Corporate

What is the auto-enrolment scheme (AE Scheme)?

First proposed in 2006 by then Miniter for Social Protection, the late Seamus Brennan, the pension auto-enrolment (AE) system has been through a number of false dawns. However, the implementation of AE, under the name My Future Fund, will become a reality for employers in Ireland on 30 September 2025.

The AE system will be run by a State Agency called National Automatic Enrolment Retirement Savings Account and Tata Consultancy Services (TCS) have signed a 15-year contract with the Department of Social Protection to implement the new AE system. It is expected that four investment managers will be appointed in the near future to manage the Pension Fund Assets. The investment managers will provide three investment strategies: higher risk, medium risk and lower risk. All participants will be included in the Default Strategy if they do not actively select their own strategy.

As the only member of the Organisation for Economic Co-operation and Development (OECD) without a mandatory or quasi-mandatory retirement savings system, the introduction of AE will bring 800,000 new savers into the pensions safety net. One of the key objectives of AE is to increase private sector pension provision as it is estimated that only 35% of private sector employees currently have supplementary pension savings, resulting in 65% of the sector being totally reliant on the State Pension.

Business Costs

Under the AE criteria, inclusion will automatically apply to individuals aged between 23 and 60 who earn in excess of €20,000 per annum from all employments and who are not already participating in a pension scheme through their payroll.

The AE system will use a similar model to the SSIA with the employee making a pension contribution, matched by their employer and topped up by the State. The level of required pension contributions will be gradually phased in over a ten-year period, 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 ten. When allowance is made for the Government top-up, this will lead to a total contribution of 14% of Gross Earnings from 2035 (6% employee, 6% employee and 2% Government top-up). The maximum annual Gross Earnings that need to be referenced for contribution deduction purposes is €80,000.

The Department of Social Protection recently stated that they plan to amend the fee structure envisaged under AE to include a flat annual fee which will be levied on each of the 800,000 employees expected to be captured by the scheme, in addition to a charge based on a percentage of assets under management.

Tax Relief/State Subsidy/Top-Up

The AE system will operate in parallel to the existing tax relief system available to pension members participating in Occupational Pension Schemes or PRSAs whereby individuals receive marginal income tax relief at either 20% or 40% on pension contributions having regard for the age-related limits and the annual earnings cap of €115,000.

Higher rate taxpayers are better off in an Occupational Pension Scheme compared to the AE system as the State subsidy under the AE system equates to 25% relief and an €80,000 earnings cap exists. The State’s AE system is preferable for those companies with lower paid employees or those who employ more casual and part-time staff.

Adapting an Existing Pension Scheme

There is evidence to suggest that for those companies that sponsor an existing pension scheme, it is their preference to adapt their scheme to be AE compliant. Employers are currently making a concerted effort to encourage employees not already members of their existing pension scheme to join for Retirement Benefits. Employers value the flexibility, control and ancillary benefits associated with a single scheme approach. From aspects such as advice, support, the range of investment options available, the ability to make AVCs, retire early and the overall quality of the employer and employee experience, operating a single scheme that is open to all employees is a very appealing option. The twin-track approach of operating two different schemes (existing pension scheme and AE system) in tandem arguably creates administration and communication complexities particularly given the difference in how both systems operate.

If the eligibility conditions of your existing pension scheme dictates that it is compulsory for all employees to join the scheme from their date of employment, AE will not be an immediate issue. However, if membership it is voluntary as opposed to compulsory, a review of the rules in relation to waiting periods, opt out provisions and contribution rates will be required.

Next Steps for Employers

It is imperative that Employers seek professional advice and take the necessary steps to prepare for the launch of AE. At a minimum, Employers should

• Identify the portion of their workforce that is within the scope of AE

• Assess the costs and administrative issues associated with adapting an existing scheme to be AE compliant (single scheme approach) or operating a dual scheme approach

• Consider how the AE system will impact your payroll, finance and HR functions

• Consider the employment law/contractual implications of a single scheme versus a dual scheme approach

• Educate and engage employees about the changes that lie ahead

• Review the taxation approach in relation to the administration of Retirement and Death in Service Benefits under both schemes

The introduction of auto-enrolment is a positive development, will narrow the gender pensions gap, significantly increase the number saving for their retirement, build a more resilient workforce and will result in employees not being solely reliant on the state pension in retirement. It is now the time for Employers to assess whether the AE system or their existing scheme is the optimum solution for their employees and their business.