Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697803785626.pdf (Ireland)
General Scheme of the Automatic Enrolment Retirement Savings System Bill Aon’s submission to the Joint Committee on Social Protection, Community and Rural Development and the Islands 18 November 2022 Aon’s Submission on Automatic Enrolment 1 Introduction This submission paper has been prepared for the Joint Committee on Social Protection, Community and Rural Development and the Islands (the “Committee”).
The purpose of the paper is to outline Aon’s key views and recommendations to the Committee on the proposed design of the new Automatic Enrolment Retirement Savings System (“AE Retirement Savings System”).

By way of background, Aon plc (NYSE: AON) is a leading global professional services firm providing a broad range of risk, retirement and health solutions.

Globally, as at 31 December 2021, Aon employs more than 50,000 employees located in 120 countries.
In Ireland, we work with nearly 200 pension scheme clients including many of Ireland’s leading indigenous and multinational companies.

We would be delighted to meet with the Committee to discuss our experience and elaborate further on any of the views expressed in this paper, and we would be happy to appear in public session at a Committee meeting.

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Auto Enrolment Design Principles and Aon’s View The following are the key design features of the new AE Retirement Savings System, and Aon’s view on these design features: 2.1 Eligibility Current and new employees aged between 23 and 60 years of age and earning €20,000 gross or more per annum across all employments will be automatically enrolled (except for employees who are existing members of occupational pension schemes sponsored by their employer).
cr People earning below €20,000 per annum across all employments and those employees aged under 23 and over 60 will be able to opt-in to the system if they so choose.

Based on these eligibility criteria, data from the Revenue Commissioners indicates that approximately 750,000 employees (out of a total labour force in Ireland of 2.6 million) will be automatically enrolled in the initial phase.
Aon’s View: • We would very much welcome the introduction of an estimated 750,000 employees into the initial phase of Auto Enrolment.

• However, we would recommend that the eligibility criteria are reviewed over time to ensure that particular groups (e.g.

women, part timers, workers not going to third level education, self-employed) are not disproportionally excluded and affected by the initial eligibility criteria.
Although there is an option for those employees excluded to “opt in”, inertia will lead to many of these employees not enrolling.

2.2 Contributions and Tax Relief Both employer and employee contributions are to start at 1.5% of gross salary, and auto-escalate every three years until reaching the maximum contribution rate of 6% each from year 10 onwards.

Aon Proprietary and Confidential Aon Solutions Ireland Limited 2 The Government plans to provide a €1 contribution for every €3 completed.
The tax relief approach is different to the current pension tax relief system i.e.

members will receive a “top up” contribution from the state, instead of the existing granting tax relief at source approach.

This top up system of a €1 contribution for every €3 completed, effectively equates to a 25% tax relief rate, compared to the current 20% tax relief for basic rate taxpayers, and 40% tax relief for top rate taxpayers.
Aon’s View: • We would agree with the ultimate total contribution rate of 15% to be sufficient for most employees to provide an adequate post retirement income, also allowing for the State pension, but phasing in over 10 years seems quite a long phase in period.
We believe consideration should be given to reducing the 10-year phasing period, and also introducing an option for employees to make additional voluntary contributions to make up for career gaps, and to give them flexibility to increase their overall retirement savings.
• Regarding tax relief, the ESRI estimates that up to 75% of likely Auto Enrolment participants will be at the standard (20%) rate of tax or outside the income tax net, so the majority of enrollees in the new system will benefit from increased tax relief compared to the existing approach, but those on the top rate of tax will be worse off.
Aon believes this adds unnecessary complexity to the new system, may lead to “regulatory arbitrage”, and can lead to perceived unfairness and difficult decisions for employers on which system is better for their employees.

2.3 Central Processing Authority A ‘Central Processing Authority’ (CPA) is to be established.

It will be responsible for the operation, coordination, supervision, and development of the system.
It will collect contributions and allocate them on a pooled basis to the preferred fund choice of members.

It will provide fund administration and accounting services for members (these may be contracted on a ‘back-office’ basis to established providers of such services but will be delivered by the CPA).

It will implement the ‘pot-follows-member’ approach.
As there will be one AE pension pot per member, rather than multiple pots across employments and across RPs of investment services, the CPA will hold and manage that pot centrally on behalf of the member.

Employers will only have to facilitate payroll deductions, rather than set up schemes and the same pension will follow workers from job to job.
Aon’s View: • A centralised model for collection and distribution of contributions will ensure the adoption of a standard set of templates and should have a downward pressure on costs.

A state agency may also add gravitas to AE rollout and should (if done correctly) establish public confidence in AE from the outset.

• However, the new Authority will be costly and timely to setup, and will require a significant amount of expertise, from an industry with a current tight labour market.
We would have concerns that the effort required to establish and operate the CPA could be underestimated.

This could lead to delays / initial teething problems in the establishment of the AE Retirement Savings System and loss of confidence in ongoing operations.

The published design principles reference a high degree of digitilisation in the service delivery which we would support, however there are many aspects to pensions administration which cannot be digitilised (e.g.
Aon Proprietary and Confidential Aon Solutions Ireland Limited 3 deaths, retirements, divorce).

We note there is provision for the CPA to outsource some of the back office administration but we would question the availability of suitable providers locally with the expertise to deliver services at such scale.

2.4 Investment The CPA will tender for four commercial investment companies to become ‘RPs’ for the CPA.

Contract periods may be up to 5-7 years.


The role of the RPs will be to provide investment options and act as investment managers for AE contributions.

