Background
The new state occupational pension scheme is not intended to replace any existing pension plans. The Irish government introduced the bill to ensure pension provision for the approximately 750,000 employees earning EUR 20,000 or more per year who currently do not participate in a workplace pension scheme. These employees are usually employed in lower-paid sectors such as tourism and retail where it is uncommon for employers to offer a workplace pension scheme.
The auto-enrollment mandate is expected to lead to greater pension adequacy, better outcomes at retirement, and help bridge the pensions shortfall among private sector workers.
Key details
The new auto-enrollment mandate will apply to employees aged 23 to 60 years old earning EUR 20,000 or more per year who are not currently participating in an occupational pension scheme or Personal Retirement Savings Account (PRSA) through their employer. Employees outside the age and earnings thresholds can voluntarily opt into the new pension scheme provided they do not participate in an employer-sponsored plan and are under the state pension age.
The auto-enrollment pension will be administered by a government-established Central Processing Authority (CPA) to keep management costs to a maximum of 0.5% of assets.
Employees will have a choice to invest their contributions in one of four different pension savings funds, ranging from conservative to moderate and higher risk. If no fund is chosen, contributions will be automatically invested in a default fund. Employees will be able to manage their account via an online portal and may remain enrolled when changing employers.
Contribution rates
The new pension scheme will phase in increasing contribution rates for the employee, employer, and government over a period of ten years.
The contributions rates will begin at 1.5% of gross annual salary for the employer and the employee each in 2024. Rates will incrementally increase every three years by 1.5% until they reach the target rate of 6% by employer and employee in year ten (2034). In addition, the government will also contribute EUR 1 for each EUR 3 contributed by the employee. Employer and government contributions will be subject to a maximum gross annual salary of EUR 80,000. There is no provision at present for employees to make additional voluntary contributions above the established rates, but they can contribute on their salary above EUR 80,000. Those contributions on excess salary will not be matched by their employer or by the government.
Illustration of phased increases to contribution rates:
| Year | Employee Contribution | Employer Contribution | Government Contribution |
| 1-3 | 1.5% | 1.5% | 0.5% |
| 4-6 | 3% | 3% | 1% |
| 7-9 | 4.5% | 4.5% | 1.5% |
| 10 + | 6% | 6% | 2% |
Employees can choose whether to participate before and after automatic enrollment. After being automatically enrolled in the new pension scheme for six months, employees will have a two-month period during which they can opt out or suspend their participation. If they do, they will be automatically re-enrolled in the scheme every two years and will again have two months to opt out or suspend their participation after six months.
Key employer considerations
One of the most significant and obvious impacts that auto-enrollment will have on employers is the cost of employer contributions. Businesses will need to budget for it, but there are many other key areas that employers will need to consider. Much will relate to what pension plan, if any, employers currently have in place for their employees and how this will compare to what is outlined under the new auto-enrollment mandate.
What this means for employers who do not offer a plan:
Employers who do not offer their own occupational pension need to weigh the benefits of introducing a company pension scheme or Personal Retirement Savings Account (PRSA) versus relying on the auto-enrollment system. No employer should just default into the auto enrollment solution without considering all options for pension provision for their employees. Employer plans can offer more flexibility in design, broader investment options, and optional voluntary contributions.
What this means for employers offering occupational pension schemes or PRSA:
At present, participation in any occupational pension plan or PRSA makes an employee ineligible for the new auto-enrollment plan being set up by the government. Employees who are not participating in an employer plan—even if eligible to do so—and who meet auto-enrollment eligibility criteria will be auto-enrolled in the government plan. This creates a situation where employees who have the option to voluntarily participate in an employer plan may choose instead to opt into the government scheme if it is advantageous to them. The government has not yet established standards to exempt employers who offer their own plan from the auto-enrollment framework, but those standards are expected in the future as the statutory contribution rates increase. There is also no provision today for employers offering voluntary participation in a company plan to automatically enroll employees in their own plan rather than the government’s. That would have to be decided by the employees themselves, which creates a clear opportunity for communication and education.
Employers who already offer a plan will want work with their advisors to review and potentially amend their eligibility criteria, whether participation is mandatory or optional, and whether there’s a waiting period that may need to change. Participation in the existing company plan may be advantageous to employees and can be promoted ahead of January 2025.
Next steps
If the legislation passes (which is expected), employers with eligible employees will need to take into consideration the following:
- The direct cost implications of including employees in their pension scheme versus including them in the auto-enrollment solution.
- Establish whether to include options for employees to join their pension plan or the auto-enrollment solution.
- Multiple offerings might make more sense for some, as cohorts of employees might be financially disadvantaged by being in either an auto-enrollment solution or a group pension arrangement.
- Reviewing total earnings for employees with part-time, variable, or seasonal earnings—which can make up a sizeable portion of their income—will be important both in relation to their own plan eligibility and these employees’ eligibility for auto-enrollment.
- It will be important to review and adapt employment contracts and payroll capabilities.
- Communications – employers will need to develop an employee communications plan for the upcoming changes.
- Death benefits are not provided under auto-enrollment – if the employer wants all their employees to have this benefit, they may need to set up a separate death benefit plan to make this benefit available.
As is evident above, there is plenty for employers to consider. Perhaps most importantly, it is vital for employers to plan robust employee communications and educational sessions that are easy to understand. How employers manage the communication of the new mandate to their workforce will greatly affect employee relations and the success of its implementation. Guidance and advice will be critically important in helping employers plan and prepare for the introduction of the auto-enrollment mandate.
Employers should take steps now to ensure they are auto-enrollment ready. The timeline for action is very tight. In addition, employers should monitor future legislation finalizing the requirements and implementation timeframes.
RESOURCES
WEBSITE – Automatic Enrolment Retirement Savings System Bill 2024