Auto-Enrolment Pension

Auto-Enrolment Pension – What Does It Mean for You?

The auto-enrolment pension scheme aims to tackle the problem of low pension provision in the private sector in Ireland.

Note: This scheme will not affect public sector employees in Ireland as they all have work pension arrangements already.

Currently, just 35% of private sector workers are part of an occupational pension scheme. The new system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension. Although auto-enrolment originally was supposed to start in 2022, the start date now is 2024 due to the Covid-19 pandemic. The scheme is voluntary, but the onus is on people to opt out rather than to opt in. This is an effort to encourage people to save for their retirement.

Who is Eligible for an Auto-Enrolment Pension?

The scheme is aimed at private sector workers aged 23-60 who earn €20,000 plus a year and are not already part of a work pension scheme. This is estimated to be about 750,000 people in Ireland.

Although employees will be enrolled automatically, they will be able to opt out or suspend participation after 6 months. However, if you opted out, you will be automatically re-enrolled after two years. Furthermore, you will only get back your contributions and not the employer and state contributions.

What are the Contributions?

Employer and employee contributions will start at 1.5%, increasing every 3 years until they reach 6% in 2034. Employers are required to match contributions and the state pay contributions on a 1:3 basis. €1 saved by you is equal to €2.33 into your pension pot. These contributions are capped at €80,000 salary. Contributions will be paid to the Central Processing Authority (CPA), a body set up by the government to handle the administration of this new scheme.

Contributions to the scheme will be introduced on the following a phased basis:

Years Employee
(as % of salary 1)
Employer
(as % of salary 1)
State
(as % of salary 1)
Years 1 – 3 1.5% 1.5% 0.5%
Years 4 – 6 3% 3%  1%
Years 7 – 9 4.5%   4.5% 1.5%
Year 10+ 6% 6% 2%

The scheme will be capped at €80,000 of an employee’s gross salary but people earning above that amount can still make additional contributions to the scheme. However, employers will not be required to match the amount.

How will the Auto-Enrolment Pension be Administered?

The CPA provide 4 different investment options, high risk, medium risk, low risk and default. If you do not choose a risk preference you will be placed into the default category. An interesting thing to note is that risk is pooled within the different options. This means that if you choose a low-risk fund and the CPA has 4 different low risk funds, you will get the average return of all 4 funds combined. The government document released on this also makes it clear that this scheme will not interfere with the supplementary pension scheme or tax-relief scheme which is already in place.

The scheme employs a “pot-follows-member” approach. This means that people who move jobs will not have to change/join new pension schemes. Also, people who work multiple jobs will have their pensions consolidated into one pot.

Is an Auto-Enrolment Pension a Good Thing?

Yes, for private sector workers who have no pension arrangements in place. The Contributory State Pension alone provides basic survival income in retirement. However, with inflation and aging population, additional pension provision is becoming essential. The auto-enrolment scheme will ensure that employers match employee contributions which is expected to be a significant motivation to contribute.

For private sector employees who are already part of a work pension scheme, their existing arrangement may be more beneficial depending on the level of employer contributions. Furthermore, 40% taxpayers currently receive 40% back from Revenue on their contributions. This is higher than the 30% which the state will contribute under the auto-enrolment scheme. These employees may be better off staying with their existing arrangements.

What are The Possible Setbacks?

There are some issues and criticisms in respect of the proposed new scheme. A private sector which already took a hit from the pandemic and increasing energy and transport costs may meet this extra expense with concern. However, the government’s decision to roll this scheme out over the course of the next 12 years will allow for ample time to adjust. The incremental increase of 1.5% every 3 years shouldn’t have any great impact on their operations. This change will also save some businesses money as they will not have to invest any money in establishing an occupational scheme anymore. They will simply have to facilitate the payroll deductions.

A connected fear can be that employers who currently offer more generous pension schemes may phase them out and join the cheaper auto-enrolment option.

All considered, the proposed auto-enrolment scheme is a step forward in tackling the low pension provision levels in the Irish private sector. It is worth remembering that pensions can still be quite complicated and financial advice will not go out of fashion.

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Mike Foley
Mike FoleyFinancial Advisor, MadeSimple