I can give the Chairman some examples now. First, my understanding of the state pension in New Zealand is that for a single person, it is roughly on a par with what somebody here would get at the full rate, and that for a couple it is not quite as good as here. That is from memory and if I am wrong on that, I will send a correction.
Let me give an example because it follows on from that. Some people have made comparisons with the UK and said that because we are setting a threshold of €20,000 and the UK has a threshold of £10,000, we should drop our threshold – that second figure is pounds, not euro, which somebody said. In the UK, the state pension is £185, or roughly €209, which is 21% less than somebody would get here. Therefore, if we were to go back to the discussion we had in December where I talked about replacement rates, what we said we think is appropriate is at least 66% of a replacement rate, or roughly two thirds. The State pension here, for somebody on €20,000, gives a net replacement rate of 73%. If we had the state pension that applies in the UK, to achieve a replacement rate of 73% we would have to reduce that threshold from €20,000 to less than €15,000.
If we had a State pension similar to that of the UK of €209 a week the auto-enrolment proposal would not require a floor of €20,000 to achieve the same outcome it would require a floor of more than €14,000 to do so. This is why I am saying a direct comparison between floors is a flawed logic.
The way the auto-enrolment system works in the UK is not the same way it proposed to work here. We propose that once people are enrolled the contribution rate would apply on all of their income. In the UK there are qualifying earnings. For instance, under the auto-enrolment scheme in the UK somebody on the equivalent of €20,000, which is approximately £17,700, would make a net contribution of £518 to the auto-enrolment scheme. Under the Irish system somebody on €20,000 would make a contribution of more than double this, at almost €1,200.
The point is that even though the UK has a lower qualifying threshold, it applies qualifying earnings so people do not pay in on all of their income. As a result there is a small pot, not only by virtue of the contribution rates but also because it is calculated on a much smaller amount. This is why there are serious difficulties in the UK, where it is believed the pots are way too small and derisory. For instance, Nest has 11 million pots but only 4.5 million active contributors. This is has become a problem that the UK is now trying to solve. We believe the reasons for this are that the thresholds are not right, the way it is incentivised is causing difficulty, and the contribution levels are too low. When we say we have researched and we have tried to learn the lessons from other jurisdictions it is things like this to which we are referring. It is way too simplistic analysis to say that €20,000 is way too high and it is £10,000 in the UK and we should drop it. This comparison is flawed. This is by way of example to give a sense of it.
I have to say I smiled when I heard some what was said about the differences to the central processing authority, CPA, between what was in the straw man and what is in the current proposal. People were pretending that the straw man was some kind of law or Bible. The clue is in the name. It is a straw man. In our plain English explanation of the straw man proposal we said it was a draft proposal designed to generate discussion of a policy idea. We explained that it would look at the pros and cons and when we got responses from the public and representative groups we might have to change parts of the proposal or perhaps even radically alter it. In the straw man itself we stated that depending on the feedback we received and the further analysis that we would be completing, the final design may either closely resemble the straw man or may deviate significantly from it. We stated that readers should not take the key features as definitive. We made these points very clearly when we wrote the straw man and published it. The reason the straw man was issued was to start discussion and debate and get views. The best way to do this is to put up a straw man and let people tear it asunder. If we discuss something in the abstract we will never have a proper discussion about it. This is why it was done. We expected it to be torn apart and changed quite considerably as a consequence.
As a consequence of the public consultation, the various groups we brought together for discussion and the further analysis we did looking at other countries, we have made quite a number of changes and not just with regard to the CPA. I will give a short list of some of them. Major employer engagement was set out in the straw man whereby we would have had to set up information and facilities for employers and get them to enrol the employees into the auto enrolment system. We have dispensed with all of this as a consequence of the consultation on the straw man. It has completely changed. It is entirely different from what was in the straw man. There is no need for detailed employer engagement in the model design now proposed. Therefore, the administrative burden is massively reduced. IBEC expressed some concerns about this when it came before the committee. I met IBEC subsequently and clarified for it that the level of administrative burden on employers as a result of the new design is minimal and that IBEC should not take the straw man as the basis of the design. This is one example where there has been a massive change.
Another change is in the opt-out restrictions. We allowed only one opt-out in the straw man and people would be re-enrolled after three years. We have changed this completely. We now allow multiple ways in which people can opt out and we are allowing unlimited levels of suspension. We realise that various issues will arise for people over their lifetimes and they may want to pause and spend money on other things. We have changed this fundamentally from the rather restricted measures set out in the straw man.
