Éamon Ó Cuív questions auto-enrolment pension fairness and inflation

A few random thoughts. The state contribution here is proposed as a third of the employer contribution. My understanding is there will be no tax relief from that. At the moment if you're paying 40% tax you get 40% off. Would you think that's an anomaly in the scheme that the state contribution is actually bigger and will continue to be bigger for those who are wealthy? Not only because they pay more in and therefore get more tax relief but also because it's going to be at a higher rate of 40% on the marginal income. Do you think that that's an anomaly that should be addressed? The second question I have is you said you're against the upper limit of £80,000. I was wondering what's the reason for that? Can you explain why you're against that? It doesn't seem a very high limit to me. Lots of people are earning £80,000, particularly in the high tech industries at a very young age. I was wondering what I think that is. I think you make a valid point about employers paying in, but that's the query I have about this whole system of paying in today and getting out in 30 years' time and having inflation biting into this. We saw figures that were given to us of what you would get in 30 years' time, but what they forgot to tell us was that you would have to do an inflation adjustment on it to get real value. Whereas improving state pensions, and there's nothing to talk about bringing a pay-related PRSI for job seekers allowance, I understand that's under consideration. If you think about it now for a minute, most of the people who will be caught in auto enrolment will not be drawn out of it for 30 years. The state, the employer, and the employer is going to pay in. So for the first 30 years, from now to about 30 years, we will say an average of 25, even some people might not be caught by auto enrolment in that chunk. It is all going in and nothing coming out. Whereas if you continue on, what I think is a very efficient system is the pay-as-you-go system and improve that, and you could even make it pay-related, it gives you the money out in real time, which means it's inflation-proofed. That sounds good for the pension industry, of course, because they don't get their hands and wads and wads of everybody's money, but they're just a few random thoughts. I wonder what your view is? Mr. Prime Minister. Thanks for your observations and questions, Deputy Deputy. To start with your question on the tax relief, yes, we have identified this as an anomaly in the proposals. What we think is really important is we have a very significant pensions coverage issue. At the same time, we have an existing model of occupational pensions that is working reasonably well for where we have that coverage. So we think it is very important that we don't break that element of the Irish pension system, which is working effectively. So we would caution strongly against any uncertainty in relation to existing tax treatment. We have seen directly in IBEC the impact that previous uncertain and volatile tax changes to the pension system, specifically in relation to the pensions levy, and the impact that that that had on trust within what you rightly say is a very long-term public policy and system of contributions. If we break that trust, then I think our entire pensions framework is under threat. There is an anomaly, as you rightly recommend. Our view was that all pensions and savings products should be treated equally. So we would have preferred to see equal treatment on the basis of the existing tax relief model. We see the merit and the simplicity in terms of the one in four approach that the state will make in terms of its contribution. I think we are going to have to accept the fact that there is an anomaly, but it is really important for us that we don't break that element of occupational pension system which is working. In some cases we are going to have a model here where there will be better support for individuals within auto enrolment and we will have a model where there will be worse support obviously for higher income earners. How could they have better? Theoretically you could have people on 20 per cent tax and zero per cent tax pay pension, but in reality you don't find it. I suppose in terms of what we are hoping to achieve in terms of coverage, we would expect to see people coming into an auto enrolment that should be getting a better contribution from the state under this model than they would under the existing tax system, the people who are currently not contributing. Yes, but they still won't get anything like the big parts. They won't get the same contribution that higher income earners will get, but they will be getting better than within the existing tax system. I think we are significantly improving what is currently available, which we think is a positive step forward. On the cap, we have always seen this as a low cost entry level scheme where we are trying to grow a very strong and positive savings habit for employees. We think that that would be focused on lower to middle income earners. We remain, and as I said in my opening comments, particularly concerned about the administrative costs on employers. When we have engaged with our members, there are two things that keep coming back to us. One is I'm going to have additional labour costs in terms of the contribution, but accepting that that's necessary for the future sustainability of our pension system and for the economy, they're going to be our future consumers. We have to make sure that they have adequate incomes in retirement. But there