Minister for Finance told that auto-enrolment target of 2024 unlikely to be reached

[Brendan Burgess]

Auto-enrolment pension scheme likely to miss ‘ambitious’ 2024 target, officials fear

Department of Social Protection working towards a draft Bill for early this year, but planned start date may slip by

www.irishtimes.com

The scheme has “policy implications” for the Department of Finance, according to the briefing for Mr McGrath.

“The focus of our policy input will be to be supportive while minimising the cost and operational risk for the State arising from the establishment of the Central Processing Authority (CPA) and assist where appropriate on design,” it says.

The department has also been involved in discussions on the tax treatment of auto-enrolment pension funds.

 

[Duke of Marmalade]

The department has also been involved in discussions on the tax treatment of auto-enrolment pension funds.

I raised this issue elsewhere.
Tax relief on conventional pensions in the income bracket between the Standard Rate Cut Off and €80k is 40%. It is proposed to be a "bonus" equivalent to 25% relief for AE. Given the AE is so much less flexible than conventional it would be neglect of duty to put this section of the workforce into AE. Every employer who employs such people will need to set up a conventional scheme and possibly ignore AE altogether though that will disadvantage people earning less than this layer. To have both systems available from the same employer would involve silly complications as to when employees should switch between the two systems.
I see no simple solution to this. An obvious solution, and which has been called for for different reasons, is to restrict tax relief on conventional to standard rate. But then that makes AE (slightly) more attractive than conventional and ALL employers will be under pressure to provide AE even if they have a conventional scheme.
These problems arise from the naïve intention in the strawman to replicate SSIAs. Strawman even had that pensions in payment would be tax free, just like SSIAs. Many people pointed out the errors of their approach and yet 4 years later they are still proposing to serve up one dog's dinner of a tax system.
"The department has been involved in discussions on the tax treatment" - I think we can be sure that those discussions have not ended!

 

[Towger]

As per my post Brendan deleted in the other thread.

The design principles are here:

https://assets.gov.ie/219768/4aada71d-2731-4522-b218-9184a699652f.pdf

The state is adding 33% and employers with have no choice but to operate AE when instructed to by the CPA.

The system will not be ready by 2024, as instead of adding a few extra fields to the PAYE system and having Revenue collect the money the CPA are going to effectively duplicate Revenue's with their own.

 

[Duke of Marmalade]

The state is adding 33% and employers with have no choice but to operate AE when instructed to by the CPA.

A 1 in 3 addition to after tax income is equivalent to 20% relief on before tax income for a 40% taxpayer and 27% relief for a standard rate payer.
If an employer has a conventional scheme in place they are not obliged to operate AE.

 

[jasdpace@gmail.]

A 1 in 3 addition to after tax income is equivalent to 20% relief on before tax income for a 40% taxpayer and 27% relief for a standard rate payer.
If an employer has a conventional scheme in pace they are not obliged to operate AE.

I'm struggling to reconcile these figures - would you mind showing workings please?

 

[Duke of Marmalade]

I'm struggling to reconcile these figures - would you mind showing workings please?

I was struggling myself as I always took it as a given that 1 in 3 is equivalent to 25% tax relief. That is only true if the tax rate is 25%.
Case 1 taxed at 40%
100 gross income
60 net income
1 in 3 bonus of 20
Thus relief of 20% of the gross income
Case 2 taxed at 20%
100 gross income
80 net income
1 in 3 bonus of c. 27
Thus relief of 27% of the gross income

 

[Colm Fagan]

I am more interested in the statement from Finance: "The focus of our policy input will be to be supportive while minimising the cost and operational risk for the State arising from the establishment of the Central Processing Authority (CPA)"

Finance are obviously worried that the CPA could be a complete mess, operationally and financially. They're right to be worried.

To see how it could be a financial mess, look across the water. NEST (National Employment Savings Trust) is up and running for over a decade and is widely seen as a success. Yet NEST had a cumulative deficit of over £800 million as at 31 March 2022, despite boasting over 11 million members. They project to finally clear the deficit by 2038. The Irish government is modelling its auto-enrolment scheme on NEST. It is also proposing the same charge (0.5% of assets under management), but it will lack NEST's economies of scale - probably less than a tenth of its membership. So how can they ever hope to break even? Fund charges will need to be much higher than the 0,.5% indicated by DSP (but not written in stone in the Draft Bill, mind you). To give an idea of the scale of the challenge, I (generously) estimate fee income of €140,000 in year 1. What will costs be in year 1, set-up and running? Any advance on €50 million, any advance on €100 million?

To see how it could be an operational mess, look again at NEST. It has over 40 default funds (for different future retirement dates). The Irish scheme will also have three risk-rated funds. Each will have to be valued daily and units allocated to/ deallocated from individual members' accounts at prices ruling on those dates. There will be a wide variety of payroll systems for the host of smaller employers participating in the scheme, making it well nigh impossible to ensure that contributions will be allocated to the right funds at prices ruling on the dates contributions are paid. The CEO of a leading provider of IT services to this market told me recently that government hasn't a hope of persuading a reputable outsourcing company even to quote for the job.

Contrast that with the smoothed equity approach as explained here. There will be just one fund for everyone. "Interest rates" will be calculated once a quarter rather than daily. Crediting "interest" to members' accounts will be a cinch, just like to a bank or credit union account. The running cost will be a fraction of the cost of running a scheme designed on the lines proposed by government. Also, members will remain in the scheme post-retirement, when account values are at their highest. The half percent's will keep rolling in, so it will be no problem to keep running costs well under 0.5% a year in the longer term.

 

[Towger]

It will cost well over 100 of million for just the setup of the IT systems, maybe double or more. It could be the Childrens Hospital for IT suppliers.
The budget for PAYE Modernisation was 50m 5 years ago. That used existing systems/resources and was designed and written in house by Revenue, with subcontractors hired to do the bulk of the grunt work.
AE is starting from the ground up, the CPA needing to duplicate PAYE Modernisation for just the 'Collection' part of the system, then add 'Investment' and 'Repayment' etc, etc etc.

 

[Duke of Marmalade]

Obvious solution to the tax conundrum. AE should get the best of both systems. Thus AE should get tax relief as usual but there should be a negative tax credit of the State bonus (which is still paid on all AE accounts), but of course not exceeding the tax relief.