All employers will be legally obliged to make payments into employee pension funds from 2024, the government has decided.

The Automatic Enrolment (AE) Retirement Savings System will apply where employees aged between 23 and 60 and earning over €20,000 across all of their employments do not have an occupational pension.

Employer and employee contributions will start at 1.5% of salary in 2024, and will increase by 1.5% every three years until reaching 6% by 2034.

The annual employer pension payment will be 1.5% in the years 2024-2026, 3% p.a. in the period 2027-2029, 4.5% in the period 2030-2033, and 6% p.a. from 2034 onwards.

Matching contributions will be made by employers to contributions made by employees up to a maximum of €80,000 of earnings.

In Association with

The state will top up contributions by €1 for every €3 saved by the employee, up to a maximum of €80,000 of earnings.

This means that for every €3 saved by an employee, a further €4 will be contributed to their pension pot by their employer and the state.

The AE system will be voluntary but will operate on an opt-out rather than an opt-in basis.

Eligible employees will be automatically enrolled but will have the choice after six months participation to opt-out or suspend participation.

Employees will have a range of four retirement savings funds to choose from.

Three funds will have differing risk/return profiles. In addition, a default fund based on what is known as a ‘life-style’/’life-cycle’ investment profile will be provided.

A tender process will also be set up to find separate investment managers for the four funds from which employees can choose to deposit their savings - a conservative, low-yield fund, a medium-risk fund, a higher-risk fund, and a default fund for those who won't choose - and the return on each pot will be averaged out, so everyone gets the same rate of return.

The government claims that administrative costs and burdens will be minimised through the establishment of a Central Processing Authority (CPA) to administer the system.

Employers will not have to invest in the establishment or procurement of an occupational scheme for their own business. They will simply be required to facilitate payroll deductions.

People moving between jobs will not have to change pension scheme or join a new scheme. People with multiple employments will have their pension savings consolidated into one pension pot.

Minister Heather Humphreys estimated that the scheme will cost the state some €3bn over the first 10 years.

Employees will be allowed to opt-out of the scheme after six months, but they will be reenrolled after two years, and taxpayers will not be allowed to access their pension early except in cases of illness.

Employees will not be able to avail of a Personal Retirement Savings Account and the Workplace Pensions Scheme simultaneously. Instead, they will have to cash out and switch over, but Humphreys said her department was looking into whether they could operate both.

Cróna Clohisey, Tax and Public Policy Lead with Chartered Accountants Ireland, commented: "The timeline is ambitious to say the least. A significant amount of work needs to be done not just to develop the legislation underpinning the scheme, but also to finalise its design and to establish the various mechanisms that will be required for it to function. 

“Payroll service providers tell us that a lead-in time of at least 18 months would be required to properly develop, test, and deploy a fully operational system.”

Chartered Accountants Ireland has also called for the existing model for tax relief at both standard and marginal rates for pension contributions to apply to automatic enrolment.

Tax arbitrage

Clohisey added: “One of the issues that remain unclear is how the existing and well-established model for tax relief at both standard and marginal rates for pension contributions will sit alongside the €1 for €3 state model that is planned for automatic enrolment.

"The operation of essentially two tax systems between auto-enrolment and private pension schemes will cause needless tax arbitrage and confusion within the market.

“We are therefore calling for the existing model of tax relief to apply to automatic enrolment and for the proposed state model to be abolished.”

Confusion and complexity

Ray McKenna, partner at employee benefits advisor Lockton, welcomed the announcement as long overdue for the one-third of employees that currently have no supplementary income outside of the state pension.

“We believe that there’s still a lot of work to be done to ensure scheme goes live in 2024,” he added.

“The new auto enrolment structure will result in two very different approaches to retirement savings, depending on whether you are in a pension or in the auto-enrolment system.

“This will undoubtedly add confusion and complexity to the overall system of saving for retirement, potentially leading to employers running two retirement savings approaches, depending on employee salary levels.

“Another critical factor will be the charges that will apply and what the cost of delivering the scheme will be. There is still a great deal of detail and clarity required as we move towards implementation,” McKenna added.

Strawman deviation

Oisín O’Shaughnessy, managing director at Irish Life Corporate Business, noted that the government appears to be moving away from the model in the ‘Strawman’ whereby the Central Processing Agency will manage the process by collecting contributions from employers and allocate them to the selected providers. 

“Instead, the state will become the sole pensions provider under Auto Enrolment with no choice for savers as set out in the Strawman.

“It would be useful if the government set out the thinking behind this change and specifically how building from scratch will help deliver the scheme earlier and provide a positive experience for savers,” O’Shaughnessy stated. 

“On face value, the government seems to be assuming  all of the set-up risk which the Strawman envisaged would rest with the private providers currently operating in the market.  The proposal would also restrict the choice of pension provider under this scheme to one provider - the state.”

According to the Central Statistics Office, the rate of supplementary pensions coverage is around 56%, dropping to 35% in the private sector.

Minister Humphreys stated: "This major reform in the pensions landscape is intended not just to get people saving earlier but to support them in that saving process by simplifying the pension choices and importantly by providing for significant employer and state contributions as well.

“What we are doing today is putting in place a system whereby people can save for their retirement."

Humphreys told reporters that she had received the final report of the Commission on Pensions with recommendations on what the pension age -- currently 66 -- should be and that she would bring it before cabinet next month, and that there were "big", "difficult" decisions to be made following "lots of debate".

Speaking on RTE's Morning Ireland programme earlier, ISME CEO Neil McDonnell said employers welcomed the announcement and that they had been calling for it for many years.

He added that employers would need some "lead-in time" for the scheme and that the touted 6% employer contribution rate could not be "done in one go" due to the related expense of employers' PRSI.

(Pic: Getty Images/Sasko Lazarov/RollingNews.ie)