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Auto enrolment and pensions: How to prepare your business

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The Irish government is stepping up plans to require businesses and their employees to use private pension schemes.

As reported by the Irish Times, cabinet approval was sought in October 2019 for an auto enrolment pension scheme.

At that time, the Department of Employment Affairs and Social Protection published Design of an Automatic Enrolment Retirement Savings System, which confirmed details about the scheme, although these continue to be subject to change until legislation is passed.

We examine the auto enrolment proposals in this article from the perspective of what employers will need to do and how much it is likely to cost them.

What is pension auto enrolment?

Automatic enrolment (also known as auto enrolment) means private businesses, by law, have to enrol their employees in a workplace pension scheme.

There may be entry criteria to ensure the auto enrolment requirement doesn’t accidentally penalise the lower-waged, and those who are just beginning their working life after finishing education.

The crucial feature is that employees are automatically opted-in upon the auto enrolment legislation being introduced, or when they start working for a business operating the scheme.

This is why auto enrolment can be effective to help people save for retirement.

If the workplace doesn’t have a pension provider then employees should be provided with one. If auto enrolment in other countries provides guidance, most pension companies create schemes specifically for the auto enrolment marketplace.

Because of their large registration numbers, these have lower administrative costs relative to other workplace pension schemes.

Under the government proposals, employees will be able to individually opt-out.

Employers can’t opt-out of providing auto enrolment.

Following the auto enrolment process, the scheme works largely the same as any other defined contribution workplace pension. However, the minimum amount paid in by employees with each wage is defined by law, as are contributions from employers and the government itself.

For businesses the administrative requirements are substantial:

  1. Employers need to auto-enrol each eligible employee (including all employees when the legislation comes into force). This is typically done via a payroll link to government computer systems.
  2. Employers need to ensure employee deductions are taken and passed to the pension provider.
  3. Employers typically need to match the employee contribution with their own contribution, and ensure this is passed to the pension provider (including any additional tax requirements for them and the employee).
  4. Employers typically need to ensure government contributions are accounted for in the wage slip.
  5. Employers need to provide a mechanism for ineligible employees to opt-in to the scheme, and for employees who are auto-enrolled to opt-out of the scheme if they choose to do so.
  6. If the scheme allows for payment holidays then this needs to be administratively provided for too.

Notably, ongoing administration of the pension such as fund management or claiming upon retirement is typically handled by the pension provider directly with the employee.

How will pension auto enrolment work in Ireland?

The government proposes a defined contribution scheme, probably offered by a selection approved pension firms.

The details known at the moment are as follows.

Eligibility criteria for auto enrolment in Ireland

To be auto-enrolled once the law is implemented (or following new employment after that date), employees must tick all these boxes:

  • Earn €20,000 or more across all employments.
  • Be aged between 23 and 60.
  • Not already be contributing to certain supplementary pension schemes.

However, those falling outside the above criteria can choose to opt-in.

Auto enrolment will occur instantly upon the law coming into force, or an employee starting after that time. There will be no waiting time before auto enrolment occurs.

This means there can be no delay while probation periods or similar are completed.

It will be against the law in Ireland for employers not to enrol, deduct and remit contributions to auto enrolment. Employers that ignore the law could be fined, or even criminally prosecuted.

Contributions for auto enrolment in Ireland

The goal is that employees will be eventually required to contribute 6% of their gross earnings to the scheme.

The employer will have to match this contribution. There will be a salary ceiling of €75,000 for employer contributions, so employers should not find themselves contributing more than €4,500 per year to each employee’s pension (although it’s noted that this limit will be periodically reviewed).

However, the requirement for 6% will be rolled out across 10 years following the introduction of auto enrolment.

It will start at 1.5% and increase by 1.5% every three years. In other words, if the scheme is introduced in 2022, as planned, then contributions will look like this:

  • 2022 (introduction year): 1.5% contribution from employee, 1.5% from employer.
  • 2025 (year 3): 3% contribution from employee, 3% from employer.
  • 2028 (year 6): 4.5% contribution from employee, 4.5% from employer.
  • 2031 (year 9): 6% contribution from employee, capped at 6% for employer (or €4,500).

Employees joining a company after the introduction of the auto enrolment legislation will use the contribution rate at that point. If an employee starts in 2025, their minimum contribution will be 3%, which will be matched by the employer.

