In September 2018, we published a speed brief on the Government’s Strawman Consultation Process for an Automatic Enrolment Retirement Savings System for Ireland (the “Auto-Enrolment System”). This publication can be accessed here.
The Government has now published an update on the progress made in the design of the Auto-Enrolment System and an outline of the next steps required before the implementation process can begin.
Summary of design features now agreed
Following on from the findings of the Strawman Consultation Process, the Government has now confirmed certain key elements of the design of the Auto-Enrolment System. The key features agreed include:
- Qualifying employees will be employees aged between 23 and 60 and earning over €20,000 per annum, who are not already in a pension scheme operated by the employer. However, employees falling outside of these age and pay brackets will still be able to ‘opt-in’ to the system.
- Employees/members will initially contribute a minimum of 1.5% of qualifying earnings, for the first 3 years. The member’s minimum contributions will be increased in increments of 1.5% every three years thereafter up a maximum of 6%.
This means a total phase in period of 9 years to get to the maximum 6% rate, as opposed to the 6 years originally proposed.
- Employers' will make matching (tax deductible) contributions to that of the members’ contributions. Such employer contributions will be limited to a qualifying earnings threshold of €75,000.
- Employees will be free to opt-out of the system at the end of a minimum membership period (during the 7th and 8th month of membership). Members who opt-out will receive a refund of personal contributions paid up to the point of opt-out.
- Additional opt-out windows will be available six months after each increase in the contributions rates and thereafter a limited number of ‘Saving Suspension Periods’ will be facilitated for members who temporarily cease making contributions. Employer and state contributions will also cease during these periods.
These additional opt out windows are a new feature, and have probably been introduced in response to feedback that the original proposals, which gave only one initial opportunity to opt out, were overly restrictive.
- Employees who opt-out will be automatically re-enrolled after three years but will have the ability to opt-out again under the same circumstances set out above.
- A new Central Processing Authority (“CPA”) will be established which will be responsible for sourcing, on a tender basis, a limited number of ‘Registered Providers’ to offer retirement savings options to employees participating in the system.
The retention of the concept of the CPA is significant, and means that the Government is committed to a centralised auto enrolment system, where it will operate the clearing house for all contributions, and will be responsible for selecting the Registered Providers who will invest and administer participants’ savings. The primary benefit of this will be to ease the burden on small employers, who will not have to go and find their own pension provider.
- There will be an initial contract period of ten years of registration for the selected providers.
- The CPA will also establish minimum standards for service delivery and product features required of these providers and will set annual administrative, management and investment charges of no more than 0.5% of assets under management.
The original proposed charges cap of 0.5% of assets under management has been retained, but the initial contract period for the chosen Registered Providers has been set at the maximum originally proposed, which is 10 years. This will give the providers some opportunity to make returns in the later years of their contract, given that the early years of the contract will probably be loss making for them.
- Employees/members will be free to choose from a range of retirement savings options.
- Where employees elect not to exercise choice and select a preferred provider or fund, their contributions will be allocated to the default fund of one of the Automatic Enrolment Registered Providers on a carousel basis.
Questions had been raised about the difficulties of allocating members who don’t make a choice to providers on a carousel basis, particularly with the potential for differing performance between providers, but this feature has been retained.
- Each Registered Provider will be obliged to offer a similar range of ‘standard choice’ savings fund options including a default fund for those who elect not to exercise choice.
- These funds will operate on a defined contribution basis.
The Government update notes that the key elements of the Auto-Enrolment System outlined above, while agreed in principle, are subject to change as work continues to progress on the design of the Auto-Enrolment System as a whole, the phasing of implementation and the development of appropriate legislation.
Design Features still under Consideration and Next Steps
Although progress has been made on the design of the Auto-Enrolment System there are certain elements under further consideration. These elements can be broken into five main areas:
1. The CPA (including its scope and role);
2. Registered Providers (including its nature and functions);
3. The investment framework and funds to be offered by Registered Providers (including the design of the default fund);
4. The pay-out phase; and
5. The State Financial Incentive.
The Government has indicated that priority is being given to the operational arrangements of the CPA and that proposals for the design of the CPA will be prepared before the end of the year. Proposals on the design of the investment framework and the pay-out phase will be submitted to Government for consideration in early 2020.
On the key area of tax or financial incentives for employees to contribute, there is no update. The Strawman Proposal had suggested a State contribution equivalent to €1.00 for every €3.00 saved by an individual member, as an alternative to the normal tax relief on pension contributions. This could create two parallel systems.
The update states only that further consideration is being given to this element of the design, and that a set of options on how to proceed on this issue is expected to be brought to the Government in early 2020.
What Does This Mean?
The design of the Automatic Enrolment system has moved forward somewhat.
However, certain key decisions still need to be made, and no fully committing steps to establish the new system by the target date have been taken as yet by Government.