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Irish Government publishes the Automatic Enrolment Retirement Savings System Bill

The Minister for Social Protection, Heather Humphreys published the general scheme of the Automatic Enrolment Retirement Savings Bill on Friday, 5 April 2024.

The proposed Irish Auto Enrolment (“AE”) system, now targeted to go live from 1 January 2025, is designed to increase private sector pension provision. It is estimated that only 35% of Private Sector workers currently have supplementary pension savings.

What are the employer obligations under the new system?

Under the proposed AE system all employees not already in an occupational pension scheme or another pension arrangement, aged between 23 and 60 and earning over €20,000 across all of their employments, will need to be automatically enrolled in the new AE system. The Bill makes it clear that the Central Processing Authority (the “CPA” – a new entity to be established under the Bill) will notify employers of employees that need to be enrolled in the Government AE Scheme. Employers must enrol eligible employees, while a repeat failure to enrol employees and remit the necessary contributions will be subject to CPA enforcement with various fines and penalties including onerous interest charges on contributions being payable.

Employees under age 23 and over age 60 or those earning below the €20,000 threshold, will be able to opt-in on a voluntary basis.

The aim is to have the system up and running for employee enrolments from 1 January 2025. This is an ambitious timeframe for the Government as the new CPA will need to be established and all of the necessary investment, administration and IT support systems will need to be put in place.

The level of required AE contributions will be gradually phased in over a decade, with both employer and employee contributions starting at 1.5% of Gross Earnings and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). When allowance is made for the proposed Government top-up, this will lead to a total contribution being paid to a member’s pension account of 14% of Gross Earnings from 2034 (6% employee, 6% employer, 2% Government top-up). The maximum Gross Earnings that need to be referenced for contribution deduction purposes is €80,000.

The Department of Social Protection has made it clear in its employer briefing session held in February that the CPA will take responsibility for advising employers through a digital payroll notification process which employees need to be enrolled and the contribution rate that should be deducted. The CPA will also advise on opt-outs and voluntary opt-ins.

Government Incentive

Under the proposed AE system the Government plans to operate a new incentive system to encourage pension savings. This involves the Government topping up member contributions. The Government will contribute €1 for every €3 of member contribution. This approach was taken as it is easy to understand and applies the same level of incentive to basic and higher rate taxpayers.

The Government has confirmed that the new system will run alongside the existing tax relief system available to pension savers participating in occupational pension schemes, PRSA and personal pension products whereby individuals receive marginal income tax relief at either 20% or 40% (up to certain contribution limits) on their pension contributions. Some key points to note about the €1 for €3 proposed incentive system are as follows:

  • Compared to the existing tax relief system:
    • This is more favourable for members who pay 20% income tax rate on all of their earnings and
    • It is less favourable for 40% income tax rate payers.
  • The proposed AE contributions are effectively deducted from an employee’s after-tax pay and not their gross pay. There has been little commentary on this but it makes a significant difference! For example, the proposed targeted long term employee contribution of 6% of Gross Earnings is taken from net income (income after Income Tax, PRSI and USC deductions). This is equivalent to deducting a contribution from pre-tax earnings of 7.5% of Gross Earnings for a standard rate taxpayer or 10% of Gross Earnings for a higher rate taxpayer. Employers will have a responsibility to ensure employees understand the implications and what to do – otherwise they may be inundated with questions/employees may make poor or ill-informed decisions.

Interaction of AE Scheme with current retirement provision

The Bill confirms the previous understanding that employees who are already enrolled in an occupational pension scheme (or in a PRSA) do not need to be enrolled in the new AE system. Employees who participate in the Government AE Scheme and are subsequently admitted to an occupational pension scheme will immediately leave the Government AE Scheme (with monies paid up until that time staying in their Government Scheme AE account).

The draft legislation as included in the Bill will not allow employers to auto enrol existing employees into their own occupational pension schemes (i.e. require them to join but with the ability to opt out after a period). Other AE systems (for example the UK system) provide for this. What this means is that unless an employer can convince employees to join the company’s pension scheme, they will have to be automatically enrolled in the State AE system.

For employers who really do want to promote pension provision, this is frustrating. These employers will attempt to encourage employees to join their own scheme as contributions are invariably far more generous; industry surveys confirm that the average employer contribution to occupational pension schemes is 7% of salary, compared with the 1.5% initial AE rate above. However, as employers will not have the ability to auto enrol employees it is likely that many employees will have to be enrolled in the Government’s AE Scheme with less valuable benefits and employers will have to deal with dual pension systems. A robust employee engagement strategy can help to mitigate this risk and drive employee take-up of employer schemes.

Occupational pension scheme design

The Bill is clear that there will be no initial requirement for an employer’s occupational pension scheme to meet certain minimum standards in terms of contribution design but a “quality test” will apply in due course. The Bill provides that this quality test will have to apply no later than from year 7 of the new AE Scheme, onwards. The Bill provides that, in the interim, if an employee or their employer pays any contribution to an occupational pension scheme, a PRSA or a Retirement Annuity contract, they will not have to be enrolled in the Government AE Scheme. This means that if an employee pays contributions to an occupational pension scheme (even with no employer contribution being paid) then they will not be auto enrolled to the Government AE Scheme (at least initially until the quality test applies).

AE assessment

With the legislation now being progressed and a signalled 1 January 2025 go live date it’s imperative that employers consider their AE strategy and employee readiness. Employers will need to consider whether they will utilise the Government AE scheme or whether they will promote their own occupational pension scheme for employees who are not currently in pensionable employment. They will also need to consider whether they need to make design changes to their own occupational pension scheme and consider the cost implications of the alternatives available.

WTW can assist employers make this assessment as well as consider longer-term implementation support including defining and delivering effective employee communications. Please contact us if you would like to avail of our AE readiness assessment service and/or broader support.