A new retirement savings Bill is set to be published in the coming weeks, outlining the Irish government’s plans for a major overhaul of the occupational pensions system. The proposed auto-enrolment regime, expected to be implemented in 2024, will introduce mandatory retirement saving for the first time in Ireland. This will have significant implications for both employers and employees.
The main aim of the auto-enrolment regime is to improve retirement outcomes for employees who do not have access to a work-based pension scheme. Under the new system, most employees and employers will be required to make pension contributions. Similar systems in other countries have proven successful in increasing the number of individuals saving for retirement, and the Irish government anticipates that over 800,000 new pension savers will emerge as a result of its introduction.
The government has accelerated progress to launch the new system, with a target start date in the second half of 2024. Employers are being urged to plan and budget accordingly. A significant government communications campaign will accompany the rollout of auto-enrolment to ensure that individuals and employers have sufficient information to understand the system’s impacts.
Once the auto-enrolment regime is launched, employees aged between 23 and 60, earning over €20,000 annually, will be required to make pension contributions into a State-run central retirement savings system. They will be automatically enrolled if they are not already paying into a pension plan. The definition of “employee” is yet to be confirmed, but it is likely to cover all directly employed individuals. The self-employed will not initially be subject to auto-enrolment.
Contributions will start at a low level and increase gradually over the first 10 years. They will begin at 1.5% of gross pay, up to a cap of €80,000, and will be calculated based on all elements of remuneration, not just basic salary. Contributions will then rise every three years, reaching 6% after a decade. When factoring in employer contributions and a State top-up contribution, employees will eventually see a total contribution of 14% of their pay being paid annually into their retirement savings accounts, subject to the salary cap.
Importantly, employees will have the option to opt out of auto-enrolment at certain points. This is crucial as affordability of pension contributions may still be a concern for some individuals, even with the phased increase in required contributions. However, international experience has shown that most employees do not opt out and instead start saving for their pension, thereby becoming better prepared for retirement. This has been the key to success in similar systems in other countries.
Many employees are already saving in an occupational pension plan or may be eligible to join one provided by their employer. Due to the difference in the way contributions will be taxed under the central system, some employees may actually be financially better off in their employer’s plan. Therefore, employers will need to decide whether to use their own pension plan to meet auto-enrolment obligations or opt for the State system. Using their own plan may offer greater flexibility, a wider range of investment options, and avoid confusion associated with offering two different pensions arrangements for employees.
If an employer chooses to use their pension plan to meet auto-enrolment obligations, they will initially only be required to ensure that a contribution is being paid either by or in respect of an employee. In such cases, employees will not be enrolled in the State’s central system. However, the government will eventually introduce specific minimum standards for pension plans, ensuring that employees are not worse off in the employer’s plan compared to the central system. This will likely involve equivalent contributions and could necessitate other changes to pension plans, such as new opt-out arrangements or the removal of waiting periods for entry.
The impact of auto-enrolment is expected to be significant for many employers. Important decisions will need to be made, and employers must understand the implications on payroll and reporting arrangements, their pension plan, and communication of changes to employees. Many businesses have already started planning and budgeting for the introduction of auto-enrolment, following the government’s advice.
Employers have a lot of work to do to ensure they are ready for the new regime.
