What will Compulsory Pensions mean for the Construction Industry? 

Why are we talking about compulsory pensions at all and what do they mean for employers and members of the construction industry? 

The Pensions Time Bomb

The best place to start is to explain one of the biggest economic challenges of the future that is facing this country and that is the pensions “time bomb”. The fact is that today there are 5.7 people working for every pensioner in the country, but, because of our ageing population, in 2040 there will only be 2 people working for every pensioner. The impact of this is that taxation (income for the state) will reduce as there will be fewer workers, while costs for the state (old age pensions) will increase as there will be more pensioners.

To try and counter this, the Government allow generous tax breaks to workers to fund their own pensions for the future. The thinking is that if people can look after their retirement themselves, this will reduce the burden on the State. Unfortunately, even with these tax breaks, half of private-sector workers are not in pension schemes. These people will be completely reliant on the State Pension, which itself is a maximum of only €230 per week. And this amount can really only reduce as the impact of the pensions time bomb kicks in.

This is a really significant issue facing the Government, and many other governments around the world. To deal with it in Ireland, the Government recently announced that an expert group would begin work on a plan to introduce proposals for a universal retirement savings scheme for private-sector workers. In short, they want people to take an increased level of responsibility themselves for their income in retirement.

The group has been asked to devise a plan that will result in automatic enrolment in pension schemes for working people who are not in state employment and who do not have existing private pension cover. In short, everyone will be enrolled in a pension. What this will look like in terms of costs (for both employers and employees), and also in terms of whether and when people can opt out, is all yet to be decided.


Pension Scheme Costs will be Key

With these compulsory pensions are likely to come lots of low contribution amounts, and in turn relatively small pension funds. The costs of running these schemes will need to be very low, or else the funds will be eroded by charges. This in turn will completely undermine the rationale for introducing compulsory pensions.

In fact, there has been much discussion in recent years relating to the reasonableness and transparency of charges in pension schemes. Administration and management charges reduce each individual’s pension savings and their income in retirement. Of course, management of pension schemes cannot come without charges, however there are vehicles that can provide far more efficient solutions than others.

At CPAS, we are really well placed if compulsory pensions are introduced, because of the structure of our schemes.

CPAS manage what are called “Master Trusts” for the Construction Sector. Under a Master Trust, the product provider (CPAS) manages a pension scheme for a number of employers under a single trust arrangement. Master Trusts achieve the scale in pension provision and governance capability, which in turn keep costs low. So instead of having a separate pension scheme for each employer, with each governed by a Trustee Board, CPAS offers pension provision to a number of employers who are all governed by a single Trustee Board, thus achieving economies of scale. Think of it like an umbrella scheme, with responsibility for lots of smaller schemes. Master Trusts can provide high quality investment management, administration, governance and communications. Full legal, actuarial, and investment services are also provided to the Trustee Board which in turn leads to each participating employer in the scheme gaining from economies of scale.

And now with over 20,000 active members in Master Trusts managed by CPAS, members of the construction industry already benefit hugely from the economies of scale mentioned above! So maybe compulsory pensions don’t pose the same challenge to construction firms, as they potentially will do for the rest of the economy.

Kevin Walsh