Corporate

Background

Current Pensions Landscape in Ireland

The pensions landscape in Ireland is most definitely evolving. The transposition of the IORP II Directive into Irish law during April 2021 is the most significant change to pension regulation in more than 30 years. The requirements under the directive are wide-ranging but with an overall goal of enhancing and strengthening the level of pension scheme governance which is ultimately good news for pension members. Last September, the Government signed off on its major reform plan which will see the retirement age staying at age 66 but allowing employees to continue to work if they choose. Under the new flexible model, those who work beyond age 66 will receive a higher payment when they eventually do retire. It is expected that employees and employers will have to pay PRSI increases in return for keeping the state pension age at 66 and the Government is working on a new PRSI roadmap due to be published in January 2023. Finally, The Minister for Social Protection, Heather Humphreys announced last October, that she had secured Government approval for the outline of an Auto-Enrolment Retirement Savings Bill.

Auto-Enrolment in Ireland

As the only country within the OECD without a mandatory or quasi-mandatory retirement savings system, the objective of the proposed Auto-Enrolment scheme is to ensure that every worker will have access to a work placed pension to supplement or compliment the state pension. It should not be forgotten that the recent announcement comes approximately 15 years after then Minister, Seamus Brennan, committed the State to such a scheme.

Under the proposed scheme, which is due to be introduced in early 2024, all employees earning over €20,000 who are not already participating in an “acceptable” employer pension scheme will be automatically enrolled. The Department of Social Protection, which is leading the development of policy and legislative design, estimates that that auto-enrolment will help an additional 750,000 people save for retirement to ensure they are better prepared for life after work. This is most welcome because our rapidly ageing population is going to place an intolerable strain on the state pension. While there are currently between four and five people working in proportion to the number of pensioners, this figure is expected to fall to two working people to every pensioner in 2050.

Contributions will start at 1.5% of gross income, being increased on a phased basis over a ten-year period to 6%. For every €1 saved by the employee, the employer matches this with a €1 contribution subject to an upper limit on salary of €80,000. The State will also make a contribution at a rate of €1 for every €3 saved by the employee which is equivalent to 25% tax relief.

While auto-enrolment will be voluntary in the sense that employees can opt out after six months, there will be a mechanism that enables the employee to be enrolled once again after two years. As part of the auto enrolment system, a new body called the Central Processing Authority (CPA) will be established to oversee the scheme, complete much of the administrative work and act in a custodianship capacity for participants.

Auto-Enrolment in Other Countries

There is no doubt that auto-enrolment has been a success in other countries where it has been introduced. Australia was the first country to introduce auto-enrolment in the early 80’s, followed by New Zealand in 2007 and the UK in 2012. Clearly, auto-enrolment has been highly effective in raising pensions coverage rates in these countries as the combination of constant re-enrolment (in the case of New Zealand and the UK) and inertia did wear down the resolve of those employees who opposed

it. When the UK introduced auto-enrolment in 2012, pension coverage was below 50% including public sector workers - coverage now stands at approximately 80%. In Ireland, according to figures from the Central Statistics Office, just 56% of employees have an active pension, and in the private sector, that drops to 35%.

Limitations with the Auto-Enrolment Design

Limiting access to auto-enrolment for people between the ages of 23 and 60 earning €20,000 will more than likely disproportionately exclude women and will potentially widen the existing gender pension gap further. Additionally, the lack of flexibility to increase payments or make lump-sum contributions to cover any periods of unpaid leave or career gaps may result in worse retirement outcomes for women.

It would appear that auto-enrolment will result in a dual pension system and this may create confusion and unnecessary complexities. For example, an employee earning more than €20,000 who pays no tax will receive higher tax relief under the auto-enrolment scheme whereas a top rate tax-payer will receive more generous tax breaks from her Occupational Pension Scheme. Employers and Trustees of Occupational Pension Schemes (including Master Trusts) will need to consider what the new requirements means for their schemes and further details are expected from the Department of Social Protection to assist Employers and Trustees in this regard.

In summary, the introduction of the auto-enrolment retirement savings system in 2024 is a positive development, will significantly increase the number saving for retirement and will result in people not being solely reliant on the state pension in retirement.