FDC: Why you need to know more about the world of pensions

A LOT has happened in the pensions world over recent times, from proposed structural reforms to the state pension system, to further developments on the road to a fit for purpose auto-enrolment scheme to increased governance and funding capabilities for company director’s pension plans. Thankfully, 2022 has provided more certainty regarding these changes and a roadmap to where we are going.

State pension reforms

Minister for Social Protection Heather Humphreys announced landmark reforms to the state pension system in Ireland last September. The measures, approved by Cabinet on the same day are a result of recommendations made by the Pensions Commission. In the words of the Minister, the changes ‘represent the biggest ever structural reform to our State Pension System’.

The most eye catching of all changes is to maintain State Pension Age at 66 years, despite suggestions from the Pension Commission to increase the age at which citizens become entitled to a State Pension. This and other key changes of interest to readers are summarised as follows:

• State Pension age to remain at 66; New ‘flexible’ system to be introduced

• People to be given the choice to work until age 70 in return for a higher State pension

• Calculation of individual pension entitlements to transition to a ‘total contributions approach’ with the abolition of the ‘yearly average approach’, the aim of this is to create a fairer and more equitable system

• Long-term carers to be provided with a pension for the first time

• Commitment to explore new scheme to support people who cannot continue working in their early sixties

• Long-term sustainability of State pension system to be addressed through gradual, incremental increase in PRSI rates

The maximum rate of State pension is currently €265.30 per week for those turning 66. The ‘flexible’ model will see increases in those rates being applied depending on the actual age at which State pension comes into payment, with these changes expected to occur in 2024.

Auto-enrolment

During 2022 the Government approved a bill to introduce the long-awaited auto-enrolment pension scheme. The bill supporting the scheme is expected to be introduced to the Oireachtas in early 2023, with the scheme due to be up and running in 2024, however many consider this timeline to be ambitious.

The aim of auto-enrolment is to increase pension coverage for employees across the country, and it is estimated that auto-enrolment will bring a further 750,000 people between the ages of 23 and 60 into the Pensions system.

Membership of the scheme is voluntary but will be on an ‘opt-out’ basis, people will have to make a conscious decision not to join a pension scheme. This benefits retirement savers, with savings starting from a younger age by removing the inertia of an ‘opt-in’ system.

Contributions under auto-enrolment will be made as a percentage of Gross salary phased in over a period of 10 years. It will look like this:

- Years 1 to 3: Employees and employers will both contribute 1.5% of salary with the State adding 0.5% of salary

- Years 4 to 6: Employees and employers will both contribute 3.0% with the State adding 1.0%

- Years 7 to 9 Employees and employers will both contribute 4.5% with the State adding 1.5%

- Year 10 onwards: Employees and employers will both contribute 6.0% with the State adding 2.0%

Director’s pension funding

2022 was a year like no other for the pension funding of directors of family businesses and SMEs. The full transposition of IORP II, an EU directive that aims to improve governance and communication standards of pension schemes provided by one’s employer, posed many challenges for employers, trustees and pension administrators alike.

Thankfully, extensive industry engagement with the Pensions Authority throughout 2022 has resulted in those higher standards being met, while protecting the pension funding capabilities for business owners. While change can often be disruptive and sometimes unwelcome, the developments of the last 12 months are positive for retirement savers.

Anyone thinking about joining a pension for the first time should seek professional advice, and crucially should not just wait for auto-enrolment to do it for you. For those that have existing pension benefits in place, speak to your adviser to ensure you are prepared for the road to retirement.

• Adrian White is a financial planner with FDC Financial Services within the West Cork region.