Joint Committee on Social Protection, Community and Rural Development and the Islands debate -
Wednesday, 7 Dec 2022

Automatic Enrolment Retirement Savings System Bill: Discussion

Vice Chairman

Apologies have been received from Deputy Charles Flanagan, Senator Paul Gavan and the Chairman, Deputy Denis Naughten. Members participating in the meeting remotely are required to do so from within the precincts of the Leinster House complex only. I ask that members and witnesses turn off all mobile phones as they interfere with the broadcasting equipment. I ask members of the committee who are participating remotely to please use the raise hand icon on Microsoft Teams if they wish to contribute.

The meeting has been convened to discuss the automatic enrolment retirement savings system Bill 2022. 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 pensions savings. The new system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. Under automatic enrolment, employees will have access to a workplace pensions savings scheme, which is co-funded by their employer and the State. Auto-enrolment includes a number of key features. An initial 750,000 workers will be enrolled in a new workplace pension scheme, the number of which will grow significantly over time. Participation in the new scheme will be voluntary. Workers will have the ability to opt out or suspend participation for periods of time. The scheme will include matching employer contributions and a State top-up. For every €3 saved by a worker, a further €4 will be credited to his or her savings account.

The decision to implement an automatic enrolment system is consistent with the key recommendation contained in the OECD's review of the Irish pension system, published in 2014, that "the single greatest goal in Irish pension policy should be to increase the supplementary pension coverage rate through the introduction or a mandatory or quasi-mandatory earnings related system." In response, in March 2018, the then Government published A Roadmap for Pensions Reform 2018-2023, in which it confirmed an intention to develop and implement a State-sponsored supplementary retirement savings scheme, into which employees would automatically be enrolled. In June 2020, the Programme for Government: Our Shared Future reaffirmed the commitment to introduce an auto-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 system Bill 2022 and the referral of the general scheme to the Office of the Parliamentary Counsel, OPC, for priority drafting. In this regard, I welcome from the Irish Congress of Trade Unions, ICTU, Dr. Laura Bambrick, social policy officer, and Mr. Liam Berney, industrial relations officer. They are both very welcome to the meeting.

Before we begin, I wish to 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. 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 Dr. Bambrick to make her opening statement.

Dr. Laura Bambrick

On behalf of the Irish Congress of Trade Unions, I thank the joint committee for the invitation to input to its pre-legislative scrutiny of the automatic enrolment retirement savings system Bill 2022. I am accompanied by my colleague, Mr. Liam Berney.

Ireland is the only country in the OECD without a mandatory pay-related pillar for retirement savings. ICTU has long argued that our voluntary approach has failed. Only 56% of all workers have a workplace or private pension to supplement their State pension. Some 90% of public sector workers do, compared with one in three, or 5%, of workers in the private sector. As the contributory State pension is paid at a flat rate of €253.30 per week, rather than as a percentage of previous earnings, workers without a supplementary pension are exposed to a significant drop in their normal living standards in retirement. When enacted the Bill will legally require employers to automatically include all employees who satisfy certain criteria in a pay-related pension savings scheme, and to make minimum contributions. These will also be made by workers and topped up by the State.

ICTU supports the introduction of auto-enrolment as a means of increasing income adequacy for workers in retirement and putting a legal obligation on employers to contribute to securing their employees’ living standards in old age. Pension savings also reduce the risk of a fall in consumer demand. Over the coming decades, the importance of this income to the wider economy will grow as the population ages. The amendments to the Bill put forward by ICTU, detailed at length in our written submission to the committee, aim to deliver a fit-for-purpose scheme. In the brief time I have available for my opening remarks, I will concentrate on our recommendations for improving coverage, contributions, and confidence in the scheme.

Under the proposed scheme, automatic enrolment will apply to all employees aged between 23 and 60 years who are earning at least €20,000 a year across all employment and are not an existing member of a workplace pension scheme, or one that meets the minimum contribution requirements. ICTU recommends that young and low-paid employees and self-employed persons with no employees also be automatically enrolled. That the self-employed will not be obliged to comply with the auto-enrolment rules is a cause for concern for ICTU. Aside from the low pension coverage among the self-employed, introducing a compulsory employer contribution will further increase the financial incentive for unscrupulous employers to misclassify employees as self-employed. ICTU recommends self-employed workers with no employees be automatically enrolled and the business for which they provide work or services be made liable for the employer contribution. This recommendation mirrors suggested approach No. 1 in the Department’s review of bogus self-employment.

ICTU also rejects the proposal to restrict auto-enrolment to workers aged over 23 years and recommends that the age trigger be aligned with the PRSI minimum age threshold of 16 years.

Workers could have wasted seven years between the ages of 16 and 23 when they have started their working lives but are not saving towards a financially secure retirement.

ICTU recommends that there be no lower income threshold. It is our view that including a limit before compulsory retirement savings kick in runs the risk of unintended consequences for workers in the form of income cliffs and employment disincentives. If working more hours, taking a promotion or new a job brings incomes over the income limit, it can result in less take home pay. For employers, it increases the incentive to keep the wages below the threshold so as to avoid their obligation to contribute to the employee's pension pot.

The proposed scheme provides for a total minimum contribution of 14% of the wage between the employer, employee and the State, to be gradually introduced over a ten-year period. Employees will be required to make a minimum contribution of 6% gross earnings to the scheme. Employers will be required to match the minimum contribution on behalf of their employee, subject to an annual earnings cap of €80,000 per annum. This is deductible for corporation tax purposes. The State will contribute €1 for every €3 an employee saves, with pro rata matching also subject to the €80,000 earnings cap. ICTU recommends that the State contribution should mirror the value of the 40% tax relief arrangement, that is, it should increase to €1 for every €2.50 a worker saves.

To make auto-enrolment attractive and affordable for low-wage workers, ICTU recommends the employee contribution be graduated up to €20,000 and a flat 5% on all additional earnings. ICTU recommends the employer contribution be raised to 7%. A 7% employer pension contribution, together with the 11.05% employer social insurance contribution, will still be below the EU average. The 5:7:2 ratio has the added benefit of upholding the established principle in collectively bargained pension schemes of the employer contributing more than the employee to the pension pot. Employers who already contribute into good workplace pensions will welcome that their competitors are obliged to move further towards doing likewise, as this will reduce the competitive advantage of lower labour costs.

