going to be proactively engaging with their pensions manager to figure out if their priorities and their ideological viewpoints are being mirrored in their investment strategies. I am not sure that is what is going to happen.

As I said, I am not sure there is a question at this point in the conversation and I am probably synopsising, but there may be a few aspects that the witnesses want to pick up on.

Denis Naughten (Roscommon-Galway, Independent)
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If the witnesses have any final comments, they can incorporate those.

Ms Jacqueline Thornton:

I will pick up on one of those points, which was exactly the point I was discussing earlier with Deputy Kerrane. I agree that the whole point of auto-enrolment is to leverage inertia. We would not expect a huge amount of interaction and requirement, let us say, but there will be certain points throughout an individual's life where they are going to have additional moneys available and they need to understand where is the best place to put that. Again, we cannot overestimate the importance of financial advice and being with a financial broker because that will help people to understand that they have the money for the shoes but they also have this money over here, and they could do both.

As part of the discussion with the Chairman, we were talking about the need for financial literacy training. This is difficult. Pensions are complicated and that impacts on the engagement. I am a former independent financial adviser who advised on pensions and I would have that exact conversation with a client about saving for retirement. However, what I would usually get was: “I will be dead by then so I do not need to worry about it.” Then, suddenly, people are at 66 and they need to worry about it but it is a bit late. It is very important to try to get a level of engagement. Yes, it is very difficult because it is complicated environment to be in but, at some point during that life cycle, as people go through the auto-enrolment system, they need to think about how to increase the adequacy of their pension in retirement – it is for you, not a cohort, but you need to have that consideration, and the auto-enrolment system should allow you to do that.

What we have discussed here today is that, as it is currently drafted, there is not that support to allow people to increase the adequacy of their pension in retirement. However, having been in the auto-enrolment scheme passively for a number of years and getting their annual statement, at least they will kind of understand what they have there, and hopefully people will have a reasonable expectation of what they are going to get in retirement, although, as we have discussed, we do not know how they are going to get it. Regardless of whether it is the State scheme or a private scheme, they will have to get an annual statement every year which will tell them how much is in their pension and, theoretically, how much it is going to be at retirement should a set of economic assumptions be met. The hope is that when people start out passively in auto-enrolment, they become more engaged because they can see it, they can see their money growing and they can see their projected income in retirement growing. The hope is that, at that point, they start becoming more engaged.

Marc Ó Cathasaigh (Waterford, Green Party)
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I know the ESRI is going to talk about this as well. It is about the flexibility as people move through their working life and whether the auto-enrolment pension stays to one side as a kind of immovable object or whether they can use it to supplement or integrate with different pension provisions.

Ms Jacqueline Thornton:

The scheme sets out “pot follows member”, which it does for their pension savings as long as people stay in the system for their entire working career.

Eugene Murphy (Fianna Fail)
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I acknowledge the presence of the witnesses. Ms Thornton had an engagement with me some time back and I picked up a lot from that, which I appreciate.

I am sorry for returning to something that has probably been addressed already and I will keep it short due to the pressure of time. I was listening in my office and, as far as I can recall, Deputy Kerrane spoke about cost-of-living factors. I want to return to that because I was not present for the answers. I do not mind if the witnesses abbreviate the answer if they have given it already.

I meet regularly with small groups of people in my constituency, as my constituency colleagues do, and one of the issues I discussed recently was pensions. There were some questions that came up with young people, young couples and single parents, in particular. For example, our economy is pretty good now and although we are concerned that every second day there is an announcement about tech job losses, we are still told there is not going to be a collapse in that sector. In reality, however, we do not know what is going to happen. What happens to people if they lose their jobs and they are in auto-enrolment? Can they get that readjusted? Can they pay less? These are the type of things that are worrying people.

Second, to go back to the point made by Deputy Ó Cathasaigh, there is a lot of mistrust of the insurance industry. I do not mean that with any disrespect to any of the people involved but it is due to happenings down through the years and bad experiences people have had. When we go back to the big crash, all of the most influential and expert people told us there was going to be a soft landing, but I think that ball is still hopping in some quarters of Irish society.

There was anything but a soft landing.

People have genuinely asked what happens if there is some type of crisis or crash. We can talk about all the guarantees in the world but we live in an uncertain world and I can understand how people would ask these questions. Interest rates are increasing and everybody knows the cost of everything is going through the roof. Covid has not helped, and nor has the war in Ukraine, but I am still quite positive about the Irish economy. We all need to address the pension issue but how can we guarantee that if we enter a financial crisis and people find they are no longer able to pay the amount of money they are paying, their payments can be readjusted? These are the type of questions people are asking.

There is no public debate about this idea. The committee is discussing it, as are our witnesses and various other groups appearing before us, but the type of debate that is needed is not happening. No more than Deputy Ó Cathasaigh and other people, I was careless about my pension for years. I spent money on holidays, cars and everything else and I did not think about it. There are challenges with getting this through. I cannot see that happening by 2024. I ask the witnesses to response on those points.

Ms Moyagh Murdock:

I might just step in here on the trust issue. We appreciate that we have come through a turbulent time with the crash and that there were casualties involved in that but we have to acknowledge the role the Central Bank has been playing with all of the industry in recent years. Solvency II is one of the outcomes of that. It regulates and ensures that all the providers in this country are properly capitalised, have good prudential regimes and internal governance and are catering for risks and scenario planning. We are in a different place with regard to regulation, transparency obligations, the inspections the Central Bank conducts on our members and the relationship it has with our members. It is an intense and robust supervisory regime that we have in place. There is a price to pay in the cost of regulation but it also makes Ireland an important place for providers to feel they can come and do business. Trust may take time to build up again but we can demonstrate that we are compliant with all of the resolution and recovery regimes, and with the Solvency II and capitalisation regimes, for our customers and the consumers out there who have invested and put their hard-earned cash into pension schemes. That will continue in the future. I have forgotten the Senator's first question. Perhaps Ms Thornton will answer it.

Ms Jacqueline Thornton:

Judging by my understanding of the Bill, if people are not working, there is nothing to tie the contribution to and they cannot make the contribution. That is the lack of flexibility issue that comes up.

Eugene Murphy (Fianna Fail)
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That stops people from changing jobs. Is that what Ms Thornton is saying?

Ms Jacqueline Thornton:

Yes. Judging by what is in the scheme, contributions are inherently tied to salary levels. If someone does not have a salary level, there is no contribution to be tied to.

Eugene Murphy (Fianna Fail)
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I want to be clear on this. What someone has put in will not be affected. Is that correct?

