IRELAND – A review of Ireland's pension system by the OECD has backed compulsory pension savings as the most effective way to increase the adequacy of retirement savings, with auto-enrolment branded a more costly and second-rate policy.

The review of Ireland's pension system, commissioned by minister for social protection Joan Burton last February, was also highly critical of the country's defined benefit (DB) regulation – arguing sponsors should no longer be able to abandon underfunded schemes and calling for changes to the reinstated funding standard.

Detailing the three approaches Ireland could take to increase participation in the second pillar – compulsion, auto-enrolment or increasing the level of financial incentives from the exchequer – the OECD noted how compulsion was a "less costly and more effective" means of increasing coverage.

"Automatic enrolment is a second-best," the report continued, noting that the costs associated with establishing an auto-enrolment framework were likely to be higher."

The authors – citing the approach taken by New Zealand and its KiwiSaver reforms, as well as Italy's largely unsuccessful attempt to boost coverage – added: "Its success in increasing coverage depends on how it is designed and on its interaction with incentives in the system."

Responding to the report, Burton said the government had a responsibility to drive up private pension coverage once the country's economy had recovered and that the government would bring forward its proposals "in due course", without directly indicating which options she preferred.

"We must recognise that there are costs involved in providing for good retirement incomes, and the earlier we can bring forward reform the better," she said.

"However, I am also extremely mindful of the current economic crisis, and this will inform my strategy for the future."

It is uncertain if the government would consider compulsion.

Three of the country's largest political parties – the current coalition of Fine Gael and Labour, as well as the former administration's Fianna Fáil party – have previously spoken of auto-enrolment as a viable solution for Ireland.

The Irish Association of Pension Funds (IAPF), meanwhile, called soft compulsion the most politically viable policy.

The OECD stressed the importance of separating pension policy from any short-term fiscal concerns, suggesting the government announce its reform package as soon as practicable and seek to establish political consensus for the changes to be implemented in future, citing the UK's decade-long gap between the Turner Commission and introduction of auto-enrolment as an example.

"This reform should include an outline of key features, such as basic parameters, provisions, designs and phase-in timeframes, as well as a definitive operational date," the report said.

"In this regard, the reform could be implemented when the economic circumstances improve, and it could be linked to certain economic parameters.

"Otherwise, short-term considerations may trump the long-term thinking needed to design pensions."

Pablo Antolin, principal economist in the OECD's private pensions unit and one of the review's authors, said compulsion was the think tank's preferred choice for Ireland.

He noted that auto-enrolment was unlikely to ever achieve the levels of coverage seen in countries with compulsory or quasi-mandatory pension savings, such as Australia, Chile or the Netherlands.

"You have to remember that implementing auto-enrolment is much more complicated, and you have to be very, very careful how you design auto-enrolment with all the other incentives that are in the system," he told IPE.

"Auto-enrolment is soft compulsion for people, but for employers it is pure compulsion – and on top of that, the administrative burden for employers is much higher with auto-enrolment than with compulsion."

Brendan Kennedy, chief executive of the Pensions Board, previously noted the increased regulatory burden – and therefore cost – that auto-enrolment would entail.

But he was confident the regulator would be able to oversee any such reforms.

IAPF chief executive Jerry Moriarty said it made "perfect sense" to follow the OECD's recommendation to announce a reform timetable now, while delaying its introduction until it became economically viable.

"Clearly, you can't impose something on the economy the economy can't take," he said. "But I still think you go ahead and design it.

"Any system in the world that has brought in – whether it's mandatory or auto-enrolment – has phased it in gently."

Topics