The new retirement savings scheme will be in addition to, not in place of, the State pension. A Roadmap for Pension Reform 2018-2023 commits to formally setting a benchmark of 34% of gross average earnings for the contributory State pension. ICTU views this as essential for public confidence that auto-enrolment is not intended to dilute or displace the role of the State pension as the bedrock of the pension system over time, and calls on Government to deliver on this commitment as a matter of urgency.

Under the proposed scheme, workers will have access to a range of retirement savings investment funds from approved commercial providers, with access to these providers mediated by the State via a newly established central processing authority, which will be statutorily independent in the exercise of its functions. Individual trust and confidence in the management of pension savings is vital to building widespread support for, and confidence in, this radical new policy departure. The Irish public remains understandably wary of the charges and fees levied on retirement savings and poor investment decisions.

While the pension levy is still fresh in the public memory, strong legislative protection for the fund from raids by future Governments can help rebuild damaged trust. ICTU rejects the proposed maximum annual management fee, viewing 0.5% as excessive, and recommends it be revised downwards and that the total charges and fees over the lifetime of the pension be capped. We further recommend trade union representation on the central processing authority board.

ICTU has long advocated for concrete action to address the alarmingly low levels of second-tier pension coverage in the private sector. The draft legislation setting out the design principles for an automatic enrolment retirement savings scheme represents a significant step towards achieving this objective.

Vice Chairman

I remind any members who are attending remotely and online that if they wish to contribute, they should indicate using the raised hand function.

Deputy Claire Kerrane

I thank Dr. Bambrick for her opening statement. I agree with the point she made about reducing the lower age limit from 23 to 16 years. Would she foresee moves in relation to the upper limit of 60 years? Given that pension age is now 66, and who knows where it may go, the upper limit of 60 is slightly questionable. It is important that people can trust this scheme given that more and more people are reliant on their State pension as their sole income on retirement and the struggles that entails. There is no certainty about the rate of the State pension because it is not linked to anything and increases are made at budget time. Does ICTU have concerns about how this scheme will be managed? There will be access to a range of retirement saving investment funds. Pensions are a minefield for a lot of people and the idea of having a number of options to choose from may also cause problems. I accept that there must be options, but we need to make it as easy as possible for people.

Will Dr. Bambrick speak a little more about how the central processing authority will work and what its main challenges will be?

Concerns have been raised about the proposed maximum annual management fee. Capping it is a good idea which should be looked at. ICTU has made a good submission to the committee and it will be very helpful as part of our work. If Dr. Bambrick would like to raise any further matters related to the submission, which makes quite a number of recommendations, I invite her to do so.

Dr. Laura Bambrick

The upper age limit of 60 years just means that people will not be automatically enrolled for the first time if they are over 60 but they will continue in the scheme after they are 60. Given the commitment to keep the State pension age at 66 years, it would only allow an individual six years in the scheme. For thee first six years of this scheme, it is to be gradually introduced so people will only be paying 1.5% for years one, two and three while getting the same matching contribution from their employer and a reduced State contribution. In years four, five and six, they will pay at 3%. The pot will be very small. Even if we manage to get the half a percentage point fee reduced, it will still take a chunk off that. We do not believe it is efficient for the scheme or the individual. There may be some confusion in that people will think that workers will stop contributing at the age of 60, but that is not the case. It just means this is the age at which, for the first time, a person will not be automatically enrolled. We would not have concerns around that.

Regarding the lower age limit, if we retain the limit of 23 years, the lowest age limit in Ireland will be the highest in operation. In other countries such as Australia and New Zealand, the lowest age is 18 and in the UK it is 22 years. Our concern is that this is a very classist approach. It assumes that all young people will spend three or four years in college after doing the leaving certificate at 18 years and are entering full-time employment from the age of 22 and onwards.

Many young people will not go on to sit the leaving certificate examinations but will enter the workforce, including apprenticeships, going onto building sites and the shop floor. They begin their full working life at 16, 17 and 18 years of age. They are liable for PRSI. Why not make them liable and eligible for automatic pension contributions? They will be doing their 40 years' work from the ages of 16, 17 and 18. They will not be in a position, physically, to contribute to their auto-enrolment pension pot at 58, 59 or 60 years of age and beyond. The Department is likely to say it will make it voluntary that younger people can enter auto-enrolment in the next stage, but pensions must be part of good practice. It must be taken out so the employee never receives the money. It should go straight into the pension. It would then become an automatic learned good practice. Those are the two reasons. The age of 23 is too high by international standards and it does not take into account the lived experience of young people who do not take the route of third level education and who are not in a position to contribute to their future retirement savings into their late 50s, 60s and beyond.

As I mentioned, given the type of service that is being offered to people, everyone will be offered four types of product, namely, products that give high, moderate or low risks on return and, if people do not make a decision about the level of risk, they will be offered a life-cycle product. The age of the person going into auto-enrolment will be considered and people in their 50s will be offered a low risk product because if the market and investments hit a bump, they do not have enough years to recover that money. Given that these are not individualised, personalised products and given the large numbers that are going in, economies of scale can be achieved, so 0.5% is excessive. The number of providers is being limited to four so they will be guaranteed a large part of the market share. Also, as Deputy Kerrane mentioned, the amount paid over the lifetime of the pension should be capped. It should not only be a cap on what a person pays annually but if your pension pot is 40 to 45 years old, there should be a limit on what is paid.

Regarding the CPA, some people will ask why we are handing this money to private providers. If we look internationally, none of the schemes give it wholly over to a state-run provider of pensions. Australia has purely private provision. There is no state involvement. New Zealand has a mix of private, not-for-profit and for-profit providers. We are going for a mix. While we originally had concerns about that, there have been improvements to the operation of the central processing authority and we have received assurance and confidence from the officials and taken independent advice that the CPA will do enough work to protect members' money. My colleague can speak about the CPA.