The contribution rates set out in the straw man were the same but the rate at which they were applied and their phasing in was entirely different. In the straw man the contribution rate was 1% in the first year, 2% in the second year and 3% in the third year, and by the sixth year people would have reached the 6% contribution rate. As a result of discussions and feedback we have changed this to the model that is now in the legislation.
We also said in the straw man that where somebody opted out they would get their money back but the employer and State money would be handed over to the CPA to help it defray its costs. This is no longer in the proposal. This money will be left in people's individual pots. This is a fundamental change from the straw man as a result of the discussions and the analysis that has emerged.
There have been great changes to the straw man throughout the design. There are also changes to the CPA but they are not massive. They are a little more limited than people might be led to believe. As with the current proposal, in the straw man the CPA was also an independent statutory body doing the collection and remitting that money to registered providers. It was also to set up an account management function because otherwise how could we keep track of it? It was also going to set up portals so that people could log in, look at their accounts and see how their pots were getting on. It was also going to be a big source of information for people. It was also going to have the facilities to change from one investment type to another. The CPA was always going to have these elements.
There are three parts to a pension. There is collection, investment and provision of the pension product at the end. As with the current proposal, in the straw man the CPA was going to be doing the collection. It was going to be handing over money to registered providers to do the investment. None of this has changed. It is exactly what is in the current design. What is different is that in the straw man the money would be handed over to pension providers to do the investment but in this proposal the money will be handed over to investment managers to do the investment. When it comes to the person reaching the age of 66 and being able to draw it down we have no details yet on how this will be done.
In December we told the committee we had deliberately not designed the draw-down process yet for several reasons. First, no one will have built a sufficiently large pot for any kind of major pension product for a minimum of six years and in reality for the vast majority of people who will be in the scheme, it will take much longer than that. It could take ten, 12 or 15 years. Second, we expect there to be significant market innovation between now and then. The current products in the pension market, which are primarily annuities and approved retirement funds, ARFs, might not be the right type of product for the bulk of people who will be in automatic enrolment, AE. A different type of product that allows for things such as inflation growth to be factored in and allows for a mix or hybrid of those types of product would probably be more suitable for the majority of AE customers. We have seen those kinds of innovations starting to occur in other jurisdictions and markets. For instance, there is a big play in Australia at the moment on investment-linked annuities which some pension providers are starting to explore here. Things will happen in the market in the next five to ten years that will be seriously important to how we set up and facilitate draw-down structures for AE participants. Therefore it would be folly to try to design it now. It is not needed and it will change significantly.
The third important piece is that pension products cost money and the bulk of AE participants will not need one for at least a decade. Why would they be paying for them now? If we engage registered providers who are selling fully-fledged pension products and therefore have to pay for all that machinery and resourcing, it will make the 0.5% rate difficult, and I would probably suggest impossible, to achieve; whereas if we limit it to the services and facilities we need, the 0.5% is eminently achievable. That is the first big change. The second is that in order to engage registered providers as fully-fledged pension providers, we would have to take Tim Duggan's money, but also his details and hand them over to a provider. If a participant does not choose a provider, we had intended to carousel it for the straw man. I would go to provider A, Mr. Diamond would go to provider B, Ms Jduge would go to provider C, the next person would go to provider A and it would continue like that. There are two consequences of that approach. The first is that provider A would know all about me and therefore have opportunities to engage with me and we would have to build a lot of general data protection regulation, GDPR, compliant structures around that. That is not necessary in the current design. The investment managers never get to see Tim Duggan's details. They do not even know Tim Duggan exists. All they know is that the CPA exists. The CPA knows Tim Duggan exists and it has already built data protection and privacy enhancing measures into this design.
The second issue is that if I go to provider A and Mr. Diamond goes to provider B the outcomes we could get because we are with two different providers, could be substantially different, even if we imagine the two of us are working on the same factory line across from one another, earning exactly the same pay and we are roughly the same age. When we looked at that carefully we decided it was not an acceptable outcome. If participants are roughly equivalent in almost all respects and are putting in roughly the same amount of money as their neighbours, they should be getting roughly the same outcome. Therefore, we decided the only way that could be achieved is if we pool contributions rather than each being invested individually. That is why we changed the approach of the straw man to a pooling approach. My money and that of Mr. Diamond are put together, divided amongst the four providers and when the returns come back, they are divided equally among us based on our contribution levels. That ends up being an equitable system and it does not result in any anomalies by virtue of good or bad luck with regard to the provider a person has been assigned to. Part of the feedback from our analysis was that the model set out in the straw man ad could result in anomalies and unfairness in the outcomes for individuals who have the same circumstances. We had to deal with that. It is a bit long-winded but that is a summary of all the issues.
Did the Chair ask a fourth question?
