Heather Humphreys, the minister for social protection, has announced details of the "design principles" for the automatic enrolment retirement savings system for Ireland. The design principles will form the basis of the draft legislation and the necessary operations to be put in place by the government and employers.
Auto-enrolment has been on the Irish political agenda for a number of years now and was the subject of a public consultation process in 2018. Ireland is reportedly the only member of the Organisation for Economic Co-operation and Development that does not yet operate auto-enrolment or a similar system to promote pension savings. According to the government's press release, the rate of supplementary pension coverage is around 56% of Ireland's working population (although the Central Statistics Office's Pension Coverage Survey 2021 refers to 66% coverage, outside of state pension) and this could be as low as 35% in the private sector. The aim of auto-enrolment is to increase the number of employees in Ireland with access to pension cover and to address the pensions gap.
Commenting at the announcement about the design principles, Minister Humphreys said:
This major reform in the Irish 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.
The auto-enrolment system will apply to all employees who meet certain age and earnings thresholds, and who are not already members of an occupational pension scheme. Eligible employees will be automatically enrolled in a pension scheme but will 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.
Under auto-enrolment, employees will be required to make certain minimum contributions to a pension scheme and employers will be obliged to match those contributions, which will then be topped up by the state. In other words, for every €3 contributed by the employee, a further €4 will be invested by the employer and the state combined. The auto-enrolment system will be introduced on a phased basis and, once a scheme is fully established, it is anticipated that an employee with an annual salary of €35,000 will accumulate savings of €293,000 over their working life, excluding investment returns. Pay-outs under auto-enrolment will be made in addition to the state pension (approximately €13,000 per year).
- All employees who are not already in an occupational pension scheme, aged between 23 and 60 and earning over €20,000 across all their employments, will be automatically enrolled in the scheme (which will have a range of four retirement savings funds to choose from).
- Employer and employee contributions will start at 1.5% in 2024 and will increase by 1.5% every three years until they eventually reach 6% by 2034.
- Employers will be required to match contributions made by employees up to an earnings threshold of €80,000.
- In addition to employer contributions, the state will also top up contributions by €1 for every €3 saved by the employee, up to a maximum of €80,000 of earnings.
- After six months, employees will be able to opt out or suspend participation. After two years, those employees who opted out will be automatically re-enrolled.
- Of the four funds referred to above, three will have differing risk/return profiles and one default fund based on a "lifestyle" or "life cycle" investment profile. People who do not express any preference for a fund will be enrolled into the default fund.
- Administration costs and burdens are intended to be kept at an absolute minimum, and a central processing authority will be established to administer the system. In relation to this:
- employers will not have to invest in the establishment or procurement of an occupational scheme, they will simply be required to facilitate payroll deductions; and
- under the "pot-follows-member" approach, people who move jobs will not have to change or join a new pension scheme. In addition, people with multiple employments will have their pension savings consolidated into one pot.
For further information on this topic please contact Niamh Crotty or Síobhra Rush at Lewis Silkin Ireland by telephone (+353 1566 9876) or email ([email protected] or [email protected]). The Lewis Silkin Ireland website can be accessed at www.lewissilkin.com/en/ireland.