Mr. Liam Berney

The question for us is whether we can say to members that they can have confidence in the money they are investing and that is being invested on their behalf producing the outcome they expect. One of the key pillars is to have State involvement in the management of the money going into the pension schemes and pots. As Dr. Bambrick stated, some countries rely entirely on the private sector to do that, but the central processing authority seems to be - this will be borne out in the passage of legislation through the Dáil - a State authority that will give mandates to investment managers to produce particular outcomes. It is likely to say that two people of a similar age who have a similar contribution profile but are with two different investment managers, should get the same or very close to the same outcome. The central processing authority is a good thing. It is good that it will be independent in its function, but the governance of it must be done in such a manner and it must take such a form that people can have confidence that there is no potential for bad practice within the CPA. As worker representatives have played a key role in other State agencies, we advocate that the ICTU as the representative body of trade unions and workers should be asked to nominate a person or persons to the board of the CPA.

Vice Chairman

Is Deputy Kerrane okay with that?

Deputy Claire Kerrane

Yes.

Senator Mark Wall

I welcome Dr. Bambrick and Mr. Berney and thank them for the presentation. As Deputy Kerrane stated, it will inform our scrutiny. It was a worthwhile presentation.

My first question relates to self-employment and perhaps Dr. Bambrick could respond. She mentioned self-employment and how it will affect auto-enrolment in her report. Perhaps she will expand on that for the committee.

The other matter I will touch on is the death in service benefit that Dr. Bambrick recommends should be part of the auto-enrolment. Perhaps she will comment on the importance of that in light of other schemes she is aware of.

Finally, she mentioned a number of examples of best international practice or what is happening on the international scene with respect to auto-enrolment and pensions. I note she mentioned examples from the UK and New Zealand in her report that I read and she mentioned Australia this morning. Should we be looking at other international best practice as we roll this out?

Dr. Laura Bambrick

I will start with the last question on international best practice. The reason we are comparing the UK, New Zealand and Australia is because when the State pension was first introduced in 1908 - do not worry, I will not give the committee 100 years of history - all four countries were part of the UK so we have the same pension model. We all have a flat State pension. Other European continental countries have a pay related State pension, so it is important for Ireland, New Zealand, Australia and the UK to have that second layer of pension. The role of the State pension is only to keep people out of poverty. The role of auto-enrolment or workplace pensions is to maintain people's pre-retirement living standards. That is the reason we are looking closely at those three countries. They are similar or near duplicates of the Irish system. They have the three pillars of the State, occupational and private pensions. Auto-enrolment will sit onto that. While it is possible to look at other countries, they are best practice for Ireland to consider because there are too many differences in the other ones.

As the Senator will be aware, bogus self-employment is a long-standing issue in the trade union movement. We have always argued that one of the key drivers or incentives for bogus self-employment from an employer's perspective is the 11.5% employers' pay related social insurance contribution. Over the next ten years, we are looking to increase that by a minimum of 6% with this auto-enrolment. That would bring it close to 18% without any other increases happening. Therefore we are massively increasing the incentive towards bogus self-employment.

On top of that, we have to be concerned about the lack of pension coverage among the self-employed. As for the workaround we see, this is just taking from the Department's own deep dive into how it would address bogus self-employment and one way it said this was separate to auto-enrolment is that, where there is a self-employed person with no employees providing all of their services to one employer, that employer would be liable for their PRSI. The same practice should apply for social insurance. When an employer is paying a contractor or, as we would say, a bogusly self-employed person, they would have an obligation to pay it as part of that. That would get rid of that incentive and the unintended consequences, which are a real concern for the roll-out of this scheme. My colleague Mr. Berney will speak about the matter of death in service.

Mr. Liam Berney

I thank the Senator. As people will know, where you have collectively bargained defined benefit or defined contribution occupational pension schemes, death in service benefit usually forms part of that scheme. What it means is that if a worker unfortunately dies while still in employment with an employer, there is an amount of money allocated to their estate to provide for their family or the people who are beneficiaries of their estate. It is typically an insurance product and usually cheap. Auto-enrolment should mirror in as many possible aspects as it can occupational pension schemes that already exist in the economy. One will find that defined benefit schemes and defined contribution schemes that are collectively bargained have a death in service benefit as part of that. It is usually between two and a half to four times annual earnings in terms of a benefit to the estate of somebody who is deceased.

Vice Chairman

Are you happy with that, Senator Wall?

Senator Mark Wall

I thank the Vice Chair.

Deputy Éamon Ó Cuív

Was due consideration given to the model that the witness intimated was available in other European countries, where what one got was pay-related, with a basic state pension and a pay-related top up on that funded by the state through the state system and through contribution there? Were comparisons carried out between that method of funding - which presumably is on a pay-as-you-go basis - and what is being proposed? Will ICTU provide statistics on the real return from pension funds? For example, when I started working I was getting £16 a week. If I had been putting 10% of the income in, it would have been £1.60; there will be a bit of inflation for conversion to euro. In real terms, taking inflation into account, it would not be much good to me today. Are there figures on the average real return, net of inflation, in other words, buying ability with money, on pension funds over 30 or 40 years?

We live on a small island; a vast sum of money belonging to the taxpayer is going to be handed over to these private funds. Does ICTU have statistics on the Irish pension case as to how much of that is invested on the island to regenerate our island? A mega amount of money is being handed out. How much of that is actually retained when they invest in gilts? They then invest in bonds at the end. My understanding is that towards the end, in the last ten years of one's pension, the pension fund managers get conservative and put them into German bonds. They will not even put them into Irish bonds, which would give a better yield, because they do not trust the Irish State. We are giving people State Irish money and they will not put it back into our own State. Are there any figures on that and the drain out of our economy of all this money and the effect that is going to have? That is something we have to take into account.

Is the CPA going to insist on ethical investments? Are investments in fossil fuels going to be allowed? Are we going to follow the European codology where there was a taxonomy and then suddenly they decided that natural gas was part of the taxonomy? If one invested in natural gas, it was considered a renewable fuel. These are all serious questions. The biggest question before we get down to the nitty gritty of this is return. The great thing about pay-as-you-go, as in the present system, is that the people paying their PRSI today pay in today to the pensioners today. We are all paying in the real value of the same money. When the person who is paying in now becomes a pensioner, they pay in at the value of today for the pensions coming out. Generally speaking, the State pension has proven more resilient to inflationary impacts. In fact, as our economy has grown, it has grown disproportionately. Is ICTU concerned about what happened in pension funds at the end of the early 2000s, from 2008 to 2010? People thought they had bought into defined benefits and there was a whole movement to try to change them all into defined contribution, ex post facto, 20 years on. There is that kind of uncertainty in the private pension industry; it is just a commercial industry, it wants to get the money because that is what it lives off. I am concerned about the history of pensions in Ireland. Our workers did not get out what they thought, in lots of cases, they were paying into. Is ICTU absolutely wedded to this private pension scheme with a mega amount of money?