Ms Jacqueline Thornton:

No. Ms Murdock has already addressed the mistrust factor and a lot of that comes back to the Chair's comment about the lack of transparency, the inability to really understand what is happening with one's pension and maybe a lack of wider financial literacy on the part of all of us in trying to understand that. It must be borne in mind that pension providers, as Ms Murdock set out, are operating in a highly regulated environment. What we disclose to our customers is determined by regulation. We have to do things in a certain way and we have to explain the statement of reasonable projection in a certain way. If we want to change that, bring in more transparency and make that disclosure more understandable, which we and our members do, some of the legislation and regulation will have to be changed to support that. Those are the kinds of conversations we have on a regular basis.

Denis Naughten (Roscommon-Galway, Independent)
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I thank the representatives of Insurance Ireland for their evidence and their constructive and positive engagement with the committee. They will revert to the committee on a number of matters members raised with them. We will suspend the meeting briefly to allow them to leave and the next witnesses to take their seats. Is that agreed? Agreed.

Denis Naughten (Roscommon-Galway, Independent)
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Our second engagement is a continuation of our pre-legislative scrutiny of the general scheme of the automatic enrolment retirement savings system Bill 2022. I welcome the following officials from the Economic and Social Research Institute, ESRI: Dr. Claire Keane, senior research officer; and Dr. Barra Roantree, research officer.

Before we begin, I will explain some limitations to parliamentary privilege and the practice of the Houses regarding references witnesses may make to other persons in their evidence. The evidence of witnesses physically present or who give evidence from within the parliamentary precincts is protected pursuant both to the Constitution and statute by absolute privilege. Witnesses are again reminded of the long-standing parliamentary practice that they should not criticise or make charges against any person or entity by name or in such a way as to make him, her or it identifiable or otherwise engage in speech that might be regarded as damaging to the good name of the person or entity. Therefore, if their statements are potentially defamatory in respect of an identifiable person or entity, they will be directed to discontinue their remarks. It is imperative that they comply with any such direction.

I call Dr. Roantree to make the opening statement on behalf of the ESRI.

Dr. Barra Roantree:

I thank the Cathaoirleach and members for inviting us to the committee today. We are both economists at the ESRI. We work primarily on tax, welfare and pensions policy. We are delighted to be here to talk to the committee about automatic enrolment. The introduction of an automatic enrolment pension scheme has been long mooted as a response to low levels of private pension coverage, particularly outside the public sector. The reason for this is that automatic enrolment is an effective way of raising private pension coverage. Evidence from countries such as the US and the UK, where similar schemes have been introduced, suggests that private pension coverage can be substantially increased by simply defaulting individuals into plans, with the long-run rise in pension provision largest for those who would otherwise have saved least. We will focus our comments today and in this opening statement on three features of the draft heads and general scheme we think are worth particular consideration by the committee during this period of pre-legislative scrutiny.

The first aspect of the proposed legislation on which we intend to focus is the proposal to change the tax treatment of contributions made through an automatic enrolment scheme. Instead of applying the existing "exempt-exempt–taxed", EET, regime, whereby income is exempt from tax when first received and paid into a pension, is exempt from tax as returns accrue and is taxed when funds are withdrawn from the pension, it is proposed that the State will pay €1 for every €3 saved by an individual in a private plan. This amounts to a move away from the provision of marginal rate relief and towards what is in effect a flat 25% rate of relief. The general scheme justifies this on the basis that "the benefits of tax relief [are] not at all well understood by ordinary workers", with "a different approach [being] needed to incentivise" lower-to-middle income workers who do not currently have a private pension. However, evidence from other countries suggests no change in the structure of tax relief on pensions is required for automatic enrolment to achieve its aim, as the policy works by shifting the default behaviour of individuals and firms. It is the default and change in default that has the effect, rather than anything to do with the tax treatment. Given this, it is unclear that such radical reform, which would add substantially to the complexity of Ireland’s pension tax regime, is needed to support the initial roll-out of automatic enrolment. Instead, if after the initial roll-out of automatic enrolment, certain groups are still thought not to be saving adequately for their retirement, the Government could then look at targeted incentives to further raise savings rates among these groups. We previously published some ideas of how one might do that, which are referenced in the opening statement.

As well as adding complexity to an already quite complex system, the creation of a different, parallel system of tax relief for automatic enrolment pension schemes raises questions of horizontal equity. I refer to circumstances in which two individuals with the exact same earnings profile over their lifetime would receive different levels of support from the State, depending on whether their employer operates an auto-enrolment scheme or a more traditional private pension scheme. There are also more practical questions, which the committee has considered previously, about the portability of funds accumulated through an auto-enrolment scheme to a more traditional private pension should an individual change employer, as is likely over the course of a working life.

A second important feature of the draft general scheme that is worth considering is the facility for people who are auto-enrolled to opt out after an initial six-month period. Research led by my colleague Dr. Keane has examined whether such a period of compulsion may lead to issues of affordability by simulating the distributional and poverty impacts of the scheme in these initial six months. Her research found that the largest impact on incomes will be felt by those around the middle of the income distribution, while the bottom two income quintiles, or bottom two fifths, of the distribution will see the smallest fall in disposable income. These results are driven by two factors. First, only around 1% of those in the lowest income quintile and 7% in the second lowest income quintile will be affected by auto-enrolment. That is because most of the people down at the bottom of the income distribution are less likely to be in paid work and have lower levels of earnings. Second, while we know that lower earners are more likely to be auto-enrolled, these individuals are often higher up the distribution of household income due to the presence of a working partner. We therefore see little impact of the scheme on the at-risk-of-poverty rate, even in the short run, based on the research that has been done.

The final feature of the scheme that we wish to highlight is the proposed cap on charges on the funds of those participating in an automatic enrolment scheme. For many people, paying for the management of a private pension is the biggest purchase they will make in life after buying a house. It is clear from the research that unlike estate agent fees or those associated with many less important purchases, pension management fees are not very salient and savers appear to face large switching costs. There is a good case for ensuring that the fees associated with the schemes into which individuals are defaulted are capped at the minimum level required to cover costs, especially as automatic enrolment is specifically designed and targeted at those who we know do not pay particular attention to their pension savings and are particularly unlikely to pay attention to charges that are often complex. At the moment, head 65 of the draft Bill says the Minister will set a limit on the charges made to the assets of an employee’s auto-enrolment fund by regulation. The Department of Social Protection has previously suggested that this cap would be set at 0.5% per year as an annual management charge, which, while lower than that applied in some other countries, is higher than, for example, the 0.3% annual management charge levied by the British National Employment Savings Trust, which is the fallback option there as auto-enrolment. That may serve as a useful benchmark or idea. The key point we make in this regard is that it is about making sure the costs are as low as possible while sustaining the programme. It is important to get that exact figure right.

We thank the committee for its time and look forward to discussing these or other aspects of automatic enrolment.

