How to budget for auto-enrolment: What Irish employers need to consider

The introduction of pension auto-enrolment will be significant for employers.

Under the scheme, employees who don’t 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 also includes stipulations such as an employee will be entitled 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 6 months.

It will be introduced on 30 September 2025 and depending on the circumstances, it could lead to a significant increase in payroll costs for your company.

Your long-term plans may need adjusting, so it’s a good idea to start budgeting and planning for it now.

You may also need to consider additional initial costs, such as any money spent on communicating and consulting with employees about the scheme. Factor in any experts, including pension providers, depending on the complexity of the pension needs for your company.

These set-up costs should also be in your budgeting. However, the long-term impact on your budget will be even more important and this too will need to be considered.

This article outlines the budgeting implications of pension-auto enrolment.

Here’s what we cover:

Direct costs of auto-enrolment

Calculate your direct payroll costs

Your first step should be to calculate what the direct payroll costs will be over the next few years and how this will impact your overall budget.

But bear in mind that corporation tax relief can be claimed on the employer contribution.

There will also be an element of guesswork in your calculations, as you can’t be sure what choices your employees are likely to make.

If your company has no occupational pension, for example, an employee could still opt for a Personal Retirement Savings Account (PRSA) rather than an auto-enrolment pension.

Consider “what-if” scenarios

Also, you, as an employer could potentially have decisions to make.

For instance, if you already offer an occupational scheme, will you offer it to all new employees, or will you offer pension auto-enrolment as a stopgap until the new employee passes their probation?

As such, your budget will need to factor in “what-if” scenarios based on different assumptions.

Remember that contribution rates will rise on a phased basis

Furthermore, you will need to take into account the increasing contribution rates over the next 10 years.

In year one, employers will only be required to contribute 1.5% of an employee’s gross salary.

However, this amount will be increased on a phased basis over 10 years, with 1.5% added every three years, and reaching 6% in the final year.

Considering this, you should ensure your budget is set up as a rolling forecast, which looks at increased employer contributions, and allows you to re-evaluate plans regularly.

Review your benefits packages

And to manage increasing future costs, you may need to review and adjust your overall benefits packages, possibly restructuring or reducing other benefits to offset pension contributions.

However, bear in mind that an employer’s contribution will also be capped at €80,000 gross annual salary.

Create a buffer for potential contribution rate increases later down the line

Lastly, you should consider creating a buffer in your budget to accommodate potential increases in contribution rates.

This is a possibility, as by year five at the latest, the Pension Authority, which will supervise the scheme, will be required to carry out an official review.

The review will look, at among other items, the earning threshold for enrolment and contribution rates and will make recommendations to the government on possible changes.

However, it’s unlikely that contribution rates will increase in the foreseeable future.

For instance, in the UK, where pension auto-enrolment was introduced in 2012, the employer contribution stands at 3%, which is significantly lower than what the contribution rate in Ireland will be after 10 years.

Initial setting up costs

There will also be costs outside of payroll in relation to setting up the scheme.

For employers, the actual administration of the scheme will be relatively simple, as the National Automatic Enrolment Retirement Savings Authority (NAERSA), which will run it, will identify the eligible employees, and payroll software will make the necessary reductions.

However, initially, employees will have to be informed about pension auto-enrolment and how it will affect them individually.

It’s not the employer’s responsibility to do a financial analysis of what pension would be most suitable for a particular employee, such as auto-enrolment, PRSA, or occupational.

However, these questions are going to crop up, and your company may be forced to take a more active role in outlining the best options for employees.

To make the process as smooth as possible, HR may have to communicate with each employee individually.

In addition, their contract will have to be reviewed from the perspective of pensions. This communication phase will take up time—and time costs money, so include it in your budget calculations.

Ongoing administration costs

Auto-enrolment will need to be continuously managed.

This includes monitoring the ages and earnings of your staff, re-enrolling lapsed employees after two years, and keeping up to date with any changes in legislation or requirements from the Pensions Authority.

You’ll need to maintain detailed records of enrolled employees, their contributions, and any requests to join or leave the scheme.

Ben Bishop is chief product and technology officer at Bright, a software company providing IT solutions for accountants and bookkeepers, with an office in Meath.

He foresees an increase in fees from payroll companies.

He says, “Moving forward, additional work will be involved in processing payrolls. If you currently outsource your payroll, you’ll likely see the fees increase due to the new work involved.

“If you’re processing your own payroll internally, talk to your employees and keep them informed about the process and how this will impact them.”

In addition, while pension auto-enrolment is designed to be simple and to take the burden off employers, the scenario whereby an employer could potentially have to operate three pension schemes, that is pension auto-enrolment, PRSA, and an occupational pension, will add an administrative burden.

And while for simplicity’s sake, some companies may like to just offer an occupational pension, this will not be a possibility, as employers cannot compel an employee to join an occupational scheme.

Again, this increased administration could mean increased costs.

Which companies will be most impacted?

The impact of auto-enrolment is going to vary across companies and industries.

The scheme is aimed at employees in lower-paid jobs, which up to now have had little pension coverage, and those employees mainly work in retail and hospitality.

As such, their employers, which are mainly SMEs, are going to be the most impacted. For some, the increased costs could see them go out of business.

Paul O’Donovan, managing partner at Cork-based accountancy practice Paul O’Donovan & Associates, says, “It is going to be a double whammy.

“These SMEs have been finding it difficult over the last few months, due to increased costs arising from a hike in the minimum wage and increased sick pay entitlements, and for hospitality, they are still feeling the effects of the higher VAT rate being reinstated.

“While there has been some help in mitigating these costs in 2024, such as the Increased Cost of Business scheme, which gives a grant of up to €5,000 against commercial rates, this grant has already expired, and many of these companies are going to need further help to manage the increased payroll costs associated with auto-enrolment.”

Long-term implications

As Paul sees it, the introduction of pension auto-enrolment will put pensions in general more in the spotlight as a key element of a benefits package.

He sees this as a good thing and predicts that employees will become more knowledgeable about the implications of various pension options.

Paul says, “It is increasingly difficult to recruit employees and pensions could be used more and more as a competitive tool to recruit and retain staff.”

Ben from Bright agrees. He says, “Employers may need to look at their scheme rates to match the top 6% rate in auto-enrolment.

“Many schemes in Ireland are currently capped at 5%, but there is evidence that companies are aligning their schemes to these auto-enrolment rates, even if the top rates will not apply for 10 years after auto-enrolment commences.”

The impact of auto-enrolment will play out over the next few years and a timely review in five years should also bring up any issues and also show whether the scheme has had a knock-on effect of boosting other pension offerings.

Final thoughts

Budgeting for pension auto-enrolment requires careful planning and a thorough understanding of both immediate and long-term financial impacts.

Therefore, budgeting will need to be multifaceted.

You need to consider the direct costs of employer contributions, administrative and compliance expenses, and potential impacts on cash flow. It will also significantly affect companies that currently offer no pension.

Bright also has an office in the UK and would previously have worked with clients preparing for the rollout of its pension auto-enrolment in 2012.

Ben adds: “Having assisted our UK clients through auto-enrolment, Bright is advising clients that getting prepared early will mitigate the impact of this new legislation.

“It’s unlikely that the financial impact of auto-enrolment will hinder the business’s performance, but if you’re not currently contributing to employee pensions, it will be a future cost to consider.”

Editor’s note: This article was first published in July 2024 and has been updated for relevance.