I have a technical question I cannot get an answer to from the State for some reason. Normally, if one is earning a salary and one takes out €100 and puts it in a pension fund, then there is tax relief at the marginal rate. As well at the 30% going in from the State, is there going to be tax relief on that money? The Department of Finance has said that it has not made a final decision - I asked a parliamentary question about that. Has it clarified to ICTU what it would not clarify to me, that there will definitely not be any tax relief on this? That raises another question: has there been confirmation from the Department of Social Protection that, in various means tests and schemes, it will discount one's investment in this scheme as regards means testing and not consider it as income? I thank the witnesses for coming before the committee and for their presentation.

Dr. Laura Bambrick

I thank the Deputy. Regarding some of the questions, if the committee has not already planned to invite the Pensions Authority, it would benefit from hearing from them. They will be able to answer these questions in much more detail. I am sure my colleague will make a good stab of it; maybe I should not tar him with my own brush. To start off with why we are going down this road and not the pay-related pension model common across continental and Nordic Europe, I do not know if it was originally thought of which road we would go down, auto-enrolment or moving to pay-related pensions. We know from media reports that Cabinet at the moment is considering moving toward pay-related jobseeker's allowance and possibly pay-related maternity and other family payments. That would be a significant move; I am sure the Deputy remembers back in the 1980s and early 1990s that there were pay-related payments in that regard for just over a decade. There seems to be some willingness, having learned from the experience of the pandemic unemployment payment, PUP, and how that was pay-related and the job that did of protecting workers' living standards when they could not work when the economy was shut down.

I do not know if auto-enrolment was compared to moving towards a pay-related pension. At the time this was being considered in 2007, New Zealand introduced KiwiSaver, which is to all intents and purposes the same as what we are moving to. In 2012, the UK moved to an auto-enrolment process. The international move was towards the second layer of auto-enrolment rather than the continental and Scandinavian pay-related model. I hope there was some justification in doing so.

On the question about returns, the Pensions Authority will be much better at giving that. The Department's literature, which I do not have with me, provides examples of a what the pension of a worker at a particular age putting in a certain contribution would probably be.

Deputy Éamon Ó Cuív

It may have but it did not tell us the inflation factor.

Dr. Laura Bambrick

I suppose there are limits to how far in advance they can look.

Deputy Éamon Ó Cuív

The thing is we can look back, and when it was stacked up, it looks kind of attractive. Someone puts in X and gets Y.

Dr. Laura Bambrick

But what is the value of that?

Deputy Éamon Ó Cuív

I am a bit older than most people here, but if I go back and look at what seemed like a large sum in 1980, it would look like joke money today. I will put this in an even more scary way. I keep all the Government Estimates for 2002 in my office. The amounts were tiny and the inflation rate is huge. The figures the Department gave were not that impressive at all when a constant rate of inflation was put in.

Dr. Laura Bambrick

I refer to how much of this money will be invested in Ireland. We are all familiar with the property market being run by German and Canadian pension funds, so there is nothing to say that in future years it will include Irish pension funds, although not necessarily within Ireland. The same applies to ethical investment. That will be a matter for both the tendering process and the CPA to put limits on what can be done with the money. It will also be a matter for pension providers, if one provider wants to make its unique selling point that it will only do ethical, green investments. One of the most difficult things about this will be getting workers to choose the investment they want. If a provider can set itself up as only investing in Ireland and-or making ethical investments, this might make it more attractive. However, it will ultimately be down to the CPA and the tendering to put parameters on how the money can be invested.

I refer to pension funds and the issue of customers not receiving the product they thought they had bought. There will be a need for legislation in this area and reassurance provided to the public that we have learned from past mistakes as well as some sort of guarantee, which will be a big job of work.

As to tax relief, our understanding is that the State contribution is instead of tax relief. That is why we have made the argument that it should be €1 for every €2.50 invested instead of €1 for every €3, so that it is equal to the 40% tax relief. However, there will be tax relief for employers and they will be able to reduce it from their corporation tax bill. They will not get the State investment, and the employees' deduction contribution will be on their after-tax income.

Deputy Éamon Ó Cuív

There was a proposal ten years ago to standardise tax relief at 33%. That meant if a person were paying 20% or 40% tax, he or she would receive 33% tax relief. The advantage of that was the people at the bottom end of the wages scale were not, once again, being hit. What the union representative is saying is that the State contribution is not going to be anything real. Most people who were paying into pension funds were at doing so 40% tax because people on low wages did not bother with private pensions. It was more important for them to get a house and live their life and rear their kids rather than to put money away for the rainy day. That is my experience of dealing with people at the lower end. The biggest pension they have going into old age, which many younger people will not have, is that nearly all universally own their property.

Mr. Liam Berney

One of the factors that has led to low levels of pension coverage in the private sector, particularly for low-paid workers, is the fact that employers did not make pension schemes available to them.

Deputy Éamon Ó Cuív

That is one factor.

Mr. Liam Berney

Small employers with five or six employees and a small retail business do not, typically, make pension schemes available and do not make a pension contribution on behalf of their employees. That is what has led to low pension coverage. It is not as if people made the deliberate choice not to make a contribution to a pension scheme. No pension scheme was available to them. This proposal seeks to raise the coverage of second tier occupational pension schemes, particularly within the private sector. It is not as simple as saying people made economic choices about where they spent their money. If people had the option of an occupational scheme in their employment, they would have availed of it, but because employers were not required to make it available to them, making a contribution was not available to employees. It is not as simple as that.

Deputy Éamon Ó Cuív

I made a choice that turned out to be very fortuitous. I was in precarious enough employment as it was, but surviving was more important than worrying about what would happen when I got to 65 years. As it happened, I did not have to worry. I am still working at 65. I took a big risk in one way, but then I did own my house.