The RPs will invest contributions for the CPA, on behalf of individual participants, and the intention is they provide the best possible return on those investments over time.

The RP will be required to offer four fund types – Conservative, Moderate Risk, Higher Risk and Default.
The Default fund in this AE system will follow a lifecycle/lifestyle approach.

Financial returns from each of the RPs for each fund type will be pooled and allocated to accounts of the individual members who comprise that fund type.

Aon’s View: • We support the principle of offering a limited number of risk rated investment options to members to minimise administrative complexity and to aid members in making appropriate investment decisions.
• However, we would have significant reservations about how the structure is designed.

Our view is that if pooling the returns for investors equally across four managers / funds, then this will be very onerous to administer, and it would lead to appointing “generalist” investment managers across all asset classes, rather than specialist investment managers who are ‘best in class’ in particular asset classes.

This structure we believe will ultimately lead to worse outcomes for members.
• We would recommend tendering for one fund platform service provider to create white labelled funds, and within those white labelled funds, appointing specialist investment managers to manage the individual asset classes.

This would give more flexibility to the appointment and removal of investment managers, and economies of scale for fee purposes and relationships with investment managers used as part of the Ireland Strategic Investment fund could also be explored.
• Alternatively, we would urge significant consideration be given to the Collective Defined Contribution (“CDC”) model for the management of the investment strategy and drawdown for members.

CDC involves pooling the assets of all members, with the same rate of return declared each year for every member depending on the underlying investment returns, with the returns smoothed over time to avoid excessive year to year volatility.
CDC is ideal for a very large scheme such as this, as it could seek greater investment returns for members through investing in different types of assets, and can hold these assets over a longer time horizon than savers would otherwise be able to do individually.
It would also be much more administratively straightforward to administer compared to individual savings pots, and if it was designed to also provide retirement income also, it should provide better outcomes for members over time than a standard DC model approach.

• • Aon Proprietary and Confidential Aon Solutions Ireland Limited 4 • Aon is at the forefront of developing the CDC model in the UK – see link below to Aon’s thought leadership and materials on CDC.
Collective Defined Contribution & CDC Pension Schemes | Aon 2.5 Opt outs and suspensions The new AE Retirement Savings System will be a voluntary system but will operate on an ‘opt-out’ rather than an ‘opt-in’ basis.

Two opt-out options plus a savings suspension facility will ensure flexibility and participant choice, without undermining the purpose of the system as a whole.

Participants who have opted-out or suspended will be automatically re-enrolled after two years.
From six months after re-enrolment, they may exercise the above opt-out and suspension options again.

Aon’s View: • We would be in favour of having an ‘opt-out’ and a savings suspension facility to offer flexibility for members, but also would be very much in favor of participants been re- enrolled after two years to ensure those members have to continue to make an active choice not to participate.
2.6 Pension Drawdown Member access to drawdown their pension savings/investment fund will be aligned with State Pension arrangements (currently from age 66).

On retirement members will be provided with access to their accumulated fund for use in accordance with prevailing pension and tax regulations (e.g.

a lump sum (subject to regulated limits), an annuity or an Approved Retirement Fund (ARF).
Members will be free to select a pension product from the open market, however the CPA may, if there is demand, tender for a set of pension drawdown options that it will make available to members.

Aon’s View: • We agree that it is not critical to have a pensions drawdown structure in place at the outset of the system given the very small pension pots which will be in place at the outset, but we think it is crucial over the long term to have this facility integrated into the AE Retirement Savings System.
3 Recommendations for Committee Aon Proprietary and Confidential Aon Solutions Ireland Limited 5 Aon very much welcomes and is supportive of the need to introduce an Auto Enrolment system in Ireland, to address the requirements of approximately half of the working population who don’t have any private sector retirement provision, and Auto Enrolment has been very successful internationally where it has been introduced.
Aon would be very supportive of some areas of the design AE Retirement Savings System, but would have views on three key areas which we believe could be improved upon, in particular; • Tax Relief: Aon believes having a different tax system for the existing pension system and the new AE Retirement Savings System adds unnecessary complexity to the new system, may lead to “regulatory arbitrage”, and can lead to perceived unfairness and difficult decisions for employers on which system is better for their employees.
• Administration: The new Central Processing Authority will be costly and timely to setup, and will require a significant amount of expertise, from an industry with a current tight labour market.

We would have concerns that the effort required to establish and operate the CPA could be underestimated, and consideration should be given at ways to simplify the model • Investment: o We would have significant reservations about how the current investment structure is proposed.
Our view is that if pooling the returns for investors equally across four managers / funds, then this will be very onerous to administer, and it would lead to appointing “generalist” investment managers across all asset classes, rather than specialist investment managers who are ‘best in class’ in particular asset classes.

This structure we believe will ultimately lead to worse outcomes for members.
o We would also strongly urge the Committee to consider the Collective Defined Contribution approach versus the traditional DC model proposed.

This model we believe will lead to much better outcomes for members over time, and will also be a lot more straightforward from an administrative perspective.
This is a once in a lifetime opportunity to put in place a globally recognised best in class pension structure for the current Irish workforce who do not have a private sector pension, and we believe it is worth getting the design right “up front” in order to avoid unnecessary cost, expense, and poor participant outcomes down the line, and to avoid negative media and public reaction to the system at the outset.
Aon are experts in all areas in pensions, both in Ireland and Globally, and would very much welcome a discussion or to assist the Committee, and would be happy to appear in public session at a Committee meeting.

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