Marc Ó Cathasaigh (Waterford, Green Party)
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I found this submission interesting. It challenged one of the central tenets that has been put across, which we have not heard challenged before, namely, the 25% top-up. The ESRI states fairly boldly that it does not seem to have a huge impact on people's decisions when you make it a default pension option. That is probably the most interesting point for the witnesses to expand on, alongside the research the ESRI relied on in making that assertion and what it found from that.

Building on that, if we remove the assumption of the 25% top-up, what are the implications for the tax liabilities or what are the tax implications? Are we saying the relief should only be 20% or are we reflecting on how some of the auto-enrolment will behave under a 20% relief? There is also the 40% tax relief regime. That has implications for an employer's obligation to provide an occupational scheme, which is presumably supposed to be superior to an auto-enrolled scheme. Will it remove some of that obligation from an employer's point of view? Will it suggest to them that they can step back and leave auto-enrolment to do the heavy lifting?

In the context of another issue, which has been raised many times, it seems to me from my first glance at the ESRI's submission that it may address some of the flexibility issues regarding the movability of that pot subsequently and the ability to top up all of those things.

I am also interested in the other points the ESRI made around affordability and compulsion. If we have time, I might come back and ask the witnesses for their opinion around environmental, social and governance concerns. The ESRI did not address them in its submission but the witnesses may have thoughts on them.

The thing that jumped out most at me, because it runs counter to much of what we have heard at the committee, is the point about people's understanding of the 25% top-up. Additionally, if we were looking at that 6-6-2 breakdown to get to the 14%, what would the implications be if we just moved to a 20% relief?

Dr. Barra Roantree:

Where automatic enrolment has been rolled out and where we know it has worked, the tax treatment of pensions has not been changed. It is really the triumph of behavioural economics in that sense. It is the defaulting that shifts people. That is what does the heavy lifting. It has done the lifting in Britain. It has had really big impact there, at least in the short to medium term. We know that is the case in other countries as well. The point is that we do not need to make the change to the tax treatment in order to get those results. Because of the complexity that it potentially introduces and the difficulties with portability, what I outlined earlier and what I have quite a strong view on is that this is something we could come back to in the future, after automatic enrolment is rolled out, if there are groups that we think are still under-saving. Then something like what is being described, an SSIA-type top-up could work quite well. It can be targeted more towards the groups that are still not participating. For me that is the important point. I am glad to discuss it further. Auto-enrolment works because it changes the default, not because of the tax treatment. The evidence, a lot of which we cited in the opening statement, is very clear in that regard.

The actual tax treatment of pensions is a remarkably complex area. Our scheme, which can be broadly applied, is called the EET scheme. We have that tax treatment in common with many advanced economies. There are a lot of good features to it. Essentially, that system is neutral between consumption today and consumption in the future. That is something we see as economically desirable, namely, that you do not have the tax system distorting consumption towards wanting people to consume today or in the future. Another important part of the argument is that it is neutral between different types of pension saving products. When we talk about changing the system of marginal rate relief, that affects defined contribution pensions. It is very difficult for it to affect defined benefit pensions.

In a scheme like that proposed in the draft heads, we would effectively have blended marginal rate relief for a subset of private sector employees, with some of them in the existing system, and defined benefit schemes, primarily comprising public sector pensions, would remain in the EET system. We would have quite a degree of difference between the tax treatment of each of those pension schemes. We know that people move between jobs and between the public and private sector. I would worry about the consequences of that in the future. I do not think it has necessarily been addressed. One of the heads states that they might look at getting the CPA to research issues relating to portability in the future. Those are issues that could be clear at the outset regarding what is going to happen down the line. People's earnings change over time. Some people would find the proposed system beneficial at certain points in their lives and the existing system beneficial at others. There are serious issues around portability that should be thought through and worked out. I am not sure they necessarily have been to date. Setting aside the change to the tax relief would avoid having to confront a lot of those issues because portability would be maintained. From that point of view, there is a lot to be said for separating out the issues of automatic enrolment and the changes to tax relief.

Marc Ó Cathasaigh (Waterford, Green Party)
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Does Dr. Roantree have anything to say about the cost to the State of moving away? Essentially we are proposing a flat rate of 25%. The relief would then follow at 20% or 40%. A lot of cases exist where the auto-enrolled income would actually be a second income in the house. Would moving to a standard taxation approach actually increase the State liability in terms of the pension contributions?

Dr. Barra Roantree:

It depends on the distribution of earnings of those who are affected. We would need to go away and do the calculations on that. It is important when we are looking at the tax relief of pension contributions to think about the tax treatment of the draw-down later in life. If we are saying we want everyone to get the same tax relief when they are saving for the pension, why are we not talking about what we are doing to the pension income on draw-down? It is important in the context of pensions to look at both of those relatedly. Some people are of the view that it is unfair or not right that certain individuals can get 40% relief on contributions because they are higher earners at a particular point. At the same time, we need to remember that if they have high earnings over their lifetime, if they have high incomes, they are going to pay 40% on draw-down in retirement. We need to think about those two things. If they are not, if they are only paying 20% in retirement, that means we are essentially allowing them to tax-smooth the way that we do people with unstable incomes in other sectors. We have this feature in farming and we even have it for sports stars. We know their earnings are very concentrated in a period of their lives. We allow them some relief on that by virtue of the fact that those earnings are all made in their 20s or early 30s.

We published a report in 2021 and much of it has found its way into the Commission on Taxation and Welfare's report. If one is concerned about the cost of tax reliefs and thinking about which reliefs are not particularly well targeted, the tax-free lump sum is the most obvious and egregious example. It does not do much to encourage people to save in a pension. It is exceptionally generous to very highly paid people with defined benefit pensions, primarily public servants. It allows them up to €200,000 tax-free and another €300,000 at 20% relief. If one was looking at areas where it might be possible to pare back tax relief to pay for any of the cost of automatic enrolment as currently proposed or a different variant, that is a very clear area at which one would look. It would do a lot more in terms of being able to focus the incentives to save on the groups that one would be concerned about.

Dr. Claire Keane:

If I can jump in there, it is probably going to cost the State more in the shorter term giving this top-up. The majority of people who will be auto-enrolled will be earning under €30,000 or €40,000 a year. Many of them will be paying either no income tax or tax at the standard rate. They would be getting either 0% or 20% relief, certainly in the shorter term and for people who will have a flat earnings structure over their lives, so they may never enter the 40%, there will be a benefit to them but a cost to the State in doing that. As Dr. Roantree said, in order to auto-enrol people and in trying to target these people, we do not have to do that. The default option works.