Mr. Liam Berney

At the risk of sounding like I am not taking the Deputy's point seriously, he is probably not typical. The typical experience of people who are on low pay and employed in small businesses has been that occupational pensions have not been available to them.

Deputy Éamon Ó Cuív

That is probably true, but the people on the low end of the surviving gig are people who would see the greatest pension would be to get a property. They would be very tempted anyway. When they get to 66, the State will say "Tough, you did not take the option." The great thing about PRSI is that it has to be paid as it is mandatory. I see this more as an industry-led gig than being State-led.

Mr. Liam Berney

The Deputy made the point earlier about whether we as an organisation are totally wedded to what he called this "private" model.

Deputy Éamon Ó Cuív

Which it is.

Mr. Liam Berney

Sorry, if I could make a couple of points. When this proposal was originally made, the Department produced the strawman paper in which it set out ideas about how the problem of the low coverage of second tier occupational pensions in the private sector would be addressed. In our submission on that, we argued that if there is to be auto-enrolment, it should be controlled entirely by the State and the money should go into a State agency and invested by a State agency. That is what we argued. The original strawman paper proposed what was more akin to an entirely private model whereby the money would go into pension providers. It seems the Department has moved away from that proposal in that it is now proposing a central processing authority that will receive the money from employers and employees.

That money will then be given to investment managers but with parameters around it to say we are giving the money but that we expect them to deliver a particular return. In fact, they will say we need them to guarantee we will get that return.

It is within the remit of the Oireachtas to give a mandate to the central processing authority, through legislation, to address some of the questions the Deputy talked about and to ensure it has a capacity to guarantee that the money will be invested in Ireland, that it will be invested in ethical schemes and so on. It is entirely within the gift of Members of the Dáil and Seanad to outline the central processing authority’s mandate in legislation. I would not underestimate the possibilities that exist within the Houses of the Oireachtas to ensure that the central processing authority will perform the function it has been mandated to perform, with the safeguards the Deputy raised.

Deputy Éamon Ó Cuív

The Department and the Government were involved in this process, but the Oireachtas was not. We do not have to buy in. We can write any report we like. We can go back and say the original model put forward by ICTU was correct, whereby it would be State controlled. The CPA is all fine and good, but all the people from outside on it, advising the Government and so on, will be from the industry, and the pension industry does not have a great record. I was there when it all started unravelling, with all the promises made relating to defined benefits and all the rest. Suddenly, it was gone with the wind. This committee could write back and say we have examined the legislation, that we think it is fundamentally flawed and that it should be a State model.

We can write any report we like. We are not hidebound to the Government. We are the Oireachtas. I am a member of a Government party but I do not feel hidebound by the Government when I sit on the committee. ICTU should not feel itself confined to what the Government has decided. We are not as confined as the witnesses probably think we are. We want to look at this fundamentally because we want to test every theory. As I said, if we look over the long term of the past 50 years at matters people have thought they could legislate into certainty, with all these bodies, we will find they take on a life of their own and say that for this, that or the other reason they cannot control one thing or another, whereas if the State controls it, at least it can keep changing the thing as it goes along. It is only with the will of the Oireachtas that this can happen, however, whereas independent bodies can go all over the place.

Mr. Liam Berney

As I said, we believe the original model that was proposed in the strawman has been significantly changed to give more State control over how this money is collected and invested. The only point I was making was that the functioning of the central processing authority and how the scheme is going to be run will now be subject to legislation. All the questions the Deputy raised about the nature of investment, where investment takes place and so on are ones to which the Oireachtas should give serious consideration, given it can mandate in legislation the authority to behave in a certain manner.

Deputy Éamon Ó Cuív

Yes, but we could also go back and tell the Government to think it out again and go for a State model. My question is whether the witnesses are convinced the State model is not the optimal one? We have never seen this previously. We have never had any of this kind of legislation in front of us as a committee previously. Is Mr. Berney's view that the optimal model is the State one or is he convinced this hybrid model is better than the original State model?

Mr. Liam Berney

We were asked to come here to talk about a Bill, whose general scheme has been placed before the Oireachtas, relating to providing a particular type of pension scheme. Our comments are reflective of what we have been asked to comment on regarding the legislation. The Deputy’s question as to whether the pension system should be provided completely by the State, with no occupational pensions, if that is what is what he is asking------

Deputy Éamon Ó Cuív

I am saying the employer, the employee and the State should contribute, given the State is the basic payer in any event, to this------

Mr. Liam Berney

That is what happens with the State pension at the moment. A contribution is made to the State pension on behalf of employees and employers and the State makes a contribution as well. We are saying there is a State system that results in the State pension being paid to people. In Ireland, we have a system where occupational pensions provide workers with a second-tier pension scheme. Occupational pensions are demanded and supported by our members. The Bill proposes to have a mandatory occupational pension scheme in the State and we think that is good. If the State wants to go further and improve the State pension to a point-----

Deputy Éamon Ó Cuív

I might put it in simpler terms. Are the Nordic and continental Europe models, which provide for State occupational pensions, better?

Mr. Liam Berney

Our model has evolved to a point where hundreds of thousands of workers have second-tier occupational pension schemes. If we were to decide to move to a more continental or Scandinavian model, how would we deal with those second-tier occupational pensions that exist? What would we do with them?

Deputy Éamon Ó Cuív

We could leave them as they are. They are not part of the auto-enrolment.

Mr. Liam Berney

No, but if the Deputy is talking about having every pension provided by the State-----

Deputy Éamon Ó Cuív

I am not saying every pension; I am saying there would be a State pension-----

Mr. Liam Berney

We have a State pension-----

Deputy Éamon Ó Cuív

-----but an auto-enrolment State pension, or an auto-enrolment State occupational pension, as Mr. Berney is calling it.

Mr. Liam Berney

In our original submission to the public consultation, we called for auto-enrolment to be controlled completely by the State. The original model that was suggested was that there would be four pension providers and it would be completely private sector provided. What is being proposed here, in our view, has moved more towards what we were suggesting, in that a central processing authority would control the funds and give mandates to investment managers regarding how the moneys put into pension funds would be managed. The proposal here is better than the original proposal in that there is more State involvement in it.

