Pension Reform: Ireland moves closer to auto-enrolment

After many twists and turns and lengthy delays, the Cabinet has now approved the General Scheme of the Automatic Enrolment (AE) Retirement Savings Bill.

This General Scheme marks significant progress on the delivery of a new auto-enrolment scheme in Ireland which will see potentially hundreds of thousands private sector workers automatically enrolled into a pension scheme.

Background

On 10 October 2022, Social Protection Minister, Heather Humphreys, announced that the Government had approved draft heads of new legislation which will underpin the long-awaited pension system that will see as many as 750,000 private sector workers automatically enrolled into a pension scheme. The General Scheme of the Bill will now be examined by the Oireachtas Joint Committee on Social Protection before the final wording of a law introducing the new regime is published.

Over the years a number of attempts have been made to introduce some form of pension auto-enrolment system in Ireland but none have reached the stage of draft legislation. Minister Humphreys noted that the scheme represents a “historic milestone” which will enable private sector workers who do not currently have pension schemes to save for their retirement. After almost two decades of discussion about auto-enrolment, it appears that the introduction of auto-enrolment is firmly on track. It is expected that the Bill will be introduced to the Oireachtas in early 2023, with the scheme up and running in early 2024.

Auto-enrolment is aimed at the combating the problem of people who do not enrol in a pension scheme because they ‘haven’t got around to it’. Minister Humphreys stated that auto-enrolment would be a “generational reform in the Irish pensions landscape” and would turn the current system on its head by creating a scenario where workers will have to consciously ‘opt out’ of supplementary pension coverage rather than ‘opting in’.

FEATURES OF THE SCHEME

The following elements of the new pension auto-enrolment pension scheme have been settled in principle by Government:

Eligibility/Ability to opt-out

All private sector workers aged between 23 and 60 years of age, who earn more than €20,000 per year will be automatically enrolled into the new scheme unless they are existing member of a pension scheme.

Those outside the eligibility criteria (for example, those earning below €20,000 or those aged under 23 or over 60 years of age) will be able to ‘opt-in’ to the scheme if they so wish. Membership of the new scheme will be compulsory for the first six months. Thereafter, members can choose to ‘opt-out’. Members who choose to opt-out will receive a refund of their own contributions paid up to the point of opt-out.

Members will be automatically reenrolled after two years but will have the ability to opt-out again under the same circumstances as outlined above. The option to optout will only exist in the first ten years of membership and thereafter members will be able to suspend payment of contributions but they will not be entitled to a refund of their contributions - instead the contributions will remain in the pot.

Contribution Levels

The new scheme will see contributions paid by employees being matched by their employers and the State will also add a top-up to the money paid into the scheme.

Contributions to the scheme will be introduced on the following a phased basis:

Years	Employee (as % of salary [1])	Employer (as % of salary¹)	State (as % of salary¹)
Years 1 - 3	1.5%	1.5%	0.5%
Years 4 – 6	3%	3%	1%
Years 7 – 9	4.5%	4.5%	1.5%
Year 10+	6%	6%	2%

The scheme will be capped at €80,000 of an employee’s gross salary but people earning above that amount can still make additional contributions to the scheme. However, employers will not be required to match the amount.

Accessing funds

It is proposed that there will be a limited ability for members to access their accumulated retirement savings with only serious illness being considered as grounds to do so.

Administration and Investment

A Central Processing Authority (CPA) will be established to administer the scheme. This body will do much of the administrative work and act in a custodianship capacity for participants.

The pension contributions will be invested by four registered providers, and there will also be four different investment portfolios available for members, depending on their risk appetite. It is envisaged that there will be an online portal where members will be able to review the size of their pension pot.

Drawdown

It is expected that drawdown of pension benefits will be aligned with the State Pension age.

Penalties for Employers failing to implement

Employers who fail to implement auto-enrolment scheme for its employees or fail to deduct and remit contributions will face administrative penalties initially, and ultimately risk prosecution as a criminal offence.

IS AUTO-ENROLMENT THE SOLUTION TO IRELAND’S PENSIONS TIME BOMB?

It is estimated that just 35% of private sector workers have an occupational pension scheme.

With so few private sector workers making any provision for their retirement, the fiscal implications of the hundreds of thousands of retired private sector workers relying on the state pension as the main source of their income is deeply worrying. The introduction of this auto-enrolment system is aimed at reducing strain on the already unsustainable state pension system.

However, there some issues and criticisms in respect of the proposed new scheme. Chief among these is the effect the new scheme is likely to have on employers. With a backdrop of businesses recovering from the pandemic and the ongoing energy crisis, employers will understandably be concerned about the costs of this new scheme. A connected fear is that, in order to control costs, employers who currently offer more generous pension schemes may be tempted to treat the auto-enrolment scheme as a cost saving opportunity and phase out their existing schemes.

However, the proposed scheme is a significant step towards dealing with Ireland’s ticking pensions time bomb and increasing pension coverage for private sector workers. In the UK, pension coverage jumped from 47% to 80% in the decade after the introduction of auto-enrolment. Given the UK’s experience, it would appear that auto-enrolment could go a long way towards securing the financial futures of hundreds of thousands of private sector workers who at present have made no provision for their retirement.

Footnotes