There is also the issue of those who were in pre-existing schemes who have the exact same earnings over their lifetime. They are going to get less State support than somebody with the same earnings who is going to be on an auto-enrolment scheme. That could create friction in moving employment. If I am getting a benefit in one employment and I was to move to a company where it is not auto-enrolment and there is a pre-existing scheme, it might come into my mind that I could be worse off in terms of State support for my pension.

Denis Naughten (Roscommon-Galway, Independent)
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One of the issues that continually comes up, especially in respect of women, is the ability to top up their pensions. Under the occupational pensions, there is a certain amount of flexibility in that regard. Under the auto-enrolment system, there is not. Part of the problem is this taxation barrier, because they are two very different systems. If we were to address the issue of portability by having the same taxation system across the board, does this then allow for greater flexibility in terms of topping up at different points in someone's lifetime when the opportunity arises, particularly for women?

Dr. Claire Keane:

The more similar we can keep the two systems, the better. As Dr. Roantree said, in the UK and the US the authorities just continued on with the system that was already in place - the system of relief. I assume that would be the same sort of rules on the amounts by which people can top up and age limitations. This is a really complicated decision for people and auto-enrolment takes the decision away from them and does something we know will benefit them in the longer term. If we are complicating it by having dual schemes - even when I am looking at my pension I struggle to make sense of it sometimes. People struggle with these decisions. The less pressure we put on people, the better it will be for them in the context of having to make decisions and figure out what is going to be beneficial in the longer term, such as whether they should move employer, whether they are better off staying where they are. It is about trying to eliminate those sort of decisions for people. If we feel there is something wrong with the system, that should be tackled as a whole. Do we want these systems of tax relief, do we want these limits? The Government should look at that as a whole, not just for the auto-enrolment scheme but for the entirety of pensions systems across the board.

Claire Kerrane (Roscommon-Galway, Sinn Fein)
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I thank our witnesses for coming in and for their opening statements. What has been said about the rate of relief is really important. It is not something that has been raised to date, certainly not in any major way. We will need to look at that. It is important to examine international best practice, because this is new to us.

We are unique in that an awful lot of countries have a second tier on top of the State pension, which is very important given income at retirement. Dr. Keane has probably said all that needs to be said in that regard. It is a really important point, so I thank her.

Will Dr. Keane speak a little bit more about her research on the opt-out? The ability to opt in or opt out is always really important in the context of pension schemes. The point she made regarding the opt-out is important. With regard to the fees, does she see the best option for many employees as being automatically put into a default fund, similar to the systems in the UK and US that she has cited in her opening statement, for which there is a capped management fee? As has been said, pensions are not at the top of the list of priorities for many people, particularly young people, especially in light of the current housing situation. For some, the idea that part of their salary will be taken away at this point will be difficult. For an awful lot of workers, particularly young workers, is such a default fund potentially the best option? There is lack of education and knowledge about pensions even for the unfortunately very small minority of people who would be interested in talking about or looking at pensions in the first place. I do not think that is an issue for my generation only.

Dr. Claire Keane:

As the Deputy said, a couple of years ago, we looked at the impact of those first six months. This was even before the cost-of-living crisis and very high inflation. That six-month period is an attempt to bed things in for people and to try to get them to stay. In the UK, you can just opt out straight away. There is that option. However, a suspension option has been introduced. People can suspend payments for a period if they feel they are facing affordability issues rather than coming out of the scheme entirely. From a practical point of view, contributing from the very start may make it a little easier, particularly young people. It will mainly be young people and those on lower incomes who will be affected by auto-enrolment. If it begins as soon as they start employment, they many never notice it. They will also know that their employer is topping it up so they are getting something back. We are the only OECD country not to have an additional system on top of the State pension. We are facing into an ageing population, so we definitely need something like this. It will be really beneficial. People of all ages, although particularly young people, often do not think about how they will benefit from this when they are in their 60s. This default auto-enrolment will be positive for them, even if it takes them decades to see that.

As the Deputy has said, we have looked at this. We used the ESRI's tax-benefit model, SWITCH, to simulate 6% being taken off all of those people who are not currently in a pension scheme and who will be auto-enrolled. We were a little bit surprised at the results because we found that the bottom two income quintiles, the poorest 40% of the population, will see very little impact from auto-enrolment. This is for a variety of reasons but mainly because there is not so much employment income in those categories. There are people who are dependent on social welfare or who are below the €20,000 cut-off. We saw that it was more the middle-income groups that would be affected. This is because, while it is more likely that an individual lower earner will be auto-enrolled than a higher earner, because higher earners are generally already paying into pensions, those people tended to be found in higher income households. Poverty rates and distributional impacts are calculated on the basis of household income. The majority of people who would be auto-enrolled had partners whose income was higher, which put them higher up the income distribution ladder. That is a positive from the point of view of poverty impacts. We found very little impact on poverty from this change because those people are not found at the very lowest end of the income distribution but in the middle. That is a positive and, as I have said, that suspension option would allow individuals who really feel they cannot afford these payments in the shorter term to pause payments into the scheme.

Denis Naughten (Roscommon-Galway, Independent)
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Dr. Keane will correct me if I am wrong, but that would allow them to pay in at the 40% effective relief rate because they are in higher income households, even though their own income may be lower. Is that correct?

Dr. Claire Keane:

I am not sure if it has been clarified how it will work if one partner is claiming relief on their own contributions and another is contributing through auto-enrolment. Does Dr. Roantree know?

Denis Naughten (Roscommon-Galway, Independent)
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If we take what the ESRI is proposing, which is that we would go with a standard relief across the board-----

Dr. Claire Keane:

Yes, with a standard relief they would be in the higher income bracket.

Denis Naughten (Roscommon-Galway, Independent)
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I accept that auto-enrolment causes great confusion in this regard but, if we maintain the existing system of tax relief, regardless of whether they have an occupational pension or are auto-enrolled, it would allow those people to avail of the higher relief, even though they are on lower incomes and at the moment would theoretically get a 25% top-up, because the vast bulk of them are in households where there is substantial income coming in.

Dr. Claire Keane:

Some may be able to if they are taxed jointly with their partners. Some are young people who live at home with their parents. Again, everything is calculated on a household basis. Those individuals would not be able to avail of that higher relief but partners who are jointly taxed would. That raises another difficulty as some may get a greater benefit even if on the same income as another because one is single and the other is not. That highlights the issues around this.

Denis Naughten (Roscommon-Galway, Independent)
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Again, that disproportionately affects more women, or at least it would have done historically, which is a weakness that has been flagged in the context of auto-enrolment. Women with lower incomes would not benefit to the same extent from auto-enrolment.

