The lack of pension coverage in the private sector has been a cause of concern for many years. The issue will really only become a tangible problem when the vast numbers of individuals with no private pension provision reach retirement and rely solely upon the State pension for income in retirement. The Government has sought to finally tackle this issue by introducing what is known as automatic pension enrolment. The Department of Employment Affairs and Social Protection has now launched “A Strawman Public Consultation for an Automatic Enrolment Retirement Savings System for Ireland”. This long awaited consultation document can be viewed here.
What is auto enrolment?
At its simplest, Automatic Enrolment (AE) would require employers in the private sector to participate in a mandatory workplace pension scheme, should they not already operate their own pension scheme, and automatically enrol their employees into the AE scheme. Employers and employees would then be obliged to contribute a percentage of an employee's salary to help fund their retirement. The State will incentivise participation in the AE system. The consultation proposes that this will amount to a contribution of €1 for every €3 saved by an employee.
Key features of the consultation's proposal
- Employers will be obliged to enrol all employees aged between 23 and 60, who earn more than €20,000, into the AE system where those employees are not already members of a pension plan
- The self-employed and those aged under 23 and over 60 can opt-in
- The AE system will commence in 2022 with a two-year staged roll-out
- When fully operational, contributions will amount to 6% of the salary from the employee, 6% from the employer and 2% from the State
- Contributions will be remitted to a new Central Processing Authority, which will then remit the contributions to an approved AE pension provider
- Employees are free to choose from four approved AE pension providers and will have a range of investment funds to choose from
- Annual charges to the member will be capped at 0.50%
The proposal is designed to generate discussion and the Department of Employment Affairs and Social Protection will consider responses to the consultation. There has already been much commentary in the area and some of the main concerns that have arisen are the following:
- Will the requirement to contribute towards a AE pension scheme stifle wage growth in the private sector?
- Will employers coerce employees to opt out of the AE pension scheme and how can this be prevented?
- Many are excluded from AE through the proposals age and financial limits
- With people living and working longer lives, it doesn’t make sense to exclude those over 60 from AE
- How will AE affect the existing tax relief system – will there be one system for AE and another for all other occupational pensions?
- Could this have a negative effect on the Irish economy as a whole by reducing take home pay?
The Government’s proposal contained in the consultation document is to be welcomed. The State has an obligation to provide a framework for private sector workers to save for their retirement in a simple and cost effective way. With people living longer lives, the viability for the State pension has come in for serious scrutiny over the last number of years. The time is ripe for the Government to introduce an AE scheme.
The closing date for the Department to consider responses to the submission is 4 November 2018.
After many false dawns, it could be that the proposed AE system offers a new hope.