Of the auto-enrolment systems in the world, it is probably at the high end. It is at that high end because based on the analysis we have done we have higher rates in education up to that age compared with other countries. Those people are in continuous full-time education and not in continuous full-time employment. That is the primary reason. Setting a lower age would mean taking money from people who are earning small enough amounts of money in part-time and casual work to fund their college and third level education. We think that rather than doing that, anyone can opt into this system provided they are not already in a scheme and they are of working age. We would emphatically make that clear in the communications campaign that is being designed. Nobody will be in any doubt that this will be available to them if they wish to participate.
If they wish to participate, it will be very easy to join. There will be a portal that people can access and there will also be an app. People will be able to join it with a few clicks on their phone if they so wish. Many young people tend to work in multiple different jobs. Their employer or possibly multiple employers would then be compelled to make contributions in the same way as if they had been auto-enrolled. The State will also be required to make the top-up as if they had been auto-enrolled.
There are a number of reasons for selecting the threshold of €20,000. We need to step back from this and look at what we are trying to achieve. We are trying to ensure that people have an adequate income in their retirement. How do we define adequate income? Down through the decades, governments, commentators and those in industry typically defined adequacy using what are called income-replacement rates. A typical income-replacement rate that has long standing in Ireland is 50%. Therefore, someone needs about 50% of their working-age income in retirement to have an adequate income to maintain the same standard of living effectively. That has always been the general wisdom, if I may put it that way. I do not think it is a good enough grounding. Based on the analysis we have done, we believe that two thirds of someone's income during working years would be closer to the mark as an average of what would be required for a replacement rate.
However, again based on analysis we have done, we know that the lower someone's income in working age, the higher the replacement rate needed is. Someone earning about €15,000 in a year needs a replacement rate of more than 90% in retirement to maintain the same standard of living. We do not judge on the basis of presumed wisdom or averages that have emerged over time. We look at the actual facts of the various income bands versus the replacement rates that would be required.
I will give some examples. At the moment the State pension provides people with an income of just over €13,000 if they have been working full time. Based on that, for someone earning €20,000 in their working life, the State pension would give them a net replacement rate of 69% to 70%, which is well over the two thirds that we believe is necessary. For those who go below that, their State pension obviously gives a much higher replacement rate. For somebody earning €15,000, the current replacement rate is about 89% to 90% from the State pension alone. That is without any of the supplementary top-ups available from the State such as household benefits, fuel allowance or any of those things if people qualify for them.
That is the situation at the moment. However, as the Deputy knows, the State pension rate will increase in January. Therefore, for somebody earning €20,000, the net replacement rate will improve to about 73% to 74%. I am making a guess here, but I am assuming that it will be even better by the time auto-enrolment is launched in 2024. The objective here is for people to have a pension but for those who already have a replacement rate that is more than adequate, we want them to save at the same time.
We then come to the difficulty between affordability and needs. In developing this design, we have been trying to strike that balance. In the same way that some people are telling the Deputy that €20,000 is too high, some commentators say that it is too low. During the public consultation, we got submissions from people who represent those on low incomes stating that there is a major affordability issue with having the threshold at €20,000 and claiming that it should be €25,000 before forcing people to give up some of that income. Their argument is that they know that people in those income brackets use pretty much all of their income and that they have very little discretionary spend available to them.
We selected €20,000 to try to strike that balance between needs in ensuring there is adequate provision for retirement and affordability in allowing them to live properly during their working lives. The figure of €20,000 was selected because it is right on the cusp of those replacement rates that we teased through in our analysis.
Regarding the issue of the self-employed, the fastest way to market is through an employer-employee relationship because that allows us to leverage payroll. Almost all employments in the country now use a payroll system.
Even the very small ones, if they do not have one themselves, are using the services of accountants or payroll bureaux that can do it on their behalf. Almost all employment arrangements in the country have payroll systems. There are only so many of those systems. Therefore, it is possible for us to engage with those and automate most of this in the exactly the same way Revenue has done for tax and PRSI purposes. The intention is we would leverage payroll. By doing that, we will quickly be able to get three quarters of a million people or thereabouts - that is based on historical data - into the system.
Self-employed people do not have such arrangements. They do not have regular pay periods. They do not have employers to make contributions on their behalf. It is an entirely different proposition. How would they be enrolled? How would that be done automatically? How would it then be worked out how much of a contribution they should be making and how would top-ups be facilitated? All of those questions need careful consideration.
Many self-employed people are also self-determining in the sense that they do not want interference. What they want to do is use their money for investment in their business to build it up over time and then, later in life, deal with retirement, pensions etc. It is a fairly typical model in the self-employed world. All we have said in the principles paper is they will not be in on day one. We will look at it. Once we have the system developed, embedded, running well and people used to it, we will look to see how best we might be able to accommodate self-employed people.
It is interesting to note there is no successful implementation of auto-enrolment encompassing self-employed people anywhere in the world that we are aware of. It does not exist. Chile tried it and it did not work very well. Essentially, it ended up with a whole load of people having nominal pots but no contributions coming into them. It became an administrative nightmare. It just did not work. We are unaware of any successful implementation of the self-employed in auto-enrolment.
The last point to make, and it does not address the problem entirely, is that there is an incredibly advanced market in the pensions industry for self-employed individuals. There are a range of products already available to them that attract full rates of tax relief. Perhaps part of what needs to be done over the next couple of years, and maybe as part of our communications around auto-enrolment, is that we go harder on the communications and education around those options that are available to self-employed people. However, I would say to the committee that it is not doable in the timeframe that is available to get this implemented by 2024 and I think the priority has to be getting in the three quarters of a million people and having them investing for their retirement.