Dr. Claire Keane:

There would be more female gain but, interestingly, we see that those who are going to be auto-enrolled are mainly men. The difference is not very big but there are more women in the public sector, so more women are already covered by a pension provision. Approximately 57% or 58% of those who are going to be auto-enrolled are men. However, there would be a gain for women who are jointly taxed and who would be able to claim relief at the higher rate.

Dr. Barra Roantree:

On the issue of fees, which the Deputy mentioned, the key thing is that the fees charged are as low as possible because we are talking about a group that is not particularly attentive to their pension affairs right now. The reason we are introducing automatic enrolment is that we know these people have put this on the back burner and we want to default them in. By that same logic or for the same reasons, we should be really concerned that the fees they will be charged on their pensions are as low as possible. I cannot say what that number is but it is really important that there is a real emphasis on ensuring that it is as low as possible because these fees can add up substantially. The annual management charge of Nest Pensions, 0.3%, gives us an idea of what has been done in the UK with a similar motivation. That company also has some charges on the inflow. It is quite complex to work out how annual charges and charges on the inflow equate to one another. In another committee, I heard people saying that Nest's charges work out at 0.48%, which is about the same, but it depends on how big the pension fund is and on the flow and sequence of contributions. It will be really important to see more evidence for the basis on which that level is set. Particularly if it is the CPA that sets this level, it should be set on a bottom-up basis. It should consider the costs that must be covered and what level of fees that equates to, which should be as low as possible. Whether that cap is 0.5%, 0.3% or something else, the key thing is that it is as low as possible because these fees really do stack up and can become quite a large share of people's pension savings.

Dr. Barra Roantree:

The current heads of Bill say the Minister will set the charge by regulation. I am not sure whether I have particularly good insights as to whether it should be the Minister or the CPA but what is important is that the basis for which charges are set is clear and that there is transparent information on the costs that must be covered, demonstrating that the charge really is as low as possible. That is key. In a way, who sets it-----

Dr. Barra Roantree:

These things can change over time, and you might be worried that, particularly when the system is being set up, it may have larger running costs that could then fall.

You would have to be careful about putting that in primary legislation. Allowing the Minister to set the charge seems a reasonable approach in terms of practicality.

Dr. Barra Roantree:

He or she could also make the decision on the basis of advice from the Department or this committee. I do not want to say that it should be set at point 3 or point 5. The key is that there is clear information and transparency regarding the level of charges, and that they are being set as low as possible. We are dealing with a group that we know will not be particularly sophisticated in terms of looking at the various options, if there are options there, in respect of different levels of fees.

Dr. Barra Roantree:

It is an effective policy lever that works by default. If the aim is to encourage more saving among people who do not currently save, auto-enrolment is an effective means of doing so. At the ESRI, we try not to take the position that something is good or bad, but it is an effective means of achieving the stated policy aim.

Dr. Claire Keane:

People will be auto-enrolled if they are between 23 and 60 years of age. Anybody younger or older than that can opt to contribute and will get the employer top-up and the State top-up. Below the age of 23 and above the age of 60, people will not be automatically enrolled but they will be given access to the pension scheme and will get the same benefits. We saw an interesting situation in the UK, which ran a similar scheme with an age limit and an income limit. It saw an increase in pension coverage among the people outside those limits. People who were not auto-enrolled increased their pension coverage purely because they had access to a scheme to which they had not previously had access. Those people saw they were gaining from employer top-ups. People above 60 and below 23 can decide to join the scheme.

Dr. Claire Keane:

Is the Senator asking what happens to the contributions they make?

Dr. Claire Keane:

Those contributions will be kept. After a certain period, I think those contributions will be kept until retirement. People cannot get the money back in the short term.

Dr. Claire Keane:

People will be automatically enrolled at times throughout their lives. The representatives of the Department may know more, but I understand that if people opt out, they will be brought back into the scheme automatically a year or two later. They would then have to decide to opt out again.

Dr. Claire Keane:

The intention is to pull back into the scheme those people who have opted out in the past.

Dr. Claire Keane:

People can pause their subscriptions. They may pay into the scheme and after a short time feel they are unable to sustain their payments. In that case, they can suspend their payments while remaining in the scheme. They can suspend payment for a time and return to the scheme later.

Dr. Barra Roantree:

We can think about it in two ways. For those who are automatically enrolled, what is being proposed is that the State will contribute €1 for every €3 saved, as the Senator said. We can think about it in that sense of €1 extra for every €3 saved. We can also think about it as a blended rate of relief, which is something that has been proposed before. Rather than giving relief at a marginal income tax rate, it is given at a flat rate of 25%. Those two things are equivalent. They are just different ways of describing the same thing. When the scheme was rolled out initially, and the design principles were there, I thought it sounded like a more dramatic change, as I said in my opening statement, to the exempt-exempt-taxed regime. It is better to look at this as a blended rate of relief for the automatic enrolment scheme in particular.

Éamon Ó Cuív (Galway West, Fianna Fail)
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There are very few people who pay no tax. At an income of €20,000, personal tax credits mean a person will be paying tax at 20% on that last bit of income.

There is a mirror trick here that is unfair. It has been more or less alluded to. Let us put it in simple terms. At the moment, if I am paying 40% tax on my salary - which happens at a fairly low individual income in this country - and I put €100 into my pension pot, that amount goes into the pension pot and there is no tax payable. Under the proposed system, if I am on the 40% marginal tax rate - I do not have to have much income to pay tax at 40% - and put €100 into my pension pot, 40% is taken away so I now only have €60 to invest. I get a kickback of another €15, which is one quarter of the €60. That means that for my trouble, even though I am a lot less well-off than a person earning €100,000 or €200,000 who puts an amount into the pot and gets a 40% kickback, I am getting €75 into my pension pot while the person on a very high income is getting €100 for the same €100 from their salary. I think my mathematics are correct. If I am paying 20% tax-----

Denis Naughten (Roscommon-Galway, Independent)
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Dr. Roantree might answer that point if the Deputy's mathematics are correct. It will probably have a bearing on where the Deputy is going.

Dr. Barra Roantree:

As far as I understand the scheme, the tax rate will not apply. The €15 the Deputy mentioned equates to €25. That is my understanding of how the scheme will work.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I have €100. I want to put money into my pension pot through the auto-enrolment scheme. Before I do that, I am on the marginal rate of tax so €40 is taken away. To put it another way, to put €100 into my pension pot, I have to have €130 or €140. If I say I want to put €100 aside, the taxman will call a halt and demand €40 of that. Now I have only €60 left. I put that €60 in and get a kickback of one quarter of that amount, which is €15. If I add that €15 to the €60, I get a total of €75. My neighbour might be able to put €100 into a pot under the current regime. Both of us take €100 in cash out of our wallets, rather than doing it all in paper transactions. One winds up with €75 in the pot and the other winds up with €100 in the pot. I think I am correct.

