Society of Actuaries criticises government's approach to taxing auto-enrolment

[Colm Fagan]

The Business Post has this article http://linkprotect.cudasvc.com/url?a=https%3a%2f%2farchive.ph%2fh2Gem%23selection-915.0-915.340&c=E,1,BaTxgmFlmZzUjwlxEfY18eSg4B3LiJB3QNIyhwFPqvl-V7i0HUtRWxr_ITy-88lyx3R9YdFQiW73lKaYSqm_DIOpI4tOUk3g0x3YzalBGo3vUh0V-GSO&typo=1 about the Society of Actuaries’ criticism of government’s proposals, and the response by the Department of Social Protection.
Unfortunately, the Department still sees AE as a form of SSIA, delivering a lump sum at retirement. They either don’t understand or want to ignore the EET aspect of pensions.
The overall effect will be to make AE utterly incomprehensible for ordinary workers. The different tax treatment of AE, combined with the requirement for workers to decide their own risk profile, will force them to seek advice on what to do. Where will they seek that advice? How much will it cost? Will the advice be unbiased?
We know the answers.
That’s why I’m still hoping that the government will see sense and follow ESRI’s advice to have absolute consistency with conventional pensions and that it will also forget about asking employees to choose their own risk profile.

 

[Fortune]

The department's response sounds a bit defensive

 

[Louisval]

In another thread on AE, I asked the question about my obligation, as an employer, to offer both the AE scheme and the existing scheme to employees. On that thread, a financial adviser confirmed that I didn't have to operate two schemes.

So, it's not helpful for the department to be suggesting that if you don't like the AE system, an employee can always revert to the old system.
“Higher income workers who prefer to operate under the tax-relief system can still choose to do so - it is not being withdrawn".

I get that they qualify this with:
"However, they should check that all of the other benefits of AE are available to them such as matching employer contributions, the ability opt-out or suspend contributions for a period of time”

I really wouldn't want to offer schemes under two different regimes to employees. Some of the reasons for this are explained in that other thread but it should be pretty obvious that most employers will not want to go from offering no scheme at all to two very distinct schemes.

At a general level, as Colm said,

The overall effect will be to make AE utterly incomprehensible for ordinary workers.

I can't imagine that employers will be enthusiastic about offering two regimes, along with the associated responsibility of ensuring that on an initial and on-going basis employees are sufficiently briefed to make informed decisions.

 

[Fortune]

"However, they should check that all of the other benefits of AE are available to them such as ..... the ability opt-out or suspend contributions for a period of time”

They know fine well that any pension product will offer this, and that it's only AE that has restrictions on opting out or suspending payments.

 

[Louisval]

Hi Fortune. Hard to know what they mean really. For example, before setting up my own company, in previous companies that I worked in, the employer could specify the eligibility conditions - including making membership compulsory as a condition of employment.

 

[nest egg]

It is said that "simplicity is the ultimate sophistication". In rolling out AE, rather than keeping things simple and just focusing on getting the scheme established, the DSP decided to try to solve all sorts of issues with pensions at the same time, like making the incentive easier to understand. A noble cause, but this is classic 'project creep' territory, it just wasn't necessary. To state the obvious, you don't need to incentivise people to take part in a scheme in which they're going to be automatically enrolled.

The result of all this is that there will now be parallel pension incentive schemes, i.e. two ways of doing the same thing. They've ended up making it harder for employers/employees to understand pensions, not easier.

 

[Brendan Burgess]

Colm

Have you a link to the Society's letter to the government?

Brendan

 

[Duke of Marmalade]

Department responses​

The Department of Social Protection has since hit back at Grimes’ claims, saying that a public consultation on the scheme found that “many people find tax relief difficult to understand”.
“However, they found the use of a top-up, where €1 is added to a person’s retirement savings pot every time they save €3, much easier to see and comprehend,” a spokesperson for the department said, adding that a lack of understanding of complex tax relief incentives has led, “at least in part, to the low take-up of occupational pensions”.

This is not the point and the DSP know it.
Of course a very good case can be made that a 1 for 3 top-up followed by taxation on benefits to be the proper State incentive. It is a genuine incentive to low earners and wouldn't make sense for high earners. And why should the State incentivise high earners to save for their pension? There is evidence (in the DSP's submission to the JOC) that they are ultimately headed in that direction, as we have seen in the big rowing back of the scope for high earners to benefit that we have seen in recent years.
Similarly a very good case can be made for a flat rate of income tax (FRI) generally rather than our progressive system, as did none other than Eddie Hobbs and Renua (remember them?).
But it would be total madness to introduce FRI for future employees and have the two tax systems run in parallel with the ability to choose at any time the one that suits better.