have been also concerned about what are the administrative costs going to be? What degree of opt-in, opt-out am I going to be dealing with in my place of employment? So we believe that we should focus the scope on the low to middle income earners and that was our view that we should have upped the cap of 50,000. In relation to your point about should it be a state system, should it be auto enrolment, is there a role for pensions industry? Right now, clearly, we have a multi-pillar system. We think that advancing the multi-pillar system further is the right public policy option in terms of occupational pensions that are working. In terms of the state pension, it's absolutely crucial that whatever else we do within this model, that the level of percentage income contribution that we have from a state pension replacement rate in the future remains the same, remains as strong as it is today. So it's really important that we don't introduce an auto enrolment system that comes about to the detriment of the state pillar. And we think that has to be a key element. And there'll be a range of kind of fiscal and economic choices that will have to be made by current and future governments to ensure that that happens. But of course, Deputy, we'll also be seeing, you know, we will see middle income workers. We have lots of workers in their 50s, for example, who don't have pension provision, who would be entering into this scheme. And those benefits will be coming back into the economy within a 10 or 15 year period from commitment of the scheme. I think we're very slow. Deputy Donnelly is the next member indicator. Deputy Donnelly, you may have answered this one. Just in terms of the contributions from employers and employees, and you talked about your engagement with employers on this, and I suppose, could you elaborate on, I suppose, the suggested contributions or the scale of the contributions and maybe concerns or you have around that? Thanks, Deputy. Good morning. Yes, we've gotten a lot of feedback on this. It's hard for any of us to know, and even the actuaries, you know, will disagree as to what the magic number is. When we look at our proposal and the proposed contribution rates, compared to similar schemes in the UK, elsewhere internationally, they do look on the high side, and we know that we're higher than in the UK. The main feedback that we are getting is around the step effect. Go from zero to six employer contribution and employee contribution, you know, within a decade or so is a significant increase in labour cost. The wider concern and my colleague Aoife has been tracking a lot of these issues that are also adding further to employer labour costs. So we have statutory sick pay, we have additional leave entitlements, there's a whole range of factors that are layering costs on employers, but that is not coming about in a coordinated way. So if we can't give the certainty to employers within the required auto enrollment contributions and potential labour cost impacts that are coming from other government policies, then that is leading to uncertainty and I think will impact on competitiveness. But my colleague Aoife might like to comment on those issues further. Aoife Aoife So the increase in employment legislation recently, it gives employers, they are now under a constant kind of administrative burden. And just to give you an example, in the last two months alone, employers have seen the commencement of statutory sick leave, amendments to protective disclosure acts, obligations to report on organisations gender pay gap, and regulations around transparency, particular working conditions. And they're also waiting for the work life balance legislation, which is currently for the Shannon, which will also increase employment rights in a number of areas. So in order to be implemented correctly, employers require extensive resources to review and create new policies, conduct risk assessments, for example, and amend contracts and internal procedures, in addition to the need for training and an increase in the required resources. So with the proposed AE legislation, if when it commences, it will have less impact on sectors and employers and employees who are well covered in terms of pension provision, but it will represent a significant challenge for sectors and employees who are up to now having a low participation rate. And while some of these workplaces are part of larger firms, small independent businesses are likely to have less administrative capacity. So this is something we would like to bring to the attention of the committee, and it's also in our submission. MR. If I could add, Deputy, the point that Aoife makes in terms of the concentration of sectoral impact, I think that's a very significant one. Because predominantly, we are not going to be talking about very large employers, multinational employers in high-tech or life sciences sectors. We are going to be talking predominantly about SMEs, we are going to be talking about companies in the experience economy, we are going to be talking about small firms in manufacturing, and we know particularly across that hospitality and experience economy that they are the very businesses that are really struggling in terms of cost of employment and cost of doing business right now. So I suppose our main ask to the committee would be that to say first of all that employers are very much positively disposed to making employer contributions, but that we need to give them policy certainty on their long-term labour cost landscape, and that has not been forthcoming from government over the last five years.