In October 2022, the Government announced that it had approved General Scheme of the Automatic Enrolment (AE) Retirement Savings Bill. At the time, the General Scheme marked significant progress on the delivery of a new auto-enrolment scheme in Ireland which would potentially see hundreds of thousands of private sector workers automatically enrolled into a pension scheme.

At the time of publishing the General Scheme, the Government set itself a very ambitious timeline for implementation of auto-enrolment, targeting a proposed start date of Q1 2024.

However, 2023 has passed without the anticipated publication of the Automatic Enrolment Retirement Savings System Bill (the Bill) and questions are now being raised as to whether the system will be ready in 2024 at all. 

What does the proposed auto-enrolment look like and where does its implementation currently stand?   

Proposed Auto-Enrolment System 

Auto-enrolment is designed to combat individual's natural inertia in starting a pension by turning the existing pension system on its head and creating a scenario where individuals will have to consciously 'opt out' of supplementary pension coverage as opposed to 'opting in'. The following elements of the auto-enrolment system have been agreed in principle by Government:

• Private sector employees aged between 23 and 60 years of age earning over €20,000 per annum (not already an existing member of a pension scheme) will be automatically enrolled.
• Employees must remain in the scheme for six months and thereafter can choose to 'opt out'. Employees who choose to opt out will be automatically re-enrolled after two years.
• Contribution rates will be levied as a percentage of an employee’s gross earnings (subject to an earnings cap of €80,000). 
• Employees will be required to make a fixed minimum contribution starting at 1.5% of gross earnings initially (increasing on a phased basis to 3% in year 4, 4.5% in year 7 and 6% in year 10) and employers will be obliged to match employee contributions.
• The State will top up employee and employer contributions (contributions starting at 0.5% and increasing to 2% on a phased basis over 10 years).
• There will be limited scope to access retirement funds before retirement with serious illness being considered as the only grounds to do so.
• An independent body, the Central Processing Authority (CPA), will be established to administer the scheme.

Current Status 

The Government initially indicated that it expected that the Automatic Enrolment Retirement Savings System Bill would be introduced to the Oireachtas in early 2023, with the scheme anticipated to be up and running by early 2024.

However, in May 2023, the pre-legislative scrutiny report of the General Scheme of the Automatic Enrolment Retirement Savings System Bill made 21 recommendations to the General Scheme. These included the lowering of the age limit for participation in the scheme from 23 to 16, aligning it with the minimum-age threshold for PRSI and proposing a two-year lead in period for businesses to prepare for its implementation.  

Despite the pre-legislative scrutiny report, the Minister for Social Protection, Heather Humphreys, confirmed that the Bill was expected to be published in Autumn 2023, with a target launch date of Q2 2024. The Bill was listed as a priority publication in the Government's Autumn Legislation Programme, but it has not yet been published. The delay in the publication of the legislation, coupled with the absence of budgeted state contributions in Budget 2024, has raised concerns about the scheme's readiness by 2024.

Nonetheless, the Department of Social Protection has assured that the new auto-enrolment scheme remains on track for a launch in the second half of 2024. However, the delays and uncertainties surrounding the legislative process have left stakeholders and observers eagerly awaiting further updates on the progress of Ireland's auto-enrolment scheme.

The Finance Act 2022 introduced a number of changes to the tax provisions relating to pensions in Ireland. One of the most significant of these is  the change to the tax treatment of employer contributions to Personal Retirement Savings Accounts (PRSAs) with effect from 1 January 2023. These changes are expected to boost the appeal of PRSAs, positioning them as a genuine and viable alternative to executive pension plans and occupational pension schemes.

Prior to 1 January 2023

Under the former tax rules, employer contributions to PRSAs were treated as a Benefit in Kind (BIK) for the purposes of employee income tax.  However, the BIK was not subject to income tax, USC or PRSI provided the combined employer and employee contribution were within the following age-related percentage of the employee's salary:

• Under 30: 15% 
• 30-39: 20%
• 40-49: 25%
• 50-54: 30%
• 55-60: 35%
• 60 or over: 40%

Further, employer and employee combined contributions were subject to an earnings cap of €115,000. 

What has changed for PRSAs?

In a significant move, the Finance Act 2022 has eliminated the BIK charge for employer contributions to an employee's PRSA.  Moreover, it has revised the law to allow employers to make contributions to an employee's PRSA without being restricted by the age-related contribution limits previously in place.  As a result, there is no longer any upper limit on the contributions which an employer can make to an employee's PRSA (subject only to the overall standard fund threshold of €2m).

With effect from 1 January 2023, only employee contributions to PRSAs are still subject to the age-related contribution limits and the earnings cap of €115,000.    

What is the impact of these changes?

When PRSAs were introduced to the Irish market in 2002, the aim was to incentivise more employees to start their pension savings by offering a simpler and more flexible pension product. However, the anticipated popularity of PRSAs fell short of expectations, partly due to the disparity in the tax treatment between employer contributions to PRSAs and those made to occupational pension schemes.