Senator Paddy Burke

I welcome Mr. Berney and Ms Bambrick. This has been a great insight into the pension system. It seems the scheme is not going to be of any great cost to the State, given it will not be tax deductible. I would favour a system where all the contributions would be paid to the National Treasury Management Agency, NTMA, which would invest in pension funds, and everybody would get almost the same return for whatever buck they put in. The system that is being planned is such that different people could invest the same sums into different pension funds and end up with different pensions. Will that not be the case?

What would be the position if somebody opened up an auto-enrolment at a young age and they were contributing a certain amount all along? As they get closer to retirement, would there any provision to put in lump sums at that stage? In some cases, if they are self-employed, they can put in lump sums, which are tax efficient for companies, when they are near to pension age. Is there any kind of provision in this pension set up for ordinary individuals in cases where they may have their house paid off, the kids are finished at school and money could be a little more freely available while they are still working? They may be able to put in some extra funds, such as in lump sums, as they get closer to the pension age.

Finally, was there any discussion in relation to the class K? There are many people in the State who are paying class K and it was of no benefit to them at all. In discussions with the Department, was there a discussion around the class K?

Dr. Laura Bambrick

I will start with the comment that this is costless to the State. That is far from the truth. What is being recommended in the proposed legislation is that for every €3 an employee puts in, the employer will match that with €3 and the State will put in €1. The State is therefore providing a 2% input into the pension pot. It is a significant amount of money and other people before this committee will wonder how the State will find the money to ensure in the long term that it will be able to finance this move to auto-enrolment.

We support the model whereby the State puts money in versus giving tax relief. We know tax relief is difficult to understand because if most people understood the tax relief that you can get on pensions savings, we would not be here today and the uptake would be much better. The best way of getting money legally is by investing in your pension. As it is so complex to the ordinary person who has more things to be dealing with and thinking about day-to-day, the best way is to set it up like the old special incentive savings schemes, SISS, which was well received by the Irish public. This will be the same thing. There will be a feature on a person's phone, an app, where they will be able to see on a weekly or monthly basis, whatever way they are paying, their pension pot grow. They will be able to watch every €3 that they put in grow to €7. That is much more attractive to people.

Apathy will stop people from opting out. They will just keep doing it. This is the same reasons they never get around to joining a pension. The international evidence shows that people do not get around to opting out of an auto-enrolment pension. The other big driver will be around the contribution. This SISS approach is far from costless to the State but it is much more beneficial to the worker who can see the benefits of investing into their pension pot. We are hugely supportive of this. Obviously, we would prefer if the State contribution was higher and we have mentioned that. However, we have no dispute with the mechanism.

Although it may not be in this Bill, there is a commitment at a later stage that workers will be able to make voluntary contributions and that will address the issue the Senator mentioned regarding a person who is nearing retirement and who wants to make investments into their pensions. There will be provisions for that.

I am not sure whether there was any discussion around the class K. We will come to the Senator on that. I apologise that I do not have any information on that at the moment.

Senator Paddy Burke

On watching the €7 grow every week or whatever, one does not know where it has been invested or what happens. It may not be €7 at the end of the following week and it may be wiped out completely. Is that not the case?

Dr. Laura Bambrick

It is not going into a post office savings account. The idea is that one will put it in and that it will be invested, but one will have the opportunity to make a decision on whether one wants a low-, moderate- or high-risk product or a life-cycle product, which suits one better in terms of how far or near one is from retirement. If there is a concern about watching one's contributions disappear because of poor investment decisions, there will be an opportunity to take a low risk product that will be equivalent to putting it into a savings account.

Senator Paddy Burke

Will there be any provision made for cashing in at any stage?

Dr. Laura Bambrick

No, the only provision will be in the case of serious life-limiting illness. We are very in favour of that. This committee will come under enormous pressure from individuals to say that people should be able to cash in for a deposit on their house, for children going to university, for their trip around the world, or for every other thing for which we would like to have a lump sum of money. However, this is a pension retirement savings scheme. That is its only purpose.

We know from looking at other models, such as the Kiwi model which is a case in point, where workers are saving for a number of years and there is a limited number of reasons, such as for a deposit on a house where he or she can cash in. This defeats the purpose of the scheme. In many of the schemes people do not have the level of savings they should given the age they are at or the length that they have been in the work market. We would be very strongly on the side of the legislation, which allows for very narrow, limited occasions on which there could be early withdrawing. As we said, that is the case of serious illness.

Senator Paddy Burke

Can you move the pot from one pension fund to another? What happens when you reach retirement age? Can you cash in the whole lot or is it a case that you are paid on a weekly basis?

Dr. Laura Bambrick

The pot will follow you and that is your pot of money. If you change jobs, that pot will go with you. Some people may have checkered work histories whereby they may have a bit of a pension from an employer for whom they worked ten or 15 years and another bit of a pension where they worked with a new employer. Then you have to go about bringing those all together. As is often the case, people may not do that, and then they are paying two sets of pension fees. The pension pot follows the member. At the same time, if a person then decides that they have had the moderate- or high-risk pension product but now wants to go into the low-risk, it will be within his or her rights to change the type of product he or she wants his or her money invested in. That will be facilitated.

Senator Paddy Burke

Will it be paid out on a weekly basis at the finish when the person reaches retirement or can the person cash in the whole pot?

Dr. Laura Bambrick

The Department has delayed making a decision on how it will be paid out given that it will first of all take ten years to build up to the situation whereby people will be paying full contributions. It will be gradually introduced. For the first decade plus, people will not have a big enough pension pot when they are drawing it down to do anything other than take it in a lump sum. Therefore, how people access their money and what parameters we will put on that will be a conversation for another day. There are no provisions in this legislation on that.

Vice Chairman

I thank Senator Burke. I have a number of my own questions, which I will ask piecemeal rather than asking ICTU 20 questions to try to wade through. I will begin at the concrete end of the questions and will work through to the more philosophical - let us generously call them - questions at the far end.

First, on the age limit, I understand ICTU is critical of the 23 years of age. I understand where ICTU's figure of 16 comes from. Maybe I am asking Dr. Bambrick to comment on something that she did not decide on. Where does the figure of 23 come from?

