Pensions Auto-enrolment in Ireland: A Closer Look
December 2023
Auto-enrolment (“AE”) is a new retirement savings system for employees in Ireland that is set to begin in the second half of 2024. Most industry observers believe that the implementation timeframe will be delayed to at least 2025, but for now, the government is sticking to the 2024 timeline. The main goal of AE is to ensure that individuals have sufficient income after retirement and is aimed at workers who currently are not enrolled in any pension scheme. The information provided in this article is based on the draft Heads of Bill published in November 2022. Once the Bill is published and enacted we expect that there will be some changes to the specific details of how the AE system will work.
In this article, we cover the following areas:
A summary of how AE will work (based on current proposals)
The Citris view on employer considerations - what is the likely impact and what should employers do to prepare?
SUMMARY OF HOW IT WILL WORK
Auto-enrolment Criteria
Employees between the ages of 23 and 60 who earn over €20,000 annually, and who are not actively contributing to a “qualifying” company pension scheme, will be automatically enrolled. They will be able to access their retirement fund once they reach the State Pension age. However, those over 60 or under 23, as well as those earning less than €20,000, will be able to choose to opt-in. Employees who already contribute to a pension scheme / PRSA which meets certain standards and contribution levels (and therefore deemed to be a “qualifying” plan) will not need to be automatically enrolled. The conditions needed to be deemed a “qualifying” plan have yet to be published.
Contributions
The retirement savings system will be managed by a Central Processing Authority (CPA), with employers facilitating payroll deductions. Both employers and employees will contribute, starting at 1.5% of gross earnings each and increasing every three years until reaching 6% each in year 10 (see details of phased contributions Figure 1 below). Employer contributions will be calculated based on earnings up to €80,000 and will be tax deductible for corporate tax purposes. The State will also provide a top-up contribution of one-third of the employee's contribution, up to a maximum of €80,000 of earnings. The proposed maximum contribution rate after 10 years is 14%, with 6% from the employee, 6% from the employer, and 2% from the State. The phased approach to employee contributions aims to allow for adjustment and familiarity with each rate before the next increase.
Unlike the current tax relief system for pension contributions, tax relief will not apply to employee contributions, as the State will provide a top-up contribution of one-third of the level of the employee contribution. On a like for like basis, this is equivalent to income tax relief of 25%, compared to the current tax relief of 20% or 40% for standard and higher rate taxpayers, respectively. This could potentially lead to certain groups of lower-paid employees being better off under the State’s AE scheme (and vice-versa for employees subject to the higher rate of income tax). This has the potential to cause confusion and it will be important for organisations to plan ahead to meet the requirements but in a manner which also aligns to the organisation’s strategic approach to pensions.
Opt-out Guidelines
The proposed system is expected to operate on an 'opt-out' basis, meaning that employees will be automatically enrolled unless they actively choose to opt-out. This approach is aimed at encouraging maximum participation without forcing individuals to participate. Once enrolled, employees will be required to remain in the scheme for a mandatory period of six months. However, they will have the opportunity to opt-out during months 7 and 8 following enrolment, in which case they would receive a refund of their own contributions. Employees will also have the option to opt-out following scheduled increases in contribution rates (in years 4, 7 and 10), but only in months 7 and 8 following the increase in contribution rates. Those who opt-out will be automatically re-enrolled after two years, provided they still meet the criteria for enrolment.
Additionally, employees may have the flexibility to suspend their contributions for a minimum of 1 year and a maximum of 2 years, except during the mandatory 6 month participation period. This design feature is being considered in order to address certain needs such as financial hardship, ill health/disability, or saving for a home purchase. However, no refunds of employee contributions will be given if an employee chooses to suspend their contributions.
Investment Fund Options
The system will offer a default fund for investment, but participants will also have the option to choose from a range of alternative funds with varying risk levels. To facilitate easy access to information and decision-making, an online portal is planned to be available to employees. This portal would provide comprehensive information about the scheme, available investment fund options, and personal account details. Employees will also receive an annual statement through the online portal.
IMPACT ON EMPLOYERS
Auto-enrolment will impact all employers, even those that already offer generous pension schemes for their employees. Some of the key potential impacts are as follows:
Design of company pension plan: Those employers who provide existing pension plans to employees are likely to consider amending their plan design so that the plan can be classed as a “qualifying” plan and the employer can avail of an auto-enrolment exemption for participating employees. However, for organisations with significant numbers of lower paid employees, a preferable strategy may be to adopt the State’s auto-enrolment plan as the main retirement vehicle. For others, adopting a hybrid approach may make sense. Each employer should consider their pension plan strategy in the context of their own workforce composition and overall objectives.
Administrative processes: administrative processes will need to be reviewed to accommodate the automatic enrolment of eligible employees. Note that there is no waiting period to enrol an employee in the new AE scheme. Probation periods and short term contracts will not be allowed to be used by employers as ways to avoid or delay enrolment.
Costs and contributions: auto-enrolment will require employers to contribute to the pension scheme on behalf of eligible employees, leading to increased costs for many employers. In addition, the AE contributions are expected to be based on ‘gross earnings’, while most pension plans’ contributions are based on base salary.
Employee communication and education: AE has the potential to cause significant confusion within an organisation. Once the company has decided on the preferred approach, it will be important to craft an effective communications plan so that all employees are clear on the company’s approach and why. The risk of getting this wrong, or poor execution of the communications plan, is the potential destruction of employees’ perceived value of this valuable component of employee total reward.
HOW TO PREPARE
Ensure your organisation’s 2024 people budget includes additional retirement contribution costs. Whilst most observers believe implementation is unlikely in 2024, it is much easier to release budget accruals rather than to look for additional budget in-year!
When the Automatic Enrolment Retirement Savings System Bill is published (expected later this year), assess whether your existing pension scheme meets the minimum standards and contribution levels to be exempt from auto-enrolment in respect of actively contributing employees.
Consider what changes may be appropriate to make to existing pension schemes to avoid part of the workforce being automatically enrolled in the State’s AE scheme (or opting to do so). This might include:
o removing waiting periods;
o ensuring contribution rates at least match those in the AE scheme (or meet the conditions set out to be a “qualifying” plan);
o making the pension scheme compulsory if currently optional;
o reviewing opt-out rules.
Alternatively, companies may consider whether having all their employees in the new AE scheme might make more sense for their employees and their business. This is unlikely to be the case unless the vast majority of the workforce are lower paid employees.
New HR and payroll processes will need to be created and a process will need to be put in place to ensure appropriate re-enrolment provisions for those who subsequently opt out.
Once you’ve clarified your organisation’s pension strategy, start working on a communication plan to ensure employees are clear on how your pension arrangements are changing, what it means for employees, and what action employees need to take.
Please reach out to us at Citris if you’d like to discuss further. We’d love to hear your views!
