Auto-Enrolment and Pensions:  An Update

PUBLISHED: 30th May 2023

Automatic enrolment is a new form of retirement savings system that is intended to be introduced in Ireland in 2024. 

Employees who do not have an occupational pension will be automatically enrolled in the new scheme, with the choice to leave the scheme or ‘opt out’ under certain conditions.

With the introduction of this system, the Government aims to promote pensions savings, increase the number of employees in Ireland with a pension, and reduce the numbers entirely reliant on the State pension when they retire.

Background

Employers in Ireland are legally obliged to provide their employees with access to at least one standard personal retirement savings account (PRSA) within six months of the commencement of employment if they do not provide an occupational pension scheme for their employees or if an employee cannot join such a scheme within six months of beginning employment.  There is no obligation at present on the employer to make any contributions.

A significant number of private sector employees do not participate in a pension arrangement, which may result in the State pension being their main source of retirement income.  That is not considered sustainable as the State pension system in Ireland is already under increasing pressure with a growing population nearing retirement age that is generally living for longer.

In 2022, it was announced that a pensions automatic-enrolment retirement savings system (Auto-Enrolment System) was to be introduced in Ireland.  It is anticipated that 750,000 employees will initially be enrolled in the scheme once it is operational, and the numbers are expected to increase significantly over time.   The Department of Social Protection is aiming for enrolments to the Auto-Enrolment System to begin in early 2024.   Employers should be planning and budgeting on that basis notwithstanding that it is an ambitious timeframe.

How will the Auto-Enrolment System Function?

The Auto-Enrolment System is designed to operate as a voluntary system to promote pension coverage whereby employees will have access to a workplace pension savings scheme which is co-funded by the State and their employer.   The system is intended to operate on an “opt out” rather than an “opt in” basis, so that as many employees as possible will participate in such system.

The design of the Auto-Enrolment System was announced last year, and details are set out in the Draft Heads and General Scheme of the Automatic Enrolment Retirement Savings Systems Bill 2022 (Draft Bill). 

The Draft Bill outlines some of the following key features:

• Private sector employees aged between 23 years and 60 years old earning over €20,000 per annum (not already in a qualifying occupational pension scheme) will be automatically enrolled.
• Contribution rates will be levied as a percentage of an employee’s gross earnings.
• Employees will be required to make certain fixed minimum contributions starting at 1.5% of gross earnings initially (increasing to 3% in year 4, 4.5% in year 7 and 6% in year 10).
• Employers will be obliged to match employee contributions.
• The State will top up employee and employer contributions (State contributions to range from 0.5% to 2% on a phased basis).
• Contributions will be calculated on the earnings of an employee up to €80,000.
• Employees must remain in the scheme for six months and will be free to opt out at a later date.
• There will be a facility to suspend or pause contributions and to leave the scheme under certain conditions.
• Eligible employees who opt out or suspend contributions will be automatically
  re-enrolled at a later stage.
• There will be limited scope to access retirement funds before retirement.
• Employees who are actively contributing members of a qualifying scheme (i.e. one that meets prescribed minimum standards and contribution levels) will not be automatically enrolled.

The Central Processing Authority (CPA)

An independent body, the Central Processing Authority (CPA), will be established to oversee and administer the scheme and to set standards for the automatic enrolment retirement savings scheme on behalf of participating members and employers.

Employers will have specific obligations under the Auto-Enrolment System including an obligation to pay and remit employee and employer contributions within specified time limits.  Failure to submit a return or remit contributions to the CPA or to make relevant deductions may result in the employer being liable to penalties.

Employee participation in the Auto-Enrolment System will be protected and employers will be prohibited from penalising an employee for opting in, or choosing not to opt-out or to suspend contributions.  Employers will also be prohibited from attempts to screen prospective employees on the basis they want to be a member of a retirement savings scheme.

An employee will be able to make a complaint to the CPA if they feel that they have been disadvantaged as a result of their participation in the scheme and, if successful, the employer may be liable to pay such employee compensation in the amount of €5,000. 

Recommendations

The Joint Committee on Social Protection, Community and Rural Development and the Islands recently published its “Report on Pre–Legislative Scrutiny of the General Scheme of the Automatic Enrolment Retirement Savings System Bill 2022”.  The Report made a number of recommendations including that there should be a two-year lead in period after the legislation is enacted to enable businesses to prepare for the implementation for the
Auto-Enrolment System.  The Department of Social Protection is likely to resist any delays to the targeted implementation date of early 2024.   

Next Steps

Employers and those operating in the pensions sector eagerly await further details of the Auto-Enrolment System later this year. 

Employers without any existing pension scheme or any plans to implement one will need to ensure that they are prepared for the system once it is introduced. 

It remains to be seen whether an employer operating an existing occupational pension scheme and their member employees will be exempt from the Auto-Enrolment System as there is a lack of clarity regarding the appropriate minimum standards to be met.    

Employers should seek advice and review any existing pension scheme(s).  Consideration should be given at a high level as to whether they want to encourage participation in an existing scheme or whether Auto-enrolment is a better solution for their business and employees going forward.  

Existing schemes may require amendment (which may involve trustee consent) to ensure relevant standards for the Auto-enrolment exemption apply once the system comes into effect.  Any such amendments will need to be considered and implemented in advance of the
Auto-Enrolment System coming into operation.

Conclusion

The Auto-Enrolment System will hopefully be a valuable means of increasing pensions coverage for employees in Ireland, but it is important that employers can participate in a
cost-effective and administratively efficient manner. 

Gillian Dully

This article was first published by Legal Island.