If an employee starts in 2031, it will be the full 6%, and this will again be matched by the employer.

Employer contributions will be deductible for corporation tax purposes, as with current pension schemes.

The government is likely to input financially too, although the details will be confirmed early in 2020. In earlier documentation from the government, it is suggested it would provide €1 for every €3 put into the pension by the employee.

This is intended to incentivise take up of the scheme and will probably be remunerated by salary tax adjustments.

The government may contribute more than this if the employee makes contributions beyond the minimum required, but this will be no more than 2% of the employee’s annual salary and is likely to be limited to the same €75,000 salary cap as the employer contributions.

Opting-out for auto enrolment in Ireland

As mentioned, opting-in will be automatic and employees cannot opt-out for the first six months.

Employees will be then be offered an opt-out window between the start and end of months seven and eight following the start of the scheme. or commencement of their employment.

If they opt-out, they have their contributions returned.

Following this and the legislation coming into force, employees can opt-out six months after each mandatory increase in contribution rates.

Assuming a January 2022 start date, this means opt-out windows will open in July 2025, July 2028 and July 2031.

Employees who opt-out will be auto-enrolled again after three years but can again opt-out.

Once the scheme is up and running at the full 6% contribution rates, employees can choose to take a break from contributions via a Saving Suspension Period. During this period, the employer and government will also stop their matched contributions.

Finding a pension provider for auto enrolment in Ireland

Employees will be invited to choose their own provider and fund(s) from a list of approved and registered providers.

If they don’t make a choice they’ll be registered for a default fund with one of the providers.

To facilitate the employee choice, employers will have to enrol them with the Central Processing Authority (CPA) when the legislation comes into force, or when a new employee starts with the business following this.

Employee will pay charges capped at no more than 0.5% of the assets under management.

When is auto enrolment due to start in Ireland?

The auto enrolment legislation will take effect in 2022, probably in January at the start of the financial year.

The introduction may be phased, perhaps following the model in the UK, where auto enrolment is already legislated. This could mean auto enrolment is rolled out within larger firms first, with small businesses following some years later.

Will auto enrolment in Ireland affect the self-employed?

Yes. However, this may be phased in at a later time following the introduction of the legislation. It’s proposed the self-employed will have the option to opt-in to auto enrolment.

In any event, because these workers are not part of the employer’s payroll, responsibility for auto enrolment is likely to rest with them, rather than the employer.

How to prepare your business for auto enrolment in Ireland

Businesses not only have to be financially ready to make contributions for auto enrolment, but also ensure their processes and systems are ready. Wage and payslip processing will be impacted. Using good payroll software will help.

Here are five questions to ask in advance of the auto enrolment legislation introduction deadline:

1. Are your payroll systems updated for auto enrolment?

It’s likely auto enrolment contributions will be collected by the employer and then transferred to the Auto Enrolment Central Processing Authority.

This will be facilitated by the recently introduced Revenue Commissioners’ PAYE real-time system that payroll systems have had to implement since the start of 2019.

This will also facilitate any government contributions to auto enrolment, which will probably need to be listed on the employee payslip.

2. Are managers within the business aware of auto enrolment?

Employees will likely turn to managers to learn about auto enrolment and its implementation, so they need to be fully aware of the requirements of the business as well as the impact it’s likely to have upon employees.

3. Are your employee contract templates updated to describe auto enrolment provisions?

The Workplace Relations Committee may provide guidance closer to the date of introduction of the auto enrolment legislation. Similarly, is the documentation in any welcome pack or similar (including electronic communications) updated to explain auto enrolment?

This will need to detail all aspects of the scheme, including the potential to opt-out or take breaks from pensions.

4. Is your business financially prepared for what will eventually amount to a 6% increase in the payroll?

If other countries where auto enrolment has been introduced provide examples, some employers limit yearly pay reviews to fund the pension contributions.

But whatever route is taken within your business, expectations among employees need to be managed and any route forward needs to be communicated early.

Remember too that auto enrolment essentially increases the minimum wage by 1.5%, 3%, 3.5% and then 6% across 10 years, above and beyond increases required by minimum wage legislation.

5. Have you managed employees’ expectations?

Auto enrolment equates to a 1.5% pay cut in take-home pay upon its introduction and employees are unlikely to be able to opt-out for several months.

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