Ireland is the only OECD country that doesn’t yet operate an Auto Enrolment (“AE”) or similar system as a means of promoting pension savings. The proposed Irish AE system, scheduled to go live from 1 January 2024, is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. WTW fully supports the concept of increasing private sector pension provision. It is estimated that only 35% of Private Sector workers currently have supplementary pension savings.
Under the proposed AE system all employees not already in an occupational pension scheme, 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. New employees will be enrolled with effect from their first day of employment with an employer. Employers must enrol eligible employees automatically. A repeat failure to enrol employees and remit the necessary contributions will be a criminal offence.
Employees under age 23 and over age 60 will be able to opt-in on a voluntary basis. This means that employers will need to be able to operate the system for all employees.
The aim is to have the system set up during 2023 for employee enrolments from 1 January 2024. This is an ambitious timeframe for the Government as the new Central Processing Authority 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 employer responsibility to operate the necessary payroll deductions under the proposed AE will be onerous. Some of the complexities that will need to be grappled with are:
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:
The principles announced confirm that employees that are already enrolled in an occupational pension scheme do not need to be enrolled in the new AE system. Some key questions however remain for employers as follows:
The guidance is not clear at this stage as to whether an employer's occupational pension scheme has to meet certain minimum standards in terms of contribution design and charges (this is the case in the UK for example). We note that the Central Processing Authority which will be set up to administer the new AE system is targeting a maximum fund management charge of 0.5% p.a.
As outlined above the AE state tax incentives are in fact less generous than the current tax relief incentives available for higher rate taxpayers. If the majority of an employer’s workforce are higher rate (40%) tax-payers then it is potentially difficult to justify adopting the new AE system. Correspondingly, the AE incentives are more generous for a standard (20%) taxpayer. Companies may want to consider the tax profile of their workforce when considering the optimum way forward. We also note that it is likely to be very complex to administer a dual system (i.e. AE system for a certain population cohort and an occupational pension scheme for the balance).
We expect many medium / large companies will look to review their existing occupational pension schemes to ensure that they meet any AE design requirements rather than perhaps operate the onerous AE payroll procedures. Companies with predominantly standard rate taxpayers, however, may conclude that the AE route provides better tax incentives which out-weigh the complexities involved. We also note that it is possible for employers to make membership of their occupational pension scheme compulsory which would also ease administration requirements. Some employers may also set up separate “AE” benefit sections under their existing schemes if the existing contribution tiers available to certain cohorts of employees are more generous than the new AE contribution requirements.
There will be a lot more detail to follow in the lead up to the new system going live but we would encourage employers to begin to consider the AE challenge as there is significant advance planning required! We will provide further updates to our clients in due course but in the interim please do contact your usual WTW consultant should you have any further questions.