Dr. Laura Bambrick

Our understanding is it is when people leave university, take that gap year and take their first full-time job. There probably is good solid evidence behind that. We have one of the highest rates of young people going to third level. As we mention, however, we still have a sizeable number of young people who do not take the academic route. It should be designed with them in mind as well by reducing the age for that. Twenty-three is based on going to college or university, taking a bit of time off and getting that first full-time job.

Vice Chairman

It is interesting. I can absolutely understand 16 years. It is when one begins paying PRSI. Twenty-three seems somewhat arbitrary but maybe that is a question for the Department.

The ICTU submission is critical of the 0.5% management fees. I understand that for the people who would be in receipt of these pension pots, it is business that will come to them. They do not have to work for it in the same way they might have to do in the private market. I merely want a sense of how that 0.5% compares with the management fees that would be paid on a privately sourced pension, because ICTU is critical of it as a rate.

Dr. Laura Bambrick

We would compare it more to occupational pensions.

Mr. Liam Berney

It probably compares quite favourably, but the Vice Chairman needs to ask the Pensions Authority that question. We are the first up but there are many questions being directed to us this morning that the Department would be better placed to answer.

Also, the Pensions Authority has a substantial amount of information the committee would benefit from. It would be interesting to hear as well from organisations such as the Irish Association of Pension Funds, which deals routinely with that kind of issue about the levelling of charges etc., and has policy papers. It would be informative for the committee, particularly on some of the questions Deputy Ó Cuív asked. The Irish Association of Pension Funds might be able to deal with them because it is the association's business in terms of the way pension schemes operate day to day.

We are a little unfortunate in that we are the first people before the committee. Clearly, the committee has many questions it wants to try to find answers to. We will try to provide them as best we can but there are other groups, including some of the ones I have mentioned, that would be in a much better position to answer those questions than perhaps we would be.

Vice Chairman

As Mr. Berney says, ICTU is first in. I will play devil's advocate in terms of his suggestion to adjust the ratio from 6:6:2 to 5:7:2. There will almost certainly be groups who will appear before us who will argue that, at 6:6:2, it is already placing a substantial burden on employers. They will talk about people in small retail, for example, and state that asking them to contribute the other part of that ratio will place a stress on their business. They will cite other rights that have been introduced by this Government, for example, sick leave. There has been considerable movement in terms of the liabilities that are being placed on employers. ICTU does not think that 6:6:2 is the appropriate ratio. It would prefer to see something along the lines of 5:7:2. Will Dr. Bambrick expand on that for me?

Dr. Laura Bambrick

In Australia, the employer pays all the contribution. The employee pays none. They pay 12%. Even at 7%, that is one aspect.

If we look at the EU 27, over 8% of GDP is taken on average from employers as a social insurance contribution. The equivalent in Ireland, GNI* stripping out the multinationals, is 4.4%. We pay very low employer social insurance, at 11.5%. Even by asking them to pay 7%, we will still be blow the EU average. They would have to be paying 9% just to take us to the average amount.

As we move into a more modern wealthy economy, we are moving away from employers paying their workers a weekly wage and nothing else. We are moving into a continental approach where people have income insurance, so if they are too sick to work, they have paid sick days, and when people are too old to work, they have a contributory pension. That is what the State is moving towards in introducing statutory sick pay and in introducing auto-enrolment, bringing us into line with our rich peers in the EU, of which we are a member.

Vice Chairman

I was posing it from a devil's advocate position, as Dr. Bambrick well understands.

Mr. Liam Berney

That is not the universal position of the employer community. There are many employers who pay well in excess of what is being proposed in the auto-enrolment scheme and well in excess of what we suggest people pay. It is not as if the employer class speaks with one voice around this issue. There are many employers who pay very significant contributions to occupational pension schemes beyond what is in auto-enrolment. We would advocate that, as auto-enrolment becomes more evolved and more mature, the question of the contribution rate should be something that is looked at continually to ensure workers have a decent standard of living in retirement.

Vice Chairman

The Irish Congress of Trade Unions has made strong points around bogus self-employment and how that should be brought into the scheme. As I said, we are moving towards the more woolly end of the questioning spectrum here. Platform working, for instance, which is difficult to define, might be most easily understood in terms of the likes of Deliveroo workers. Of course, there are different forms of platform working and that is only the most visible kind. Across Europe, Governments are struggling to understand how the disruptive influence of platform working will integrate into our more traditional systems. Is there scope within this Bill to bring some in?

Mr. Liam Berney

On platform working, there is currently a discussion taking place in the European Union around a directive on platform working and providing greater certainty for platform workers. A fundamental plank of that draft directive under discussion is criteria that would lead to the automatic classification of employee status as opposed to people being declared as self-employed. The approach in the draft directive is that there are a number of criteria, and if a person meets two of the criteria, he or she automatically is assumed to be an employee. There is an effort taking place specifically for platform working in the European Union to give greater certainty around employment classification for people who work as platform workers.

Looking at case law as it is developing across Europe, these platform workers are increasingly being found to be employees. There was the Uber case in the United Kingdom. There has been a case in the Netherlands where these platforms have been tested about their classification of workers and they have been found to be misclassifying them.

There is a road to travel around platform working and, ultimately, where it will end up. To some extent, it is old wine in new bottles because we have had a problem of bogus self-employment and misclassification of workers in this country for a long time and we continue to have it. It is evident in some sectors of the economy where the level of self-employment is much higher than the average in other sectors of the economy. The average rate of self-employment is between 10% and 13% whereas in some sectors it is has high as 30% or 40%. In some cases, it is even higher than that.

It is obvious why it is higher in some sectors. In construction, for instance, 30% of people are self-employed. We suspect most of those are misclassified as self-employed. The point Dr. Bambrick made about ensuring people who are self-employed without employees are within the scope of the scheme is important because, if they are not, it will add another incentive for employers to misclassify people as self-employed.

Vice Chairman

That point is well made. The funds should be mandated to produce certain outcomes, and if we do not define those outcomes, then the only motive will be profit. It is critical that such things as divestment from fossil fuels, where money is sent and the ethics of the investment are designed into the default model. I know people will be subsequently able to choose from three different investment products, but we know many people will stay where they land. It is critical we design some values into the products being made available for people because we will be talking about a very large sum of money once this is established and it should be put to work in a way that reflects the values of the State. I will not ask the witnesses to comment on that because it is outside what they are being asked to do. Will they comment on the statutory protection against future raiding? It will be a substantial amount of money. At some point in the future of the State it will begin raining again. Are there enough protections built into the Bill or do they need to be strengthened to ensure that, the next time it starts raining in the economy, if it is not raining already, they are adequate to make sure the pension fund remains a pension fund?

