The level of occupational pension coverage in Ireland is particularly low and AE is being designed to improve pension adequacy for those who risk an unwanted reduction in living standards. A key feature of the proposed system is that an employee’s pension contributions will be collected in the same pension ‘pot’ and will follow the employee even when they change employer or have multiple employers.

What are the implications of pension autoenrolment for you?

The government plans to introduce a AE scheme in 2022 for employees with no pension scheme. This will compel both employers and employees to contribute to an individual’s pension fund. The level of occupational pension coverage in Ireland is particularly low. It is estimated that only approximately 35% of private sector employees contribute to a pension scheme, and Ireland is the only OECD country that does not have a mandatory earnings-related pension system.

AE is being designed to improve pension coverage and adequacy for those who may only have the State Pension on retirement and risk an unwanted reduction in living standards. A key feature of the proposed system is that an employee’s pension contributions will be collected in the same pension ‘pot’ and will follow the employee even when they change employer or have multiple employers.

In October 2019, the government announced updated proposals on target membership, contribution rates, the policies for opting-out, investment options, etc. Much of this aligns with earlier proposals which the government consulted on over 2018/19. Below are the key implications.

Implications for employees

• Current and new employees aged between 23 and 60 years of age who are not in a pension scheme and are earning €20,000 or more a year will be automatically enrolled in a pension scheme
• Employees earning below €20,000 pa or aged under 23 and over 60 years will be able to ‘opt-in’ to the system
• Employees who are already members of a pension scheme which meets minimum standards and contribution levels will not be automatically enrolled
• Contributions during the first six months will be compulsory. There will be a two-month ‘opt-out window’ during the seventh and eighth months, when employees can get a refund, but individuals will be automatically re-enrolled after three years. A limited number of restricted ‘Savings Suspension periods’ will be facilitated, but employer and State contributions will cease in those periods
• Employees will select from the approved pension funds
  Early access to accumulated retirement savings may be provided on the grounds of ill health and enforced retirement from work.

Contribution rates

• The Government proposes an initial minimum contribution rate for both employees and employers of 1.5% of gross earnings before PRSI and tax. This will apply for three years, and then increase by 1.5% every three years until a maximum contribution of 6% at the beginning of year 10. This approach allows more time for the contribution rate to bed in and earnings to adjust before the next increase
• CIPD Ireland welcomes the longer timeframe. While the contributions will have a financial impact on both employers and employees, the current lack of pension investment in the country is not sustainable The move to a three year cycle will also provide greater opportunity for the increases in the contribution rate to be aligned with pay increases
• In a major gap in the proposals, the government has not clarified the State’s financial incentive, so earlier proposals are clearly under reconsideration. The State contribution had been set to ensure the overall contribution to each employee's pension pot was 14% of income per year, the internationally recognised contribution rate for a more sustainable approach

Implications for employers

• Employers will be required to make a matching contribution on behalf of the employee at the specified contribution rate (starting at the initial 1.5% for the first three years and increasing up to 6% by year 10)
• Employer contributions will be limited to earnings of €75,000
• Employers will be required to automatically enrol employees when they start employment. There will be no employee waiting period before contributions are made. The AE pension fund will follow the person when they change employers

Scheme and fund management

• A Central Processing Authority (CPA) will be established by the State for sourcing a limited number of Registered Providers to provide the retirement savings options
• The CPA will establish minimum standards for service delivery and fund options, and the funds will operate on a Defined Contribution basis
• Employees (rather than employers) will be responsible for selecting the provider and the savings fund option, and will be able to change funds while in the scheme
• The CPA will seek to set annual administrative, management and investment charges of no more than 0.5% of assets under management
  Early access to accumulated retirement savings may be provided on grounds of ill health and enforced retirement from work

Economic impact

The ESRI was commissioned to undertake an economic impact assessment of the introduction of pension automatic enrolment in Ireland. It concluded as follows:

• Although the introduction of an automatic enrolment retirement savings system would lead to some lower levels of economic activity in the short to medium-term, it is likely to have a positive effect on the economy over the longer term as consumption is smoothed over the life course.
• Pension autoenrolment will result in lower household disposable income as contributions are made to retirement saving funds.
• The maximum rate of the State Pension gives a relatively high income replacement rate for many low earners and the findings agreed with setting an earnings threshold of €20,000.
• On the basis of the age and earnings criteria, the ESRI estimated that the size of the target population for automatic enrolment would be 585,000 employees.
• The ESRI concludes that in the longer term automatic enrolment is likely to have a positive effect on the economy, as AE will allow individuals to smooth their consumption over the life course and that by deferring income though such a scheme, people will have higher income in retirement

Next Steps

The target for implementation of this system remains 2022, a very ambitious time line. In continuing to develop the automatic enrolment retirement savings system, the Government has to design:

• the State financial incentive;
• the scope and role of the Central Processing Authority and the Registered Providers;
• the investment framework and funds to be offered;
• the pay-out phase; and
• the phasing of implementation (potentially starting with larger employers)

Like the earlier proposals, little consideration had been given to the pay-out phase, which will arise in a short number of years follow pension autoenrolment for those close to 60 years.

The attractiveness of this scheme to other workers who may have minimal occupational pensions has still not been recognised, and how autoenrolment will connect to such schemes and tax breaks has yet to be recognised.

Full details of the Government’s proposals are on the Department’s website.