If slow and steady wins the race, the implementation of a Statewide Auto-Enrolment (AE) pension system has been under consideration in Ireland since 2006 may prove to be the undisputed champion! The Minister for Social Protection published the Automatic Enrolment Retirement Savings System Bill 2024 on 5 April 2024. The Minister is targeting introduction for early 2025.

So, what is Auto-Enrolment (AE)?

AE is a new pension savings scheme for certain employees who are not paying into a pension. They will be automatically included in the scheme but can opt out after 6 months. There are approximately 750,000 workers over the age of 23 and earning at least €20,000 per annum who are not benefitting from a workplace pension scheme.

When will AE be introduced?

The Minister is targeting introduction for early 2025.

What is AE in Ireland likely to look like?

Contribution Rates

The bill consists of nine parts. At a high level there will be the establishment of the National Automatic Enrolment Retirement Savings Authority (the Authority). Employees will be automatically enrolled if not already contributing to a pension plan, aged between 23 and 60, and earning €20,000 or more per year. Alternatively, employees can voluntarily enrol if they do not have a pension scheme, aged outside 23-60 years, and earn less than €20,000 per year.  For every €3 contributed by an employee, the employer must match with €3. Employee contributions are not relieved for PAYE, USC or PRSI, and instead the State will make a top up of €1 for every €3 paid by the employee.

In this regard the employees’ gross earnings will be calculated up to €80,000 per annum. Contribution rates will gradually increase over a 10-year period, starting at 1.5% of gross pay, and reaching a maximum of 6% by 2035. All employee contributions will be matched by their employers and topped up by the State. Employers will for the first time effectively be required to make pension contributions. A summary of the contribution levels is below:

Tax

Specifically, with regards to the state top up, there is also a very clear difference when it comes to this when versus tax relief within an Occupational Pension Scheme or PRSA. In respect of the latter, an employee paying income tax at the 40% rate effectively receives tax relief at the marginal (highest) tax rate. However, if they become a member of the AE system the State will provide a top-up equivalent to 33% of the employee contribution. Of course, that equation changes in favour of the employee if they are paying tax at the standard rate of 20%. Again, this highlights the potential utility of the new AE system for employees in lower paid areas of the economy. Further it is not currently proposed that additional voluntary contributions (AVCs) will be facilitated under the scheme.

Job Changes and Drawdown Date

Employees who move jobs will not have to change scheme and will be able to bring their pension pot with them and the date of drawdown is likely to be aligned with the State pension age.

Investment Management

Finally, the Authority will appoint an entity or entities to provide investment management services and this provider will be required to offer three investment strategies with a risk rating of Low, Medium and High. A default strategy where funds automatically move from higher risk to medium risk to lower risk as the member approaches retirement will also be provided.

Should employers take any action now?

Deciding on your approach to AE

Many employers are arguing that AE comes at a time when they are already facing surging costs in areas such minimum wage increases and sick pay entitlements. There are some preliminary steps which employers can take. Firstly, employers will need to consider the make-up of their workforce, how many employees are currently in an existing pension arrangement and how many are not. Whether the AE system is appropriate for their employees or whether an existing occupational pension scheme should be used to enrol employees as an alternative to the AE system, must also be considered. For some, a hybrid approach of running both systems may make sense. Employers should also determine a budget for the cost of contributions depending which system is chosen.

Consider Retention Benefits

Attracting and retaining employees are also key considerations for employers and employees and job candidates have become a lot more sophisticated in terms of their pensions knowledge and this is having an increasing influence on their choice of employer. Companies which offer a defined contribution pension scheme with contribution levels designed to deliver an adequate pension in retirement will enjoy a distinct advantage in the talent market.

How to prepare for AE

Depending what decisions an employer makes on this front and when legislation is available, a review of contracts of employment and existing pension scheme rules will likely be needed. In addition, employers who do not currently automatically enrol employees into their pension scheme will also need to adapt their payroll systems either to cater for increased contributions to their pension scheme or to remit contributions to the AE scheme. A summary below of steps that employers could do to prepare for AE:

• carry out a cost analysis and budget for potential costs of AE;
• consider engaging with its payroll to understand what steps will be required to facilitate AE. Employers will be required to facilitate payroll deductions for members of the scheme;
• consider making changes to your existing pension provisions;
• review HR contracts;
• undertake an analysis of staff and pension take up (not all staff may be members of scheme);
• prepare communications for existing pension members; and
• consider if/how to communicate with other staff.

If an employer currently has a pension scheme in place it, a side-by-side comparison of the AE terms versus the pension scheme would allow the employer to understand actions required to facilitate AE or to adapt the scheme to be AE compliant.

Will AE just apply to new employees?

AE applies to all existing staff and new staff which includes staff on probation and casual and part-time staff.  If an employee is currently enrolled in a “qualifying occupational pension scheme” into which the employer and employee are actively making contributions, they are excluded from the AE system.

Summary

Employers need to pre-empt the arrival of AE in 2025. Of course, there is also a large cohort of smaller firms operating in some sectors which do not currently have a pension scheme in place and probably have no intention of establishing one. The AE system will certainly play an important role in boosting the retirement incomes for workers in those firms.

Undoubtedly, the forthcoming AE program represents a significant stride in bolstering the financial well-being of retirees in Ireland. Nevertheless, its implementation poses notable administrative and financial hurdles for both employees and employers. We recommend that business owners and employers seek guidance on establishing their own occupational pension scheme prior to the auto-enrolment rollout. Establishing a scheme or modifying an existing one to align with AE requirements may pre-emptively address these challenges.

For employers, the opportunity to tailor the pension offering and foster employee engagement remains paramount. Ultimately, those who opt to establish their own pension scheme may gain strategic advantages in terms of administration efficiency, investment flexibility, cost management, compliance adherence, and talent retention.

If you’d like to learn more about AE, or other pensions schemes in Ireland, please get in touch to speak with a member of our team.