Auto-enrolment FAQs: Answers to questions on workplace pensions in Ireland

After decades of discussions, draft legislation was approved for the pension auto-enrolment scheme in March 2024.

The next step is for the bill to pass through the Oireachtas in the coming weeks.

In this article, we discuss the implications of the scheme for employers, including how auto-enrolment works, how it’ll be funded, costs for you to be aware of, and what happens if your business has a workplace pension in place already.

Here’s what we cover:

What is the auto-enrolment scheme?

Under the scheme, employees who do not have a private pension, earn more than €20,000 per year, and are aged between 23 and 60, will automatically be enrolled into the pension scheme.

It will apply to almost 800,000 employees who are employed but not in an occupational pension scheme, or other type of private pension such as a PRSA (Personal Retirement Savings Account).

For the moment, the self-employed are not included in the scheme, but this may be considered in the future.

Why is it being introduced?

There are two main reasons why the government is introducing the auto-enrolment scheme.

Firstly, the scheme will supplement the state pension, which is currently about €277 a week.

For a person relying solely on the state pension when they retire, this can mean a significant drop in income, and the auto-enrolment pension should help close the gap.

As it stands today, there are a significant number of workers who will only have the state pension to get by on.

Figures from the Central Statistics Office say a third of workers in 2023, that are aged between 20 and 69, had no private pension.

Secondly, there is a loudly ticking pension time bomb.

People are living longer and the population is ageing, which means pensioners will make up a higher proportion of the population in the coming years.

This will put enormous pressure on the exchequer and the auto-enrolment pension is one way of alleviating the pressure.

When does the scheme begin?

The proposed date is January 2025.

That does not leave a lot of time to prepare, and only once the legislation is passed, can the wheels start turning in terms of setting up the scheme.

There is also very little awareness among the public and eligible employees in particular will need to be informed well ahead of time.

But the scheme should start sometime in 2025.

How does the scheme work?

Any employee between the age of 23 and 60, and who is earning over €20,000 a year, will automatically be enrolled into the pension scheme when they start a new job, unless they have their own pension or access to an occupational pension.

People under 23 and earning less than €20,000 can choose to opt in, if they want to.

An employee will be able to opt out or suspend contributions after six months.

However, the employee will be re-enrolled again after two years. Once re-enrolled, the employee can opt out again after another six months.

Is it a legal requirement?

Yes, it is a legal requirement and as an employer, if you do not fulfil your obligations, you will be subject to penalties and possibly to prosecution.

How is the scheme funded?

It will be funded by the employee, the employer and the government, with the contributions increasing on a sliding scale over the next 10 years.

In year one, the employee and employer will each pay 1.5% of the employee’s annual gross salary.

This will gradually increase to 6% by year 10.

The government contribution will start at 0.5% in year one and climb up to 2% by year 10.

In essence, this means that after a decade, 14% of an employee’s gross salary will go towards their pension.

However, both the employer’s and government’s contributions will be capped at €80,000 gross annual salary. However, if the employee earns over €80,000, they can still contribute, but the employer or the government will not match contributions for any income over €80,000.

As yet, there is no possibility of the employee making additional contributions.

This is usually an option with private pensions, as long as the additional contributions are within Revenue’s limits in terms of tax relief.

Who will be overseeing the scheme?

A National Automatic Enrolment Retirement Savings Authority (NAERSA) will be established to oversee the running of the scheme and it will be supervised by the Pensions Authority.

Also, as with other pensions, the Financial Services and Pensions Ombudsman will handle any complaints.

In addition, there will be four commercial investment companies appointed to invest the contributions and once the legislation is passed, there will be an open tender to select these institutional investors.

Where will the contributions be invested?

The scheme will be run on the same lines as other private pensions, with the contributions being invested by institutional investors, as stated above.

In terms of contributions, an employee can either opt for a default fund or choose from a choice of funds, which will have varying risk profiles from high, to medium, to low.

For the default fund, the risk will decrease as the employee gets older.

How does an auto-enrolment pension compare to a private pension?

The structure is different.

An employee with a private pension receives tax relief. The rate of tax relief is set at the highest rate of income tax the employee pays.

So, that means:

• For a single person earning over €42,000, the tax relief is 40%
• For a single person earning €42,000 or less, the relief is 20%.

Under the auto-enrolment scheme, there is no tax relief, but the government tops up the contribution by 33%.

This means if a single person earns €42,000 or less, and thus pays only 20% tax, the auto-enrolment pension will be more beneficial.

But for the most part, a private pension will be more beneficial.

For instance, in a private pension, although there are limits to the amount of pension contributions an employee can get tax relief on in any one year, it is significantly more generous than the auto-enrolment pension.

For private pensions, the maximum percentage of tax relief an employee can get on their income depends on their age, which is 15% for employees under 30 years, and climbs up to 40% for employees over 60 years.

Also, the maximum amount of gross income taken into account to calculate the percentage is €115,000.

Therefore, considering factors such as tax relief and also age-related tax relief, auto-enrolment will only be more beneficial than a private pension when the employee’s income is low.

What happens if an employee moves job?

The scheme is designed on a “pot follows member” basis, meaning the retirement savings pot will follow the employee to their next job.

This will happen automatically and will be managed through the new governing authority, NAERSA.

What if an employee has more than one job?

If an employee has more than one job, their gross pay from all their jobs will be considered for the eligibility assessment of the scheme.

If it is over €20,000, the employee will be enrolled in respect of any jobs where they do not make pension contributions through payroll.

What do employers need to do to facilitate the scheme?

Employers will have to make considerable changes to prepare for the roll-out, in particular in terms of payroll, finance and HR.

More details about how to do this will be published once the legislation is passed.

Eligible employees will also need to be informed well in advance.

Will there be extra costs for employers?

As an employer, you will be obliged to sign up to the scheme if any of your employees do not have a pension and there will be costs.

This will be on top of additional costs already imposed in 2024, including increased minimum wages and the continued roll-out of statutory sick pay.

Pay related social insurance (PRSI) charges are also set to increase later in 2024.

In terms of the scheme, you should look at your current payroll and make an estimate of the cost.

However, you will be able to claim corporation tax relief on the employer contribution.

What happens if there is already a workplace pension in place?

An existing pension scheme will run in parallel to auto-enrolment.

Any employees that have a record via payroll of either employee contributions and/or employer contributions will not be enrolled in the scheme.

Final thoughts

Overall, auto-enrolment is a positive move, and is designed to get lower-income employees to start contributing to a pension.

Based on international experience, it works. And once employees are automatically enrolled in a pension, they generally do not opt out.

Daragh Cassidy is head of communications at comparison and switching website bonkers.ie.

He says: “The new auto-enrolment scheme is aimed at workers in lower-paid jobs, particularly in the retail and hospitality sectors, where until now pension coverage has been lacking or non-existent.

“These are the people who will benefit the most.

“However, auto-enrolment will also hopefully lead to an increased focus on the importance of pension planning among all workers, which can only be a good thing.”

That being said, it will really only be suitable for lower-income employees and with the contributions currently so low, it will still not be enough to ensure a comfortable retirement.

For higher-paid employees, a private pension that offers generous tax relief and also often more flexibility will still be the better option.

For you, as an employer, if a significant number of your staff don’t have a pension, it will mean a sizeable increase in costs.

However, as Daragh points out, the government has flagged this initiative well in advance and is giving employers an entire decade to fully bring in the measure. Though, he suggests, targeted support for particularly impacted businesses may be needed.