 

[Colm Fagan]

Colm

Have you a link to the Society's letter to the government?

Brendan

Sorry, Brendan. All I saw was the BP piece.

 

[nest egg]

It is said that "simplicity is the ultimate sophistication". In rolling out AE, rather than keeping things simple and just focusing on getting the scheme established, the DSP decided to try to solve all sorts of issues with pensions at the same time, like making the incentive easier to understand. A noble cause, but this is classic 'project creep' territory, it just wasn't necessary. To state the obvious, you don't need to incentivise people to take part in a scheme in which they're going to be automatically enrolled.

The result of all this is that there will now be parallel pension incentive schemes, i.e. two ways of doing the same thing. They've ended up making it harder for employers/employees to understand pensions, not easier.

As the penny starts to drop on the implications of having two different incentive schemes, more and more bodies are calling for change.

This time it's Chartered Accountants Ireland:
"In order to avoid the “administrative complexity” of setting up and operating a second staff pension scheme under auto enrolment, Clohisey said, such employers may instead offer to extend participation in their current pension scheme to currently non-pensionable employees. However, if even just one of these employees refused to join the staff scheme in favour of being automatically enrolled, Clohisey said, the employer would still be compelled to undertake the cost of setting up and operating a second scheme. “While we recognise the state’s intention to make the establishment of an auto-enrolment scheme as seamless as possible, this is arguably at odds with the overall policy objective of auto enrolment,” she wrote."

 

[Duke of Marmalade]

As the penny starts to drop on the implications of having two different incentive schemes, more and more bodies are calling for change.

This time it's Chartered Accountants Ireland:
"In order to avoid the “administrative complexity” of setting up and operating a second staff pension scheme under auto enrolment, Clohisey said, such employers may instead offer to extend participation in their current pension scheme to currently non-pensionable employees. However, if even just one of these employees refused to join the staff scheme in favour of being automatically enrolled, Clohisey said, the employer would still be compelled to undertake the cost of setting up and operating a second scheme. “While we recognise the state’s intention to make the establishment of an auto-enrolment scheme as seamless as possible, this is arguably at odds with the overall policy objective of auto enrolment,” she wrote."

I think many of the complications, like this one, will prove non events in practice. The Bill devolves a lot of the details of administration to regulations and I can see them being handled in a pragmatic way.
The anomaly in the tax treatment is a different matter. Any resolution of this will really expose the incompetence of those who are responsible for this SSIA brainfreeze.

 

[GSheehy]

Where will they seek that advice? How much will it cost? Will the advice be unbiased?
We know the answers.

Quiet the slur on an entire profession from a member of a profession who have managed more than their fair share of good life & pensions companies into the ground, seem to have been oblivious to a lot of misselling scandals and brought us some beauts of products/'features' such as initial units, unit-linked whole of life, with profit MVAs and tracker bonds. Let's not forget who runs the show.

 

[nest egg]

As the penny starts to drop on the implications of having two different incentive schemes, more and more bodies are calling for change.

This time it's Chartered Accountants Ireland:
"In order to avoid the “administrative complexity” of setting up and operating a second staff pension scheme under auto enrolment, Clohisey said, such employers may instead offer to extend participation in their current pension scheme to currently non-pensionable employees. However, if even just one of these employees refused to join the staff scheme in favour of being automatically enrolled, Clohisey said, the employer would still be compelled to undertake the cost of setting up and operating a second scheme. “While we recognise the state’s intention to make the establishment of an auto-enrolment scheme as seamless as possible, this is arguably at odds with the overall policy objective of auto enrolment,” she wrote."

PWC are also on the case now, with similar commentary on the consequences for employers who will have to manage, and bear the costs inherent with running two parallel schemes.

https://www.pwc.ie/services/workforce/insights/auto-enrolment-pension-pulse.html

"Any existing occupational pension scheme may have a two-year vesting where the employee doesn’t receive the value of the employer contributions in the event they leave the organisation within two years. This will be important to consider where employers have significant turnover compared to the AE system where employer contributions are immediately attributed to the participant’s account."

"Employers will need to be clear in their communications where two different systems may be adopted. They’ll also need to consider which options suit different employee cohorts."

"Employers should consider the effect of operating AE or an existing pension scheme in isolation (where applicable) or both an existing scheme and AE scheme. They should weigh up the options, costs, and respective pros and cons."

