The government has announced details of a new auto-enrolment pensions savings scheme.
It’s designed to encourage workers to save for their retirement and make it more straightforward for businesses to offer a workplace pension option.
Currently, only around 35% of employees in the private sector have a supplementary retirement saving scheme.
The design principles for the Automatic Enrolment Retirement Savings System for Ireland, introduced recently by the Minister for Social Protection, Heather Humphreys, will form the basis for the draft legislation.
This article will offer advice to small and medium-sized employers, and HR and payroll teams on what auto-enrolment will mean for them and their employees, how auto-enrolment will work, when it will begin and how it will be phased in.
It will also help businesses prepare for the new legislation, which is due to begin from September 2024.
Here’s what we cover:
- What is auto-enrolment?
- How auto-enrolment will work
- When will the auto-enrolment scheme begin?
- How businesses can prepare for the new legislation
- Final thoughts: Providing financial security for your employees
What is auto-enrolment?
Auto-enrolment (short for automatic enrolment) is a pension investment scheme for employees, which involve their employer matching their contributions of a set percentage of their gross income with a top-up from State funds.
An estimated 750,000 employees (not including the self-employed) earning more than €20,000 per annum and aged between 23 and 60, and who are not already enrolled in an occupational pension scheme, will be automatically enrolled in the new scheme.
The accumulated funds plus investment returns will be paid to participants upon their retirement in addition to the State pension, and drawdown will be linked to the State pension age, which is currently 66.
How auto-enrolment will work
All employees–current and new–who fit the eligibility criteria and who are not already enrolled in a workplace pension scheme will be automatically enrolled in the new scheme.
Employees aged between 23 and 60 earning more €20,000 per annum will be eligible to participate in the new scheme.
Those earning below the income threshold or aged outside of the parameters will be able to opt in to the system if they wish.
Members of an existing occupational pension scheme won’t be automatically enrolled for that employment. Employees who are on probation, or are casual or working on a part-time basis will be assessed by a new Central Processing Authority (CPA) to determine eligibility.
Initial contributions will be 1.5% of gross income. This amount will be increased on a phased basis over 10 years with 1.5% added every 3 years until a total of 6% is reached.
As an employer, you’ll match your employees’ contributions and the pension will also be topped up by the State at 33%, with employer and State contributions capped at €80,000 of earnings.
Here’s how contributions will be raised over the 10 years:
Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%
Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%
Years 1 to 3: 0.5%
Years 4 to 6: 1%
Years 7 to 9: 1.5%
Years 10+: 6%
For each €1 saved by an employee, €2.33 would be credited to their pension savings account comprising their €1 personal contribution, plus €1 from their employer, plus €0.33 from the State.
So for every €3 an employee contributes, they will receive a further €4 into their pension pot.
The added incentives are aimed at encouraging workers to remain in the scheme by reducing their costs of saving for retirement.
Detailed examples of projected earnings for different life and work situations can be found in the Department of Social Protection document, The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System.
Opting in/out option
All eligible employees will be automatically enrolled in the scheme.
However, participation is optional and operates on an opt-out basis.
Employees who have been automatically enrolled can choose to opt out or suspend their participation after six months.
Those who opt out will be auto-enrolled after two years have elapsed and they can opt out again after another six months.
If an employee opts out, they’ll receive a refund of their (employee) contributions, but employer and state contributions will remain in their pot.
Members will be able to pause their contributions after 6 months of saving, suspending their contributions for a maximum of two years.
They won’t receive a refund on what they’ve saved so far and can restart their saving at any time before the auto-restart.
Choice of funds
Employees will have a choice of four retirement savings funds to choose from, depending on the level of risk they prefer.
Three of these funds will have differing risk/return profiles comprising a conservative fund, a moderate risk fund and a higher risk fund.
The fourth option – a ‘life-style/life-cycle’ investment profile – will be the default fund provided if the employee doesn’t express a preference.
The scheme will be set up on a ‘pot follows the member’ basis, so an employee’s pension is not linked to their employment but follows them as they move jobs.
This means workers will not have to join a new scheme each time they change employer and those who have more than one employment will have their pension savings combined into one pot.
Participants of the new scheme will be able to access their account via an online portal run by the CPA.
They’ll be able to view account balances, contributions and investment returns and update information or suspend their payments.
When will the auto-enrolment scheme begin?
Legislation and processes will be implemented from now, with the launch of the scheme and paid contributions to start from September 2024.
Contributions will be gradually phased in over 10 years, with employee and employer payments beginning at a modest level of 1.5% and increasing every three years by 1.5% until they reach 6%.
How businesses can prepare for the new legislation
The workplace pension scheme is designed to minimise the administrative burden on employers who will not need to set up and run an occupational pension scheme.
Instead, employers will be responsible for recording employee-related data via a simple payroll instruction.
The scheme will be introduced on a phased basis, with contributions beginning at a modest level in 2024 and increased at a set rate until 2034.
This gives your business time to prepare for the scheme.
You’ll need to review the following areas and plan accordingly:
- Communication with employees
- Financial management.
An employer who fails to fulfil their obligations under the scheme, including implementing a payroll instruction for enrolment, and/or deduction or remittance of contributions as required, will be subject to penalties.
Consultations with providers of payroll systems and software used by employers are planned to ensure smooth and accurate integration of the new scheme with existing systems.
If you already use software to process your payroll, your provider can advise on how the new scheme will affect your payroll system.
In advance of the legislation coming into force, you’ll need to review employment contracts.
You should consult your solicitor well in advance of the January 2024 roll-out to ensure your employment contracts are updated to include the provision for pension contributions and any other legal details required.
Communication with employees
Under the proposals, employers will have a full year to ensure employees fully understand the scheme before it begins in September 2024.
This will give you time to communicate with your employees about how it will work.
You should provide details of the scheme and advise employees on the four fund options, how much they will contribute, tax implications and the benefits of the scheme, including the employer and State contribution.
Employee contributions will be taken from net income, after deductions of income tax, pay related social insurance (PRSI) and universal social charge (USC).
Tax relief won’t apply in respect of these contributions. Instead, the State tops up the pension fund at 33% of the employee contribution.
Participants in the new scheme will still be entitled to receive a ‘benefit-in-kind’ tax exemption in respect of their employer’s contribution.
Financial management to cover the contributions
The scheme is designed to be as simple as possible for employers to set up and implement.
The new CPA will oversee the scheme and minimise administrative costs to employers with a cap of 0.5% per annum of assets proposed on management charges.
The new arrangements will be phased in gradually and contributions will start at a modest level and increase over time.
Employers will be required to match members’ contributions starting at 1.5% of gross income up to an eventual maximum of 6% subject to an earnings threshold of €80,000.
How taxes will be affected
Under the new scheme, tax relief on pension contributions will change for employees as explained in the ‘Communication with employees’ section above.
However, employer contributions will be deductible against corporation tax in the same way contributions to existing pension schemes can be offset.
Final thoughts: Providing financial security for your employees
The new pensions savings scheme is designed to incentivise employees to start saving for retirement and through the employer and State contributions, it’s envisaged that they will see the benefits of staying in the scheme.
Under the auto-enrolment scheme, pension pots will move with the employee through their working life giving them the assurance of retirement income that will help them to maintain a reasonable standard of living.
The scheme aims to simplify and streamline the pension process and reduce the admin burden on employers, while providing financial security for the future of their employees.
Editor’s note: This article was first published in February 2020 and has been updated for relevance.
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