First published: April 8th 2022
Last updated: May 10th 2023
What will auto-enrolment pensions mean for Irish employers?
The Government announced details of its proposed Automatic Enrolment Retirement Savings System in April 2022.
The publication of draft legislation in October 2022 represented further progress and in March 2023, the Government confirmed that the procurement process for the appointment of pension administration services and systems that will manage the Automatic Enrolment Retirement Savings System was open.
It’s clear that the Government remains committed to establishing the Automatic Enrolment Retirement Savings System by its target date of January 2024.
Why introduce an automatic enrolment pension system?
Auto-enrolment is deemed necessary to close the pension gap that exists in Ireland. The demographic trend of the Irish population indicates that the ratio of active workers per pensioner in the population is due to fall from its existing 4.5:1 to 2:1 by 2050.
Ireland is also the only OECD country without an auto-enrolment system or similar system to encourage pension savings. The new system aims to make workplace pensions more accessible to employees.
Is automatic enrolment mandatory?
It’s estimated that 75% of private-sector employees aged between 23 and 60 (lower age limit remains subject to change) and earning more than €20,000 a year will be automatically enrolled in a new workplace pension scheme.
All relevant employees will have access to a workplace pension savings scheme that will be co-funded by their employer and the Government.
Employee participation is voluntary, however. Automatic enrolment is an 'opt-out' system rather than an 'opt-in' system. It will be up to employees to actively opt out of the scheme once they have been auto-enrolled.
Key features of the auto-enrolment system
The finer details of the auto-enrolment system remain subject to agreement. The proposals being decided on include:
- all employees who are not already in an occupational pension scheme and who are aged between 23 and 60 (lower age limit remains subject to change) and earning over €20,000 across all of their employments will be automatically enrolled into the pension system
- automatic enrolment will be gradually phased in over a decade, starting in 2024, with both employer and employee contributions starting at 1.5% of gross salary, and auto-escalating every three years, until reaching the maximum contribution rate of 6% from Year 10 onwards
- the employer’s contributions will match those of the employee and the State will also make a contribution at a rate of €1 for every €3 saved by the employee
- those who are auto-enrolled will have the choice to opt-out or suspend their contributions after six-months mandatory participation
- where a member opts-out or suspends their contributions, they will be automatically re-enrolled after two years, after which they may opt-out or suspend again after a further six-months mandatory participation
- a Central Processing Authority will be established to manage the automatic-enrolment system
- commercial investment companies will compete through an open tender for the role of ‘registered provider’ and will invest contributions on behalf of the pension scheme
- participants will have a range of savings funds to choose from. These will include a default fund for those who prefer not to choose as well as an alternative choice of funds for those who wish to make a more active choice
- drawdown will be aligned with the State Pension age
- automatic enrolment will complement the State Pension rather than replace it. The State Pension will remain in place and provide retirees with a basic level of income.
Does automatic enrolment benefit employers?
The automatic enrolment scheme promises to reduce the pressure on employers to establish a pension scheme.
For many employers however, the cost of this new automatic-enrolment pension system will be the biggest concern. Under the draft scheme, employers are required to match employee contributions starting at 1.5% of gross income before rising incrementally to 6% of gross income subject to an earnings cap of €80,000.
There will also be tax relief for employers as employer-side pension contributions will be deductible against corporation tax.
What happens next?
The Joint Oireachtas Committee on Social Protection has completed its pre-legislative scrutiny of the draft legislation that will establish the automatic-enrolment system.
The procurement process relating to the operator of the pension administration services and systems is also underway.
The Government therefore remains committed to introducing this new scheme by early 2024.
What can employers do to prepare?
To be ready for the establishment of automatic enrolment, employers will need to consult with their payroll providers to ensure the relevant salary deductions are in place when the scheme commences.
Contracts of employment will need to be reviewed and employers will need to be ready to deal with queries from employees.
Finally, employers should consider the financial implications of making matching contributions as this added labour cost could be substantial.
Employment law expertise on auto-enrolment and pay and benefits
Automatic enrolment is a major development in Irish employment law.
To find out more about how to prepare for its introduction next year, call one of our HR experts today on 1800 719 216