Denis Naughten (Roscommon-Galway, Independent)
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I will seek a comment on that point and will allow the Deputy to come in again. This is significant for us all in respect of the operation of the scheme.

Dr. Barra Roantree:

When looking at the tax relief on pension payments on their way in, it is important to also look at the tax paid on the way out. Under the current scheme, there is relief at the marginal rate on the way in but it is also important to think about the rate that will be paid on the way out.

Denis Naughten (Roscommon-Galway, Independent)
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Is Deputy Ó Cuív right in his mathematics as they apply to the payments into the scheme? I accept that there is a different tax treatment on the way out. The argument the Deputy is making is that one will have a fund to invest at €100 compared with a fund at €75.

Dr. Barra Roantree:

Is the issue in respect of the rate of relief that is being applied or in respect of the cash amount? Does the Deputy's concern relate to the equity?

Éamon Ó Cuív (Galway West, Fianna Fail)
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My concern is that like many things in this country, the State is more generous to the well-off than the poor. It is a mirror trick because people think they are getting cash back. It is a salesperson's trick. Life is full of them but one does not normally expect the State to get into salesperson's tricks. The proposal at one stage was that everyone would get tax relief at 33%. While that would mean a lot more money for those at the high end, it was at least the same in terms of percentage. In this case, if one hits the 40% at all, one is getting robbed, to put it bluntly. I could not understand that about the trick.

Dr. Roantree referred to the exempt-exempt-taxed regime. Let us consider two people, one of whom is contributing to a private pension fund.

He or she is exempt when putting it in. The other one is taxable but gets a bit of a kickback. It is not as good as the tax relief if someone is on 40% and is about the same on 20%. There is nobody on 0% because of the reason I gave. I presume that both are equal and that the income earned from the scheme is subject to tax relief, although we saw during the crisis what happened with that. One pays tax at the marginal rate of tax and presumably this income is as taxable as any other income.

Dr. Barra Roantree:

I believe that is correct.

Éamon Ó Cuív (Galway West, Fianna Fail)
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If that is so, it is rather presumptive, particularly considering the reality of people's lives, various sources of income and so on, to presume that the person who is put into auto-enrolment does not wind up paying 40% tax on the way out, on the total cumulative income. If people do not pay that, that is because they have a low income. Any people who put money into a private pension fund who wind up paying 40% tax only do so on the basis that, on any income, the higher one goes, the more tax one pays. I think the out and exempt part is the same because the income is treated the same. It is only the quantity that might be different and, therefore, I maintain that a trick is being played on people here and that the scheme is a bad deal, particularly for that middle-income group. Will the witnesses clarify a matter? If one person in a couple is earning a good income, that person would presumably get tax relief, but the other is in auto-enrolment, will be treated individually and will not get tax relief. In the case of tax at the moment, someone has to be legally married to a spouse, because that is the legal situation. He or she has to be in a civil partnership or a legal marriage. It does not cover cohabiting couples at the moment. The people on auto-enrolment would not get any relief on their investment but would get the kickback instead.

Dr. Barra Roantree:

That is my understanding of how the scheme will work. We talked earlier about how that is one aspect and complexity that the scheme introduces. There can be couples with the exact same income and distribution of income between partners who get different levels of relief depending on whether one person in the couple is in a more traditional private pension scheme. That is one complexity.

Éamon Ó Cuív (Galway West, Fianna Fail)
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I am looking at this in the way that people look at it. Industries look at things from a global perspective but people look at it from a personal one. If people came to Oireachtas Members for advice and asked if they should stay in or get out, the first question we would ask would be whether they are paying a 40% or 20% tax rate. If they are consistently paying 40% tax, we would tell them to talk to a financial broker and that the private pension will give them the same return as the other pension. Certainly, from a tax point of view, they would be better off getting out and putting the same amount of money in a private pension fund.

Dr. Barra Roantree:

The Deputy has well described the complexity that is potentially being introduced here. As I said in the opening statement, this is not necessary in order for AE to achieve its aim. We can separate these two things. We know from the evidence in other countries that AE works and lifts the level of private pension coverage because it changes the default option. The group we are looking at are people who might not necessarily pay attention to those pension affairs. AE effectively works because it changes the default choice, which would be to be in rather than out. That is why it lifts private pension coverage. From the evidence we have seen in other countries, one does not need these additional changes to achieve that. A better way of approaching it might be to look down the road in three, four or five years and see if there are still groups that we are worried are under-saving. If there are, maybe we can design something tailored specifically to those groups rather than having a broad change to the scheme of taxation. For all the reasons the Deputy outlined, this creates much complexity.

In a way, this is trying to achieve two objectives. One is to lift the level of private pension coverage and the other is to change the system of marginal rate relief. Those two things can be separated. Automatic enrolment will work to lift private pension coverage and there is much detail about that. On the second matter, there is a broader conversation that needs to be had. One of the things that I highlighted earlier as part of that conversation is that the biggest example of a mistargeted relief from the tax system is the tax-free lump sum. That is something that the Commission on Taxation and Welfare is focused on and which we have written about at the ESRI. That is not a well-designed or well-targeted incentive to encourage the people who we are worried about not saving enough to save enough; rather, the beneficiaries of those systems are those who will get 100% or so of their final salary as a big lump sum. By virtue of being able to get €200,000 of that tax free and the next €300,000 with a 20% relief, that is where the focus on restricting tax reliefs should be, rather than necessarily changing the marginal relief scheme, which broadly works quite well. There are issues around that, particularly the PRSI treatment.

At the moment, most of the contributions made to pension schemes have not had PRSI paid on them on the way in and, because we do not charge PRSI on the incomes of those aged over 66, that is a departure from the exempt-from-tax kind of model. There are ways in which could address that, such as levying PRSI on the incomes of those over 66. That is a separate discussion to the one of automatic enrolment. The issue of tax relief, the tax-free lump sum and PRSI is ultimately one which we can think of as separable from AE issue and whether it will work.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Did anyone cost it, within the narrow confines of the tax relief versus the State contribution, to do that at 40% and to give a little bonus to the 20% taxpayers? I think we are agreed that few involved pay no tax.

Dr. Barra Roantree:

I am not-----

Éamon Ó Cuív (Galway West, Fianna Fail)
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There could be a little generosity to those at the bottom rather than being a skinflint to those who might be on the 40% tax and still in the auto-enrolment system. We would also allow for better continuity of pensions.

Denis Naughten (Roscommon-Galway, Independent)
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Dr. Roantree addressed this earlier.

