The arrival of auto-enrolment will kickstart pension saving for thousands of Irish workers who have not planned for retirement. John Cradden explains how it will work for employers and their staff.
The new auto-enrolment workplace pension scheme that is due to begin in late 2024 will help cater for the estimated two-thirds of Irish private sector workers (around 750,000 people) who do not have any kind of occupational or personal pension coverage.
It’s designed to effectively ‘nudge’ workers into saving for their retirement, but also to make it simpler and more straightforward for employers to pay into a workplace pension for their employees without having to set up or administer a company pension scheme.
“Administered by a Central Processing Authority rather than the employer, it won’t replace the State pension, but will act as a support to it”
The auto-enrolment scheme and its design principles mark a major development in the field of pensions coverage, and a similar scheme has been operating very successfully in the UK since 2012.
Remind me what auto-enrolment is?
More details for employers can be found here, but auto-enrolment is a national pension investment scheme that is co-funded by employers and the state.
Administered by a Central Processing Authority rather than the employer, it won’t replace the State pension, but will act as a support to it.
People aged 23-60 who are earning more than €20,000 per year and who do not have a pension scheme will be automatically enrolled into this scheme, but they have the choice after six months of participation to ‘opt-out’ or suspend participation. Those who opt out will be automatically re-enrolled after two years.
The accumulated funds plus investment returns will be paid out to workers upon their retirement in addition to the State pension, and drawdown will be linked to the State pension age, which is currently 66.
As an employer, you’ll match your employees’ contributions and the pension will also be topped up by the State at 33%, with employer and State contributions capped at €80,000 of earnings.
In terms of contributions, eligible employees will start paying 1.5% of their gross income into the scheme to start with. This contribution will increase on a phased basis over the next 10 years with 1.5% added every three years until a total of 6% is reached.
What does it mean for employers?
The auto-enrolment scheme is designed to reduce and minimise the administrative burden of setting up an occupational pension scheme.
Companies that already operate a defined contribution scheme for employees may be exempt from implementing the auto-enrolment scheme.
But for those that don’t provide any pension provision for their employees, the new scheme means they won’t have to set up their own occupation pension scheme. Instead, they will be required by law to facilitate their employees’ participation in the scheme by recording employee-related data via a simple payroll instruction, and making or deducting contributions as required.
How can employers prepare for this?
Some details of the scheme have yet to be ironed out, but there are a few areas that employers should examine in order to prepare for its introduction, according to payroll software provider Sage.
1. Payroll systems
Providers of payroll systems and software are consulting with the government to ensure that the new scheme integrates smoothly and accurately with existing payroll systems.
Talk to your payroll software provider for advice on how the new scheme will affect your payroll system and what you need to do.
2. Employment contracts
Employment contracts will need to be reviewed as well before the legislation comes into force, according to Sage.
Your solicitor should be able to review your contracts to ensure they are updated to include provision for pension contributions and any other required legal details, but with less than a year to go until before the scheme is launched, be sure to contact them as soon as possible.
3. Communicating to your employees
Similarly, you’ll need time to communicate with your employees about how auto-enrolment will work.
This will be essential because, with the legislation underpinning auto-enrolment due to be in place by September 2024, awareness among workers is very low. According to research from Standard Life, seven in 10 members of the public are not aware of the new scheme.
As well as the basic details of the scheme (how much they will contribute, tax implications and the benefits of the scheme, including the employer and State contribution) you will need to inform your employees about the four fund options.
They will also need to know that employee contributions will be taken from their net income, after deductions of income tax, pay related social insurance (PRSI) and universal social charge (USC).
Another key point to get across is that, unlike other pension arrangements, tax relief won’t apply to employee contributions to this scheme because of the State top-up arrangement.
However, participants in the new scheme will still be entitled to receive a ‘benefit-in-kind’ tax exemption in respect of their employer’s contribution.
Another benefit of the AE scheme to promote is that employees will be able to move jobs without having to switch pension or start another one because they will remain within the system. All that would change is that their new employer would take over the deductions from their payroll and any other responsibilities.
4. Finance and administration
The scheme is designed to be as simple as possible for employers to set up and implement.
The new CPA will oversee the scheme and minimise administrative costs to employers. It’s been proposed that a management charge of no more than 0.5% per annum of assets will apply.
Contributions will start at a modest level, but increase over time to give employers time to settle into the new system. To begin with, they will need to match their employees’ contributions at 1.5% of gross income, which will rise in steps over the following ten years to a maximum of 6%, subject to an earnings cap of €80,000.
Employer contributions to the scheme will also be tax-deductible.