Auto Enrolment Update - November 2019
On 30th October The Minister for Employment Affairs and Social Protection, Regina Doherty TD published an outline of the intended shape of the new Automatic Enrolment Retirement Savings System, due to come into effect in 2022.
At Provest Private Clients Limited we are in favour of an auto enrolment system being introduced. However, the terms and conditions associated with the proposed system will need to be scrutinised before judging whether it is fit for purpose.
It is estimated that the number of people entitled to the State pension is set to more than double over the next 36 years and it is estimated that only 35% of private-sector workers have their own pension
Furthermore eligibility for the State Pension will increase to 68 by 2028 and a further increase is likely in 2035. In the years ahead there will be a greater onus on individuals to make their own provision for retirement.
The key features agreed so far include:
Current and new employees aged between 23 and 60 years of age and earning €20,000 or above per annum across all employments will be automatically enrolled;
Employees earning below €20,000 per annum and employees aged under 23 and over 60 will be able to ‘opt-in’ to the system;
There will be no employee waiting period before enrolment;
Employees who are existing members of a pension scheme/contract which meets prescribed minimum standards and contribution levels will not be automatically enrolled;
Employers will be required to make a matching (tax deductible) contribution on behalf of the employee i.e. at a specified contribution rate;
Employer contributions will be limited to a qualifying earnings threshold of €75,000 – which will be reviewed over time;
Contributions during the first six months of membership will be compulsory;
Member opt-out of the system will be facilitated in a two month ‘opt-out window’ (between the start of the 7thmonth and the end of the 8thmonth);
Thereafter, a limited number of ‘Savings Suspension periods’ will be facilitated for members who wish to temporarily cease making contributions. Employer and State contributions will also cease in this scenario;
Members who opt-out will be automatically re-enrolled after three years but will have the ability to opt-out again under the same circumstances outlined above; and
· Early access to accumulated retirement savings may be provided on the grounds of ill health and enforced workplace retirement.
A Central Processing Authority (CPA) will be established by the State and will be responsible for sourcing, on a competitive basis via an open tender, a limited number of Registered Providers to provide a defined suite of retirement savings options;
The CPA will establish minimum standards for service delivery and product features required of all providers, e.g., the number of investment fund options for members, service response times, etc.;
Employees will be automatically enrolled with the Central Processing Authority by their employer on commencement of employment;
Employees (rather than employers) will be responsible for selecting a provider and a savings fund option. In the absence of any savings decision, the enrolled employee will be automatically allocated to the default fund of one of the Registered Providers on a carousel basis;
The initial contract period for service delivery by Automatic Enrolment Registered Providers will operate for a period of ten years;
The CPA will seek to set annual administrative, management and investment charges of no more than 0.5% of assets under management. This charges cap will apply to all providers;
Each Registered Provider will be obliged to offer a similar range of ‘standard choice’ savings fund options including a default fund for those who elect not to exercise choice;
These funds will operate on a Defined Contribution basis;
These products may incorporate a ‘lifestyle’ or ‘target date fund’ investment approach and will be defined by reference to risk profile;
Members will be entitled to transfer funds accumulated in the automatic enrolment system (contributions plus investment returns minus investment and management fees) between the savings products;
Invested funds and scheme membership will follow the member when members change employments.
Following the comprehensive consultation process, the Government has decided to commence with an initial minimum contribution rate (for employees and employers) of 1.5% for three years, which will increase by 1.5 percentage points every 3 years thereafter to a maximum of 6% at the beginning of year 10. This addresses concerns expressed by both employees and employers about the Strawman proposal to escalate the contribution rates from 1% to 6% over a shorter time period with a rate of increase of 1 percentage point per year. This new approach allows more time for the contribution rate to bed in and earnings to adjust before the next increase.
Seeking to get the automatic enrolment retirement savings system finalised by 2022 is very ambitious and there are five main areas where work is continuing so as to produce design options for Government to consider.
These areas are related to the design of:
the State financial incentive; (tax relief)
the scope and role of the Central Processing Authority;
the nature and functions of the Registered Providers;
the investment framework and funds to be offered by Registered Providers, including, the design of the default fund, and also the pay-out phase; and
the phasing of implementation.
Needless to say clarity around these points will be published in the months ahead.
Some critics of the proposed system have challenged the limit of 0.5% on administrative, management and investment charges as it will not facilitate independent advice for consumers, and with a 10 year build-up to full contributions many may miss out on having adequate savings built up for retirement.
It is expected that Employers will push back on the level of contribution they are expected to make on behalf of employees.
If you are an employer and you want to discuss the implications of Auto Enrolment please feel free to get in touch.