Dr. Barra Roantree:

Apologies. I did not mean to interrupt the Deputy. We have not done that. In principle, it is possible. The best people to do it might be Revenue or the Department of Social Protection. It is something that is knowable but it is not something that we have done. Regarding the Deputy's suggestion relating to tax, in previous work, we have suggested that rather than changing the marginal rate of relief from 20% to 40%, we could instead do something like an SSIA. It would be like what is being proposed but for a smaller, selected base, in addition to the tax relief. That gets at the group the Deputy is concerned about, which includes those people who are getting 20% relief on the way in and are maybe only paying 20% on the way out. If he is worried about them, it is a matter that could be returned to in two, three or four years. We could determine that we are still worried about that group saving too little and provide a scheme such as the SSIA, which would be targeted specifically at those people.

Éamon Ó Cuív (Galway West, Fianna Fail)
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What I am suggesting is much simpler. I like simple things. Most politicians put in the crinkles here but then when they come to-----

Denis Naughten (Roscommon-Galway, Independent)
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In fairness, Dr. Roantree has gone through this twice. We are under time pressure.

Éamon Ó Cuív (Galway West, Fianna Fail)
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Why was that 25% not made 40%?

Dr. Claire Keane:

We would have to ask the Department of Social Protection about that. One has to weigh up the cost to the State. It is not just a cost this year but a cost in perpetuity when this runs. That is the kind of work that we can do. In the past, I have looked at giving relief at a 33% rate. Those are political decisions. That is a decision about changing the entire tax relief. Dr. Roantree pointed out that if we want to get auto-enrolment under way, we do not even have to touch that at the start. It could be looked at separately if there was a question about whether the relief was fair. There are political decisions about redistribution and providing relief, but those sorts of relief are not needed to get people into pension schemes. As Dr. Roantree said, just putting them in by default will do that.

Denis Naughten (Roscommon-Galway, Independent)
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I have a question for Dr. Keane on that specific matter and her study of the modelling of the lowest 40%. She said the auto-enrolment does not really have an impact on them because they are under the €20,000 income threshold.

They are under the €20,000 income threshold. Most of the income for a lot of the people within that cohort is not employment income. We have heard evidence from the insurance industry in various guises, who have argued strongly that the threshold of 20% should be reduced. They gave the example of the UK where it is £10,000 and that they are even considering reducing that to £7,000. The Department of Social Protection, Community and Rural Development and the Islands have made the opposite argument that in relation to that cohort with under €20,000 income, the most important pension for them is the State contributory pension and the investment in that is where the focus needs to be. This is an issue that committee members have previously raised as an issue of concern. In terms of the modelling that has been done on those thresholds, if we were to reduce that threshold from €20,000 down, has that modelling been done or can it be done? Can the witnesses give the committee an indication if we reduced the threshold from €20,000 to €15,000 or €10,000 what would be the outcome? That is my first question.

My second question is for Dr. Roantree. It relates to the case he made very well and he has given the committee a lot of food for thought in terms of the evidence he has provided. In terms of the issue of portability, one of the biggest challenges we have regarding the State contributory pension is workforce participation. We saw a phenomenal increase in that during Covid-19 because there were more options in terms of flexibility. The reality is that if we want to increase incrementally over time and deal with the potential pension deficit in relation to the State contributory pension, if we can increase workforce participation rates that will have a dramatic impact on that. One of the ways to do that is by flexible working. Dr. Roantree referenced that auto-enrolment could be a potential barrier to moving between employments. Could it also be a barrier to moving between full-time and part-time work, or between mixed part-time employers as well? My question is whether we could inadvertently, through an auto-enrolment system that cannot be blended with an occupational pension system because of the way the taxation is structured, end up creating barriers to flexible employment and barriers to workforce participation that could cause us financial problems down the road as regards the social insurance deficit by 2070 or 2075. I know that question has a very broad scope but perhaps Dr. Keane could come in and Dr. Roantree could muddle over that one for a minute.

Dr. Claire Keane:

We did look at an alternative income cut-off of €14,000. This was work we did for the Department of Social Protection, Community and Rural Development and the Islands because it was trying to figure out the appropriate income cut-off. First, it is hard to compare with the UK because average wages are lower there and average pensions are lower there so what we want to do is to make sure people have an adequate replacement rate so that the income they get in retirement is roughly similar to what they got while they were working. That is probably even more important for people on lower incomes because if I am on a higher income then maybe I have my mortgage paid off and have more discretionary spending and can cut back a bit more whereas people on lower incomes, if they are relying just on the State pension to cover their costs, may need to have more. From 70% to 80% of a person's income is what we think of as an adequate or high enough replacement rate. If we look at the State pension we are talking around €14,000 to €15,000 per year and a person does not have to pay tax on that if they do not have an occupational pension. Compared to someone who was getting €20,000 before it is probably roughly adequate. Making someone who was on €14,000 or €15,000 contribute in the short term, that may be harder for them; having to pay the 6% charge, people on lower incomes might have even more affordability issues than people on higher incomes. It is very hard to pick what the best level is but if we go too low we are taking money from people all of the time when they are working and then they are getting the State pension which is probably an adequate amount for them anyway. It could be slightly lower but it is important to note that people can opt in. If I am below €20,000 but I feel that I want to have a top-up to my State contributory pension over my lifetime then I can opt in as well. What we imagine will happen is that generally people's earnings rise over time so just because I am on €20,000 now when I am 18, 19 or 20 does not mean that I will be on that for the rest of my life so I will probably get auto-enrolled in the future. Given that opt-in option where people can decide, yes I can take a 6% hit to my current income for the longer term, I think that €20,000 is probably a realistic and roughly appropriate level. It would obviously have to be monitored over time as incomes rise. People being able to opt in and pay into it themselves if they want to is important.

Denis Naughten (Roscommon-Galway, Independent)
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Will Dr. Keane provide the committee with that modelling on the €14,000?

Dr. Claire Keane:

Sure I can send on the publication. I think it is footnoted.

Denis Naughten (Roscommon-Galway, Independent)
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Can we have the plain English version not the economics version?

Dr. Claire Keane:

We looked at what would happen if people under 40 on between €14,000 and €20,000 were to be auto-enrolled and, again, we see very little impact on poverty. This goes back to the fact that those people may be on low enough individual incomes but we tend to find them higher up in the income distribution so they could be students, younger people living with parents, or they could have a partner who has a higher income. Even with that lower income cut-off we did not see a real, significant impact on poverty rates. That is the short version, the Chair need not read the report.

Denis Naughten (Roscommon-Galway, Independent)
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Dr. Roantree, an easy question.

Dr. Barra Roantree:

Yes. The risks the Chair outlined are worth taking seriously. It is very difficult to say the magnitude of how big the issue would be, that is something that is hard to know. However I think it is worth taking seriously and thinking carefully about it. Given that these changes in terms of the tax relief and having potential limitations on portability are not necessary to achieve the policy aim, that is why I would be very cautious about making those changes and would rather look at other ways of achieving the same aim.