"Employers should consider the operational changes needed once any decision is made about which pension structure to adopt for which employee cohort. This will include payroll changes, HR policies and procedures, and finance. Employers will also need to review employee contracts and existing pension scheme eligibility conditions. And they’ll have to prepare communications for employees."

 

[Duke of Marmalade]

Strange that they don't mention the tax anomaly. Also they state that taking a lump sum at retirement will be an option. I presume they mean tax free as currently DC retirees can encash the lot with 25% tax free. That is how it currently reads but will it be the permanent arrangement?
Hint on how to remember the anacronym NAERSA; think NEARSAY with A before E but don't ask Y.

 

[Duke of Marmalade]

Quiet the slur on an entire profession from a member of a profession who have managed more than their fair share of good life & pensions companies into the ground, seem to have been oblivious to a lot of misselling scandals and brought us some beauts of products/'features' such as initial units, unit-linked whole of life, with profit MVAs and tracker bonds. Let's not forget who runs the show.

Ouch!

Quiet the slur on an entire profession from a member of a profession who have managed more than their fair share of good life & pensions companies into the ground,

Not fair. We are talking about life companies and there have been no such incidents in Ireland and very few in the UK. Compare banks and general insurance companies.

seem to have been oblivious to a lot of misselling scandals

Turned a blind eye maybe, but the bulk of the misselling was done by intermediaries, including banks

and brought us some beauts of products/'features' such as initial units,

Yes that was an own goal, entirely scored by the actuarial profession. Didn't last long before the same profession rooted it out.

unit-linked whole of life,

Yes it was too complicated

with profit MVAs

Don't see the problem with these but they shouldn't have overseen the competitive stampede to unrealistic WP bonuses and worst mistake was allowing Single Premium WP.

and tracker bonds.

No again! The tracker bonds overseen by actuaries were all of the vanilla variety and served a certain market fairly, but that is a subject for a totally new rabbit hole. Structured Products on the other hand were not associated with the actuarial profession except in so much that due to pressure from actuaries the Central Bank finally put some sort of manners on the egregiously misleading nature of many of these, including outrageous use of statistically unsound backtests.

 

[nest egg]

Strange that they don't mention the tax anomaly...

I get the impression this was written for the benefit of employers, rather than employees.

That being said, even from that perspective, PWC should have called out the tax anomaly. Employers with an occupational pension scheme in place need to be aware those employees paying tax at the lower rate will have an incentive not to join their existing scheme.

 

[JimmyB99]

In another thread on AE, I asked the question about my obligation, as an employer, to offer both the AE scheme and the existing scheme to employees. On that thread, a financial adviser confirmed that I didn't have to operate two schemes.

So, it's not helpful for the department to be suggesting that if you don't like the AE system, an employee can always revert to the old system.
“Higher income workers who prefer to operate under the tax-relief system can still choose to do so - it is not being withdrawn".

In fairness, it's not just the Department that has peddled this line - Colm Fagan came out with more or less the same line when he was being interviewed by the former Pensions Ombudsman's brother a few weeks ago. When it was pointed out to him (even by Brendan) that this was not correct, he refused to acknowledge the point.

 

[Colm Fagan]

In fairness, it's not just the Department that has peddled this line - Colm Fagan came out with more or less the same line when he was being interviewed by the former Pensions Ombudsman's brother a few weeks ago. When it was pointed out to him (even by Brendan) that this was not correct, he refused to acknowledge the point.

Not again! I called this a rabbit hole the last time you tried to bring me down it - yet you're still at it!
All I said is that no-one will be forced to join the AE scheme, neither the one in the Bill nor my proposed alternative. People can always do their own thing as far as pension provision is concerned.
For what it's worth, I also said that I would much prefer if the AE scheme were treated exactly the same for tax purposes as existing pension arrangements. To do otherwise is to make things even more confusing.

 

[JimmyB99]

I'll try again!

If an employer doesn't offer an alternative to the AE scheme, then the employee has the following choices:
- to join the AE scheme
- to join a completely self-funded scheme (and thereby foregoing the employer contributions otherwise payable in an AE scheme)
- to join no scheme at all.

Do you agree that these are the three available options?

 

[Colm Fagan]

Do you agree that these are the three available options?

No! The one I was thinking about was the simplest of the lot, which you haven't mentioned. If I were the employer and someone didn't want to join the AE scheme, it would be no skin off my nose to match their contribution to their preferred pension