The Finance Act 2022 has addressed this disparity, aligning the tax relief available for employer contributions to a PRSA with that of employer contributions to an occupational pension scheme. Notably, employer contributions to a PRSA are no longer treated as BIK in the hands of the employee and employer contributions will no longer reduce the amount which employees could personally contribute within the age-related tax relief limits.

The IORP II Directive (EU) 2016/2341 (IORP II) was signed into Irish law on 22 April 2021 and has ushered in a period of significant change for the Irish occupational pension schemes landscape. IORP II encompasses a wide-ranging suite of legal requirements that aim to improve the way occupational pension schemes are governed, bolster management standards of pension schemes and substantially augment the supervisory and intervention powers of the Pensions Authority.

Key IORP II Requirements

IORP II sets out minimum standards for the management and supervision of pension schemes. As a result of IORP II, pension schemes are subject to more extensive regulation, and places additional obligations on pension schemes including:

• putting in place effective systems of governance and internal controls;
• appointing key function holders for risk management, internal audit and actuarial (if relevant); 
• preparing and applying written policies on risk management, internal audit, actuarial functions (if relevant), outsourcing and remuneration for trustees and key function holders;
• having a minimum of two trustees or, in the case of a corporate trustee, two directors;
• fitness and probity requirements for trustees and key function holders;
• issuing pension benefit statements to members (including deferred members) annually; 
• requiring trustees to submit an Annual Compliance Statement to the Pensions Authority; and
• trustees carrying out own risk assessment at least every three years.  

All group pension schemes were required by the Pensions Authority to meet the full IORP II requirements by 1 January 2023. However, the Pensions Authority permitted a derogation from IORP II requirements for pension schemes that are to be wound up. The deadlines set out below.

Wind-up Deadlines

In June 2023, the Pensions Authority issued a timely reminder to pension scheme trustees of the deadlines by which their schemes must be wound-up to avoid being subjected to the rigorous requirement imposed by IORP II:

• one-member arrangements established on or after 22 April 2021 must be wound-up by 30 June 2023;
• one-member arrangements which have been submitted for Revenue approval prior to 11 May 2023 and are still waiting for Revenue approval have six months from the date of approval in which to complete their wind-up; and
• group pension schemes must be wound up by no later than 31 December 2023.

Trustees of one-member arrangements establish on or after 22 April 2021 and of group pension schemes with less than 100 active and deferred members will not be expected to prepare a full trustee annual report and audited accounts provided:

(a) the scheme is wound up before the relevant date listed above; and

(b) a final alternative annual report is prepared.

In order to demonstrate compliance, trustees who are in the process of winding-up their schemes to meet the above deadlines should ensure that they instruct their scheme administrator to promptly update the Pensions Date Register once the scheme has been successfully wound up.

Penalties for Non-Compliance

The Pensions Authority monitors compliance with all provisions of the Pensions Act (including IORP II compliance). Those who are found guilty of an offence under the Pensions Act are liable:

• on summary conviction to a fine not exceeding €5,000 or to imprisonment for a term not exceeding one year, or to both; or
• on conviction on indictment to a fine not exceeding €25,000 or to imprisonment for a term not exceeding two years, or to both.

Footnote

[1] Report of the Commission on Pensions published on 7 October 2021

The task, and associated costs, of complying with increased obligations and responsibilities as a result of the transposition of IORP II Directive (EU) 2016/2341 (IORP II) has led to a prominent shift across the market from private sector defined contribution pension schemes to Master Trusts.

However, this shift to Master Trusts has given rise to certain worrying unforeseen consequences, particularly in relation to the enforceability of Pension Adjustment Orders.

What is a Master Trust?

A Master Trust is a trust based occupational pension scheme in which multiple employers (who do not have to be related) can participate. One of the major advantages of a Master Trust is that the participating employers can effectively outsource pension regulatory compliance to a professional corporate trustee appointed by the Master Trust provider. 

As a result, many employers have opted to wind-up their existing defined contribution pension schemes and transfer the members' benefits into a new Master Trust.  

What is the problem with Pension Adjustment Orders?

A Pension Adjustment Order (PAO) is a Court Order made following divorce, judicial separation or dissolution of a civil partnership, instructing the trustees of a pension scheme to allocate part or all of the retirement and / or death benefits under a pension scheme to the person(s) seeking the order.

However, PAOs are only granted in respect of a specific pension scheme and are served on the trustees of that specific pension scheme, and there is only a limited window (12 months) during which these orders can be varied by the Courts. 

Consequently, if a member's benefits are transferred from a specific pension scheme to a new Master Trust, the PAO will no longer be enforceable given that the PAO relates to the specific pension scheme named in the PAO and not the new Master Trust.   

Emergency Legislation Sought 

The Law Society of Ireland's Director General, Mark Garrett, described this unintended consequence in the shift to Master Trusts as being “very serious” and has emphasised that it needs to be addressed “without delay”. Pension benefits are usually the second-largest asset after the family home and the Law Society of Ireland have estimated that the potential financial loss to PAO beneficiaries may be in the region of several hundred thousand euro.

The Law Society are currently working with the Pensions Authority with the aim of resolving this issue as soon as possible. It is hoped that legislation will be introduced shortly which will give some much-needed clarity and reassurance to PAO beneficiaries as to the enforceability of PAOs.