The Pension Auto-Enrolment System
Laura Reidy
Head of Pensions

The Pension Auto-Enrolment System
Auto-enrolment has been on the Irish political agenda for a number of years now and was the subject of a public consultation process in 2018. Ireland is the only OECD country that does not yet operate auto-enrolment or a similar system to promote pension savings.

The proposed Irish Auto-enrolment system, scheduled to go live from 1 January 2024, is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. According to the government’s press release, the rate of supplementary pension coverage is around 56% of Ireland’s working population (although the Central Statistics Office’s Pension Coverage Survey 2021 refers to 66% coverage, outside of State pension) and this could be as low as 35% in the private sector. So now that auto-enrolment is finally happening, I will take you on a whistle stop tour of what it is and how it will operate.

The Auto-Enrolment System Design
The auto-enrolment system will apply to all employees aged between 23 – 60, earning over €20,000 across all employments, and who are not already members of an occupational pension scheme. Eligible employees will be automatically enrolled in the scheme but will have the choice after six months of participation to ‘opt-out’ or suspend participation. Those who opt out will be automatically re-enrolled after two years.

The aim is to have the system set up during 2023 for employee enrolments from 1 January 2024. This is an ambitious timeframe for the Government as the new Central Processing Authority (CPA) will need to be established and all of the necessary investment, administration and IT support systems still need to be put in place. The scope and role of the CPA has been laid out by the Government with it being an independent statutory body regulated by the Pensions Authority. The CPA will be responsible for, amongst other things, contribution collection, compliance, the allocation of pooled contributions to registered providers (RPs), the allocation of pooled investment returns to participants, and the overall administration of the auto-enrolment system.

Phased Contributions
The level of required auto-enrolment contributions will be gradually phased in over a decade, with both employer and employee contributions starting at 1.5% of Gross Earnings and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). When allowance is made for the proposed Government top-up, this will lead to a total contribution being paid to a member’s pension account of 14% of Gross Earnings from 2034 (6% employee, 6% employer, 2% Government top-up). The maximum Gross Earnings for contribution deduction purposes is €80,000. The rates and timeframe are summarised as per below:

Years 1-3 Years 4-6 Years 7-9 Year 10+
Employee 1.5% 3% 4.5% 6%
Employer 1.5% 3% 4.5% 6%
Share Contribution 0.5% 1% 1.5% 2%
Total 3.5% 7% 10.5% 14%

 

State Tax Incentives
Under the proposed auto-enrolment system the Government plans to operate a new incentive system to encourage pension savings by topping up member contributions. As outlined above the Government will contribute €1 for every €3 of member contributions.

It is important to also understand that auto-enrolment is being referred to a SSIA scheme and will not replace or indeed threaten tax relief available for private supplementary pensions. In other words, the Government has confirmed that the new system will run alongside the existing tax relief system available to pension savers participating in occupational pension schemes, PRSA and Personal pension products whereby individuals receive marginal income tax relief at either 20% or 40% (up to certain contribution limits) on their pension contributions. Therefore when comparing the new incentive system to the existing tax relief system it will be more favourable for members who pay 20% income tax rate on all of their earnings and less favourable for 40% income tax rate payers.
The cost per €1 to member summarised below:

Higher Rate Taxpayer (40%) State Contribution under AE Standard Rate Taxpayer (20%)
Member cost €0.60 €0.75 €0.80
Total €1 €1 €1

 

Employer Planning and Considerations
As outlined above the auto-enrolment state tax incentives are less generous than the current tax relief incentives available for higher rate taxpayers. If the majority of an employer’s workforce are higher rate (40%) tax-payers then it is potentially difficult to justify adopting the new auto-enrolment system. Correspondingly, the auto-enrolment incentives are more generous for a standard (20%) taxpayer. Companies may want to consider the tax profile of their workforce when considering the optimum way forward.
Employers and trustees do not need to take immediate action in response to the auto-enrolment announcement, as the system is not due to be implemented until late 2023/early 2024. Furthermore according to the details announced employees who are already enrolled in an occupational pension scheme do not need to be enrolled in the new auto-enrolment system.

Employment Changes
Individuals would remain in the auto-enrolment system when they change employment and therefore under the ‘pot-follows-member’ approach, individuals who move jobs will not have to change or join a new pension scheme. In addition, individuals with multiple employments will have their pension savings consolidated into one pot.

Investment Funds and Registered Providers
The CPA will tender for four commercial investment companies to become Registered Providers (RPs) for the CPA. The role of the RPs will be to provide investment options and act as investment managers for auto-enrolment contributions. The RPs will invest contributions for the CPA, on behalf of individual participants, and provide the best possible return on those investments over time.

While the CPA will settle the precise parameters of fund types closer to the launch of the system, RPs will be required to offer four fund types:

  • Conservative (e.g. a mix of Government bonds, cash and cash equivalents, blue chip private bonds and stock market index funds);
  • Moderate risk (e.g. an investment portfolio involving a mix of Government bonds, blue-chip equities and property);
  • Higher risk (e.g. a portfolio comprising of predominately equities, commodities and property); and
  • Default (e.g. operating on a lifestyle/ lifecycle basis). The default option is required for people who do not nominate a preferred fund type and is a key element in a successful auto-enrolment system.

 

In broad terms, investment would work in the following way:

  1. CPA collects all pension contributions;
  2. Employees will select a fund type through the online portal provided by the CPA;
  3. Employees who do not select a fund will be automatically allocated to the default fund;
  4. The CPA will pool all pension contributions according to fund choice and allocate the pension contributions among the RPs;
  5. Financial returns from each of the RPs for each fund type will also be pooled and allocated to accounts of the employees who comprise that fund type.

 

Conclusion
Well apparently, the best things in life are worth waiting for so auto- enrolment must be one of those! According to Government statistics auto- enrolment will bring approximately 750,000 workers into the new scheme. Legislation to set up the auto- enrolment system is expected to be in place by the third quarter of 2023 in anticipation of its commencement in the first quarter of 2024. Auto- enrolment will have a financial impact on employers who do not currently operate occupational pension schemes and in this vein, employers should continue to monitor developments over the coming months to ensure they are adequately prepared. While a launch date in 2024 does sound rather ambitious, the auto- enrolment system is undoubtedly a positive move by government to address lower pension coverage in the private sector and it will significantly increase the wellbeing, financial security and independence of Ireland’s future retirees.

Laura Reidy is Head of Pensions at Cantor Fitzgerald Ireland.

Contact details for each individual team member can be accessed here on our website should you wish to speak with a Portfolio Manager or Account Executive.

Cantor Fitzgerald Ireland Ltd. is regulated by the Central Bank of Ireland is a Member Firm of Euronext Dublin and the London Stock Exchange.

Warning: Past performance is not a reliable guide to future performance.

 

Warning: The value of your investment may go down as well as up.

 

Warning: Not all investments are necessarily suitable for all investors and specific advice should always be sought prior to investment, based on the particular circumstances of the investor.

 

Warning: Assessments of the economic impact of elevated geopolitical risks including conflicts, tensions between states, economic sanctions, potential sovereign defaults, and the COVID-19 pandemic on this investment are not possible at present. These risk factors may negatively impact on the counterparty default risks, valuations & performance of this investment.