Dr. Laura Bambrick

It will not be one mega pension fund. It will be close to 700,000 individual pension funds. That will be difficult to protect in legislation. We could look at something like the National Training Fund, which can only be spent for certain purposes and within certain parameters. For all intents and purposes these will be individual savings accounts. It will be difficult to get national legislation but it will have to be looked at. A tax increase on savings in the future could cover people's pensions pots. Given how close we are to recent raids on pension funds, it will be a difficult sell to convince people they can have confidence in the scheme. Everything that can be done should be done.

Deputy Éamon Ó Cuív

This has opened up an interesting debate. There is a long way to go on this, and if anyone tries to rush it, the committee has to stand firm and look at every angle. We are putting a lot of money aside for 32 years' time. Many things can go wrong in that timescale, even things people think they have legislated against. There is an attraction with putting in now and the State paying out later, but we have to think deeply on this.

The only one that held up during the crisis was the State pension. I am not talking about going back to having only a flat rate. People have to have the opportunity to invest their income and should be incentivised to do it. The question is who should do it and on what basis. Is there a logic to paying in today and so on? Is that how we should support it? We have to do a study. I suggest the Vice Chairman mention to the Chair that it might be worth our while getting people in from the Nordics and the European model. In many other areas, we have decided we are European Union members rather than British Commonwealth members and have moved away from the common law system and the old empire ideas. We should look at the European model here. One thing I learned in Departments is that they always put out consultation papers but usually have an idea and fixate from the beginning on where they are going. Believe you me, I am a long time at it.

Dr. Laura Bambrick

I do not think that is unique to the Department of Social Protection.

Deputy Éamon Ó Cuív

It is very common in-----

Dr. Laura Bambrick

Across Government.

Deputy Éamon Ó Cuív

Europe does the same thing. I used to say about the Common Agricultural Policy, CAP, reform that they built in 10% that they would negotiate and the other 90% of the final document was the original consultation document.

Mr. Liam Berney

We argued for significant State control. Somebody mentioned the National Treasury Management Agency, NTMA, somewhere along the line. I think we mentioned the NTMA in our original submission. In the Bill that is proposed, they have come more towards the model we advocated originally. If through the good work of this committee, they can be persuaded to come 100% towards what we advocated, it will be a job well done.

Deputy Éamon Ó Cuív

That is exactly the debate we needed to have today. I am glad Mr. Berney made that clear statement. Just because they come in with a Bill and have fixed on a model does not mean the only thing we can do is tinker at the edges. We can look at it as ab initio because we never had it before. This is a Government proposal but not an Oireachtas proposal. We can say, "No, go back and reshape the whole model." We do not have to recommend this goes forward with minor amendments. We can do what we want. We are only at the beginning of this and the witnesses are first up. Maybe they are the radical voice at the table.

There has been much badly informed commentary by the media on keeping the pension age at 66. ICTU stood out from that report, if I remember rightly, and said to keep it at 66. When you examine it, the PRSI difference in cost was minimal. Both of the options we were given needed State subsidy. Keeping it at 66 was not putting up the PRSI contributions that appreciably. I think we all agree self-employed contributions are low for the benefits a person gets on invalidity and so on. I do not go along with the presumption that, just because ICTU is the only one that stands out, it is necessarily wrong. Those who stand out can often be proven in hindsight to be right.

Vice Chairman

I do not think I will ask the witnesses to comment on that.

Dr. Laura Bambrick

We will take the compliment.

Vice Chairman

Would the witnesses like to offer a concluding statement?

Dr. Laura Bambrick

We did not touch on the income limits. It has been proposed that those earning under €20,000, that is, in and around a full-time minimum wage, would not be automatically included. It is a bit like the lower age limit, which is very high by international standards. In the UK, those earning less than £10,000 are not automatically included. We are looking at twice as high. In Australia it is around $3,500, so apart from those doing a few weeks' work over the year, everybody is automatically included. That needs to be looked at.

We have talked about many of the negatives, but across the water in the UK they are ten years further down the road than us and the evidence coming from that is hugely impressive. Pension coverage has jumped from 47% before auto-enrolment was introduced to 80% now. For the lowest paid workers, those in hospitality, their coverage has jumped from 5% to 51%. If we get this right, it could be very successful and beneficial to workers, ensuring they have a decent standard of living in their later years.

There are a lot of reasons to be hopeful as well.

Deputy Éamon Ó Cuív

Yes, we have been asking hard questions, but the British economy post Brexit is much more introverted, so the likelihood is they are going to invest a much higher percentage of these funds within the island of Britain than we are. It happens in Ireland to a point, and on that point, one of the arguments we are making is, if we are going to be sucking money out of the Irish economy, whether that could be used in the economy. We need a lot of infrastructure in this country. Infrastructure always pays in the long term. Look at all the things we built ten or 20 years ago; they look dead cheap now. We need, in our particular island situation, to have a debate on this issue. There are two things here: paying the pension until the end to get a return, but also moving a mega amount of money, including a significant contribution from the State, offshore. It was said this is the argument about not burning the bond holders. At the end of the day, nobody knows where the bloody money goes because it gets lost in the network of financial transactions, funds and people pressing buttons on computers, but it does cede the control of sovereign money to the fund managers.

Dr. Laura Bambrick

That is a valid point.

Vice Chairman

That concludes our consideration of the matter today. I thank Mr. Berney and Dr. Bambrick. They may have been first up and best dressed, but it meant we had a wide-ranging discussion on issues that may have fallen outside the matters raised in the comprehensive submission to the committee. I thank them both for this submission and for appearing before us today.

That concludes the committee's business in public session and I now propose the committee goes into private session to consider other business. Is that agreed? Agreed.

The joint committee went into private session at 11.02 a.m. and adjourned at 11.33 a.m. until 9.30 a.m. on Wednesday, 14 December 2022.