Ireland’s new pensions auto-enrolment system
On 29 March 2022 the Department of Social Protection published the Final Design Principles for the introduction of a pensions auto-enrolment system in Ireland. In the foreword to the publication, Minister Heather Humphreys stated that:
“the introduction of auto-enrolment represents a change from a system whereby employers may, or may not, make provision for a workplace pension scheme to one where every worker will have access to a workplace pension.”
Link to the full text of The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System
Under the system, employees earning €20,000 or more and aged between 23 and 60 who are not currently enrolled in a workplace pension scheme will automatically become a member of the auto-enrolment scheme. The employee, their employer and the State will contribute to the scheme, with contributions (based on a percentage of gross income) increasing on a phased based over the first ten years after introduction of the system, as shown in the table below:
|Years 1 – 3||1.5%||1.5%||0.5%|
|Years 4 – 6||3%||3%||1%|
|Years 7 – 9||4.5%||4.5%||1.5%|
Employees will have the choice to invest contributions in one of four funds, with contributions being invested in a default fund if an employee does not express a preference.
Employees may opt-out of the scheme in a two-month window that runs from the end of six months after being automatically enrolled. There will also be a window for employees to opt-out six months after each phased increase to contribution rates. Alternatively, employees may suspend their contributions to the scheme at any time. In all cases where an employee has opted-out or suspended contributions, the employee will be automatically re-enrolled in the scheme after two years.
Employers and trustees do not need to take immediate action in response to this announcement, as the system is not due to be implemented until late 2023/early 2024. However, employers and trustees may wish to note the following:
- The interaction of the auto-enrolment system with other aspects of Irish pensions law (e.g. transfers and the “outgoing worker” provisions of the Pensions Act 1990) still need to be worked out. We expect to see more detail on how these interactions will operate when the auto-enrolment legislation is published later this year.
- Auto-enrolment will be tax inefficient for higher-rate taxpayers. Higher rate tax payers currently get tax relief on their contributions to an occupational pension scheme at 40% and the equivalent relief they would get on contributions to an auto-enrolment pension scheme will be less than that. Employers and the State are also not required to make contributions on earnings in excess of €80,000. Higher earners are therefore likely to find it more beneficial to join their employer’s workplace pension scheme rather than the auto-enrolment scheme.
- The above limitations mean that there will still be a place for standalone workplace occupational pension schemes. Moreover, the administrative burden of enrolling employees in workplace schemes may be lower than enrolling them in the auto-enrolment scheme, given that the latter requires making provision for opt-outs and re-enrolment of opted-out employees every two years.
More information on the Design Principles is available from the Arthur Cox Pensions Team audio briefing available below, or here on the Arthur Cox website.