In terms of portability one thing that is worth adding to that is that we are thinking about a group who we know do not pay particularly much attention to their financial affairs. That is why we want to default them into the pension system. Do we really want to be in a position whereby if they move around different employers, they end up having multiple different schemes? That is a real issue. There is the portability issue and because of that issue do we want someone when they get to retirement to have three, four or five different schemes? If that is something the lack of portability exacerbates the risk of, I take that issue quite seriously. We do not want someone who has not paid much attention to their financial affairs over time coming to retirement and then having to go around five different providers. I have done a PhD in economics and I am already dreading having to go to two, and from my time in the UK having to go to get the details from that one and bring it over. Trying to minimise the amount of complexity there is important and a good aim. From the point of view of what the Chair set out it is worth thinking about those things seriously. I do not think there is anything concrete we can say about how big an issue or what the magnitude of that issue would be.

Denis Naughten (Roscommon-Galway, Independent)
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Is it not potentially an attraction for auto-enrolment that if there was the same level of tax relief in auto-enrolment as there is in an occupational pension? Then with auto-enrolment, which allows a person to more from employer to employer, they are not tied to any employer or to any pension fund and they get the same level of tax relief. It actually might bring more people who are potentially in occupational pensions into auto-enrolment as a result of that because we do know now that people will end up in four or five jobs throughout their career, which is something that maybe was not an issue when auto-enrolment was established in the likes of the United States or even the UK to a certain extent.

My final comment is that no one projected the massive jump we would see in workplace participation levels over Covid-19. I think it was the ESRI who said it would not happen in terms of the evidence they provided to the Pensions Commission and we saw a dramatic shift in a very short period of time. Is there not a concern that if we start tinkering with this we do not know what the fallout could be in terms of workforce participation if there is not a need for it? Is that what Dr. Roantree is saying in plain English?

Dr. Barra Roantree:

Yes. Again with pension systems they are so important and so complicated and operate over such a long horizon that there is a real virtue to being careful in how we proceed in that there is the potential for inadvertent consequences down the line. We do not have to want to go back and change the system again. From that point of view what the Deputy says is correct. We want to make changes to the pension system rarely and carefully and from that point of view it is important to think these things through and be sure in what we are doing.

On the participation rates, during Covid I was especially worried about permanently low levels of participation, particularly among younger adults who were just emerging from the great recession, yet participation rates have shot right back to where they were. That is also the case across all age groups and it really is striking. I caveat that by saying it is not what we are seeing in other countries. In Britain and the US we are seeing lower rates of participation among older workers. We have not seen that here but we are not particularly sure what the reason for that is. There are some issues there. That links to the second part of the question the Chair had about sustainability. There is much that can be done for the sustainability of the pension system by having people working longer and in kind of a flexible way, as he outlined. However, I would not be so sure that is enough to eliminate the need for changes elsewhere in terms of-----

Denis Naughten (Roscommon-Galway, Independent)
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No, and we accept that.

Dr. Barra Roantree:

Yes, exactly.

Denis Naughten (Roscommon-Galway, Independent)
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In fairness, the committee reflected in its report that it was just one element of what could be done, but it is a significant element that should not be ignored and that was the point the committee made.

Dr. Barra Roantree:

Yes.

Dr. Barra Roantree:

Not as far as I am aware. One of the things it is quite important to think about when we talk about changing the marginal rate of relief and that bit of the debate, is that those changes will not affect public service pensions because that is-----

Dr. Barra Roantree:

I am not so sure about their pension arrangements. If they are part of the single public service pension scheme this is not relevant to them as they are already enrolled in a pension. Thinking carefully, one of the issues with consideration of the fairness of tax relief with respect to the marginal rate is you end up treating defined benefit, DB, and defined contribution, DP, differently and there is a big public sector-private sector division in participation in that. With apologies for making this point repeatedly, the tax-free lump sum is where you can give a lot more equal treatment for public and private sector pensions, in that it is something both can avail of. The tax-free lump sum is something very large and not particularly well-targeted at encouraging people who we want to save to do so. Again, that is where the focus should be for those who wish to restrict tax relief, rather than changing the marginal rate of relief.

Gerard Craughwell (Independent)
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There have been a number of changes to public service schemes over the years. I think the first major change came in 1995-1996. In April 1996 they moved to a co-ordinated pension. Then we had another revision and I think in 2013 the final revision came, which meant pensions are now based over your life. That means if you want a reasonable pension, you need to be Secretary General of a Department at the age of 25 years. The 2013 pension is having a detrimental impact on the public service, and especially on the Garda, the Army, the fire service and the Prison Service as their staff all have accelerated pensions because they are forced to leave in mid-life, sort of, when they are aged in their early 50s. Has any work been done on how that has impacted both recruitment and sustainability in some aspects of the public service?

Dr. Barra Roantree:

Not to my knowledge, or at least, not by the ESRI recently. The Senator is quite right to say it is important, in the context of the conditions and retention of public sector employees, to think about both salaries and pensions jointly. It is something that impacts the decisions and it is worth thinking about those things in an integrated way, but again we have not done any work on that and I am not aware of any recent work that has been done on it. There may well be some I am not aware of.

Gerard Craughwell (Independent)
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Is it something the Dr. Roantree would consider having a look at? I ask because we are beginning to see the impact now, especially in the area of accelerated pensions. By and large, the idea for most people in that area is to get in, get trained and get out, and to do it all as quickly as they possibly can because the pension simply is not there. It is particularly the case if a person is retiring at 55 years-----

Denis Naughten (Roscommon-Galway, Independent)
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We are dealing with auto-enrolment here and not public sector pensions.

Gerard Craughwell (Independent)
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Okay, I will leave it at that.

Denis Naughten (Roscommon-Galway, Independent)
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The Senator might want to take the issue up with the finance committee. I suggest the ESRI team here take it back to their colleagues for consideration and they might engage with the finance committee on that. Auto-enrolment really only relates to the private sector, and even the self-employed are not part of this.

That concludes our consideration of the evidence. I thank Dr. Roantree and Dr. Keane sincerely for their testimony. I can tell from the questions asked by colleagues that our ESRI guests have provided a huge amount of food for thought. Their contribution has been very significant in challenging some of the evidence we have had up to now and it will be clearly reflected in the report we produce. The committee will be considering this in our private session and we might take the opportunity bilaterally for some more information. If there is anything that has come up in the evidence that our guests feel could be of assistance to us, or from the work they are doing at the moment, they might forward it to the committee.

We will now go into private session to consider other business.