Pension – Employee Auto-Enrolment

Ireland’s Pension landscape is undergoing major changes which will have significant implications for all employers, without exception.

Last month, the government released details of how a proposed auto-enrolment pension scheme might work. Nothing is set in stone yet, and the details released to date are planned to form the basis of further discussion. However, as Ireland is one of only two OECD countries without a mandatory, earnings-related component to retirement saving, auto-enrolment is seen by many as a vital step in moving towards better pension coverage.

Currently 65% of workers in the private sector in Ireland have no supplemental pension coverage to top up the State Pension, which is currently set at a flat rate of €12,652 payable from age 68. The auto-enrolment policy introduced in the UK has been generally viewed as a success with close to 10 million people now included in these new plans since they were introduced in 2012.

Who will be included under the Auto-Enrolment Scheme?
The plan is to compulsory enrol all private sector employees in the scheme who are:
• Over age 23 and under 60 with gross earnings of over €20,000; and
• Who are not at that time in a private pension arrangement or are but it doesn’t meet a ‘prescribed minimum standard’ which has not yet been specified.

There will be no waiting period before enrolment. The €20,000 earnings limit for joining will be fixed for the first 5 years and adjusted thereafter. Others, such as private sector employees outside the limits above and the self-employed, can also opt to enrol, but they don’t have to.

How would the scheme work?
The main proposals are as follows:
• The employer will compulsory enrol the relevant employee in the auto-enrolment scheme through a portal called the Central Processing Authority (CPA), a State run body;
• The employee will be able to pick from one of four ‘Registered Providers’ appointed by the CPA;
• Each provider is likely to operate their scheme on a Master Trust basis;
• Each Provider will need to offer three standard funds, a low, medium and high-risk fund, probably run along a ‘Lifestyle’ fund approach.
• A lifestyle fund is an investment fund that manages a diversified portfolio across assets with varying risk levels which are linked to a target retirement date – as the individual approaches this retirement age an automatic de-risking mechanism ensures that the capital is protected for retirement by reducing the fund risk levels. In the final year(s) the member would see little growth however the funds would be largely insulated from volatility and potential large drops.
• The maximum fund charge will be 0.5% per annum. If the employee doesn’t choose a fund, a default fund will be specified by the Provider;
• The employee contracts with the Provider and their account will be run on a Defined Contribution basis;
• The required contribution payable by the employee when the scheme starts will be 1% of gross earnings taken from their net income, up to an earnings limit of €75,000;
• The 1% will be increased by 1% in each of the first 6 years to reach 6% by 2028;
• The employer will pay a matching contribution each year. These contributions will be tax deductible for the employer;
• The Government will pay a contribution to the member’s account of 1/3rd of the member’s contribution, instead of providing tax relief on the employee’s contribution. This amounts in effect to a fixed 25% tax relief [currently the tax relief for lower incomes is 20%, but is 40% for those on incomes >€35,000];
• The employee must remain a member of the scheme for at least 6 months, but can then opt out during a 2-year window. If they do opt out, they are automatically re-enrolled after a further 3 years;
• Where an employee opts out of the scheme, they will receive a refund of their own contributions only. The employer and government contributions will be retained within the scheme to cover its ongoing expenses;
• The normal retirement age of the scheme will be set at the employee’s State Pension Age, currently age 68 for most, but this is likely to be extended in line with life expectancy in Ireland. There will be no early access to benefits other than on ill-health grounds;
• It is planned to start rolling out the auto-enrolment scheme on a phased basis from the end of 2022.

Whilst the proposed scheme is to be largely welcomed, there are considerable differences between the proposed and current supplemental pension system in terms of the reduced level for tax relief for many, and the age from which benefits can be taken. Nevertheless, employers will need to factor in the additional payroll expenses as the scheme ramps up over the initial 6-year period and thereafter. More details on the auto-enrolment scheme are likely to emerge in 2019 after the end of the consultation period.

Jeff Lord is Director Client Services, Glennon Employee Benefits. If you have any additional questions or concerns with regard to pensions, life assurance, group private medical insurance, income protection or are seeking advice with regard to attracting and retaining staff please contact 01-7075880 /

 

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