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How Will the New Auto-Enrolment Pension Scheme in Ireland Work?

What’s happened?

The Irish government has released its proposals and is consulting over how the new auto-enrolment pension scheme could operate. Under the new proposals for auto-enrolment in Ireland, employees, employers and the State will each make a contribution.

Why?

Currently, in Ireland, just 47% of all employees, and 35% of private sector employees have a supplementary pension, leaving the majority to rely on the State pension of about €12,000 a year (a third of the average wage). The picture is even worse for women in Ireland, where a major gender pension gap exists. Add to this that the number of people aged over 65 in Ireland is expected to double to more than one million within two decades and it’s clear that there’s a growing ‘retirement savings gap’.

Following the successful implementation of auto-enrolment (AE) schemes in other countries such as Australia, New Zealand and the UK, the government believes that implementing a behavioural psychology-based approach will overcome decision-making inertia and improve the Financial Wellness and retirement readiness of employees.

When’s it happening?

AE will be introduced on a phased basis from 2022.

How will it work?

AE:

  • Will not replace existing pension provision – it will supplement the existing State Pension and work in tandem with existing private pension provision.
  • Will be an earnings-related workplace savings system using a Defined Contribution (DC) model with personal accounts.

Members will:

  • Be able to choose from a range of retirement savings products.
  • Have the option to opt-out.
  • Have their own savings pot with a “pot-follows-member” approach. This will mean that regardless of the number of jobs a person has they will have one consistent retirement savings arrangement.
  • Have the choice of three different retirement saving fund options based on their risk appetite, which they will select along with their provider (from a maximum of four) through an online portal.
  • Be allocated to a ‘default’ fund option provided by one of the registered providers on a ‘carousel’ basis if they don’t actively make a selection.
  • Be able to suspend contributions to deal with other pressing financial matters during limited “Savings Suspension” periods. Employer and State contributions would also be suspended during these periods.
  • Have a choice over how they take their retirement funds from several standard drawdown options including lump sums, annuities and approved retirement funds, when their State pension becomes payable.
  • Not be able to opt-out of the system for at least nine months after being enrolled.
  • Face maximum charges for administration and investment of 0.5% per annum.

Who will be auto-enrolled?

  • All employees earning over €20,000 and between the ages of 23 and 60 who do not already have pension arrangements. The government estimate there are c410,000 such employees at present.
  • Those earning less than €20,000, outside of the age band suggested, or who are self-employed will have the option to ‘opt-in’. The government estimate there are c675,000 such employees at present. If they do opt-in, then their employer (where applicable) and the State will also be required to make contributions.
  • Employees earning more than €75,000 can contribute to the scheme, but their employer will not have to match contributions above that amount.

How much will employees contribute?

  • Initially, employees will make contributions of 1% of earnings.
  • This will auto-escalate by one percentage point each year to 6% after six years (2028).

What about employers?

  • For the first time, there will be a mandatory employer pension contribution.
  • Employers will be required to make contributions matching those of their employees. These will increase over the same timeframe and are subject to a maximum of €75,000 of earnings (approximately twice the average earnings).
  • Employer contributions will be tax deductible.
  • The system will be overseen by an independent ‘Central Processing Agency’ or ‘CPA’. Employers will need to register their employees, deduct their contribution through payroll and pass them to the CPA.

What about State incentives?

  • The State will contribute €1 for every €3 put into the pension by members. So, when employee contributions rises to 6%, the State contribution will rise to 2%.
  • This is a change to how tax relief provisions for pensions currently operate.

What about expats?

The last census in 2016 showed 535,475 foreign nationals from 200 countries were living in Ireland, with applications for Irish passports jumping by 25% since the UK’s EU referendum. These extraordinary levels of global mobility mean that employers increasingly need to help support expats to assimilate on arrival in Ireland, and to think about their Financial Wellness and retirement planning in a wider context rather than just the time they live and work in Ireland.

Consultation process on auto-enrolment in Ireland

The consultation process is open until 4th November 2018. You can share your views on auto-enrolment in Ireland at autoenrolment@welfare.ie

The growth of Financial Wellness in Ireland

The introduction of auto-enrolment in Ireland is one of the major factors driving the adoption of Financial Wellness strategies amongst Irish employers. To find out more about how we can help you implement a solution contact us.