15 Jun 21
Automatic Enrolment Retirement Savings System
The 2018 Irish Census revealed that only 47% of the working population in Ireland have supplementary retirement savings in addition to the standard state pension. This rate falls to 35% for the private sector. It is estimated that only 30% of the self-employed contribute to a pension. These figures highlight a worrying and growing retirement savings gap. Since 2003, employers in Ireland have been required to either offer a group retirement plan or facilitate employees’ enrolment into a Personal Retirement Savings Account. However, it is not mandatory for employees to enrol in this type of retirement saving scheme.
Currently, state retirement benefits in Ireland are set at a flat rate of €12,192 per annum. Given the growing gap in retirement savings and an ever-aging population, the state pension system in its current format will not be fit to support future generations to maintain an adequate standard of living upon retirement.
In planning for the future, Ireland is introducing pension auto-enrolment. Under the proposed auto-enrolment retirement savings scheme, employees will automatically be enrolled in a scheme (unless they are a member of their employer’s scheme) and will be required to contribute a portion of their salary each month to retirement savings. Auto-enrolment plans do not require the employee to take any action to consent to participate in the scheme. Employee contributions will be topped up with contributions both from employers and the State.
Ireland is one of only two OECD countries without a mandatory earnings-related pension scheme. The introduction of an auto-enrolment retirement savings system will support the extension and growth of pensions coverage, particularly among low to middle income groups. It will also help to ensure support for retirees is equitable and sustainable. A similar scheme of auto-enrolment was introduced in the UK in 2012 and has been widely praised for increasing pensions coverage to an additional ten million people.
Roadmap for Pensions Reform
In November 2019, following two years of public consultation and market research, the Irish government published the Roadmap for Pensions Reform 2018-2023. The proposed policy aims to modernise Ireland’s pension system by targeting six main areas:
Reform of the state pension
Building a new automatic enrolment savings system
Improving regulation of the pension sector
Supporting the operation of defined benefit schemes
Public services pensions reform
Supporting fuller working lives.
Auto-enrolment is expected to be introduced from 2023. From then employers will be required to register all qualifying employees in the scheme, or from the start of any qualifying employment thereafter.
Who will be enrolled?
All private sector employees who:
Are aged between 23 and 60;
Have gross earnings over €20,000 per annum; and
Are not currently included in a private pension arrangement or are included in a private pension arrangement which does not meet a ‘prescribed minimum standard’.
The earnings limit will be fixed for the first five years and adjusted thereafter. As of yet, there is no further information on what qualifies as a ‘prescribed minimum standard’.
For employees falling outside of these parameters, participation is voluntary.
How will enrolment be facilitated?
The roadmap proposes the establishment of a new state body, the Central Processing Authority (CPA) to support the administration of auto-enrolment in Ireland.
The CPA will be responsible for appointing, by way of an open competitive tender, a number of Registered Providers. The CPA will also be charged with establishing the minimum standards for service delivery from Registered Providers. The full scope of responsibilities and power of the CPA are still under consideration.
Employers will be mandated to enrol qualifying employees through a CPA portal, either upon rollout of the scheme or, if later, upon commencement of employment.
How will the Registered Providers operate?
Registered Providers will be appointed for a period of 10 years to provide a specific suite of retirement saving services. The employee will enter into a contract with the Provider for a defined contribution pension scheme.
There are a number of areas with respect to the Registered Providers which are still under consideration including their functions, investment framework and offered funds. However, it has been agreed that the maximum fund charge will be set at 0.5% per annum.
What choice will employees have?
Employees will be able to pick from the appointed Registered Providers. Each provider will need to offer a minimum of three standard funds for the employee to choose from – a low risk, medium risk and high-risk fund. Registered Providers will also likely offer a lifestyle approach fund option.
A lifestyle fund is an investment fund that manages a diversified portfolio of assets with varying risk levels linked to a target retirement date. As the individual approaches retirement, the scheme is automatically de-risked to ensure savings are protected from volatility and potential value drops.
If an employee does not select a Registered Provider, they will be allocated on a rotated basis. If they do not pick a fund, contributions will be allocated to the Registered Provider’s default fund.
What will the level of contribution be?
Initially, employees’ contributions will be set at 1.5% of gross earnings, up to a limit of €75,000. This rate will be increased by 1.5% every 3 years to reach a contribution of 6% by year ten of the scheme.
Employers will pay a matching contribution each year. These contributions will be tax deductible.
The level of contribution from the State has yet to be agreed. The initial proposal included an example wherein the State would contribution €1 for every €3 contributed by the employee and employer. However, the level of contribution from the State and the interaction between the existing marginal rate of tax relief for the scheme was one issue that generated significant debate during the consultation process.
Can employees opt out?
Employees may opt out of the auto-enrolment scheme after a period of six months. This opt-out window will be limited to the start of month seven and the end of month eight. Participants opting out during this period will receive a full refund of personal contributions made. Additional opt-out windows will be available six months after each contribution rate increase.
Employees will also have the option to implement a limited number of Savings Suspension Periods, to take a temporary break in contributions. During these suspension periods, contributions from the employer and the state will also cease. Employees may opt back into the scheme at any point but in any case, they will be automatically re-enrolled every two years.
To encourage participation, employees contributing to the scheme for more than five years without a break in payments will receive a once-off bonus payment.
When will the scheme pay-out?
The standard retirement age for the scheme will be set at the state retirement age, currently 67 years old. This is expected to increase to 68 by 2028.
Early access to accumulated retirement savings may be provided on the grounds of ill health and enforced workplace retirement.
Full detail on the pay-out phase has still to be outlined.
Without exception these changes will have significant implications for all employers in Ireland and will require substantial planning and resources to implement.
Auto-enrolment is not just a concern for employers without a company pensions plan. According to a recent survey, over 50% of large employers in Ireland with an existing pension scheme will need to adjust their current operating procedures to be ready for auto-enrolment.
Employers should be acting now to assess their obligations with regards to auto-enrolment and ensure they have sufficient time and operational capacity to deal with these requirements.