Employers - have you started thinking about pensions auto-enrolment?
Auto-enrolment is a major development on the horizon for Irish employers. With the government's plan to introduce this new pension scheme, it’s vital that businesses of all sizes understand what it entails, why it is being introduced, and how they can best prepare for the upcoming changes. As your financial adviser, we want to guide you through some of the key questions, ensuring you’re equipped with the right information to make sensible decisions about this important development for your company and your employees.
What is Auto-Enrolment?
Auto-enrolment is a new national retirement savings system set to become mandatory for many employers in Ireland. Under this system, workers who do not have access to a workplace pension scheme will automatically be enrolled in a national retirement savings plan. Both employers and employees will make contributions, with the government also making an additional contribution to help boost savings.
The key idea behind auto-enrolment is to make pension savings easier and more accessible for employees, particularly those who are currently under-prepared for retirement. Auto-enrolment simplifies the process by automatically enrolling workers into a pension scheme, with the option for them to opt-out under certain conditions if they choose not to participate.
Why is Auto-Enrolment being introduced
It’s being introduced to address a significant issue in Ireland: the pension coverage gap. Studies have shown that only about 35% of private sector workers in Ireland are covered by workplace pensions, which means a significant number of employees are not setting aside savings for retirement. Many others are not saving adequately for retirement, and there is concern that a large proportion of future retirees could face financial challenges in their later years.
The government’s primary goal with auto-enrolment is to improve retirement outcomes for Irish workers. It encourages people to begin saving for retirement earlier and more consistently. By automatically enrolling eligible workers into a pension plan, the policy overcomes inertia, one of the main barriers to pension savings. Many people delay or avoid signing up for pensions, often because the process seems complicated, or they underestimate the importance of long-term saving for retirement. Auto-enrolment removes these barriers by making pension participation the default option.
What are the main features of Auto-Enrolment?
- Automatic enrolment for eligible workers: Employees between the ages of 23 and 60 who earn over €20,000 annually and do not currently have access to a workplace pension will be automatically enrolled in the scheme.
- Set contribution levels: Employers will be required to contribute a percentage of their employees’ gross earnings to the pension scheme. Employees will also contribute a matching percentage from their wages. Also, the government incentive will amount to 1/3rd of an employee’s contribution, which equates to tax relief of 25%. The initial contribution amount will be 1.5% of salary by the employer and also the employee, rising to 6% from each over a 10 year period.
- Opt out options: Employees will have a window to opt out of the scheme after a 6-month period and a number of other points in the future. However, they will be automatically re-enrolled in the scheme after a two year period outside of the scheme.
- Choice of funds: Employees will have a choice of funds to invest in, with a default fund option available for those who prefer not to make an active choice. The government aims to provide a range of low-cost, high-quality investment options to ensure that retirement savings grow effectively over time.
When will Auto-Enrolment be introduced
On the 5th of April 2024, Minister Heather Humphries announced the publication of the Auto Enrolment Retirement Savings System Bill 2024 and stated that auto-enrolment will commence on 1st January 2025.
However a government source said in September 2024 that, “We can’t have increases in the minimum wage, increases in statutory sick pay days and auto enrolment all happening on January 1 2025. It’s in nobody interests for businesses to close their doors due to costs”. The source said that the scheme will happen in 2025 but that a delayed start date will be announced in the coming weeks to give businesses clarity. So unfortunately, we all have to wait and see…
Who is overseeing Auto-Enrolment?
The oversight and administration of the auto-enrolment system will fall under a newly established body called the National Automatic Enrolment Retirement Savings Authority (NAERSA). This body will be responsible for managing the enrolment of employees, collecting contributions, and facilitating the investment of funds. They will also handle communication with employers and employees, provide educational resources, and ensure compliance with the scheme.
For employers, the NAERSA will be a critical point of contact, providing guidance on their responsibilities and ensuring that the enrolment process is as straightforward as possible.
There is a significant amount of work for this body to undertake to be ready for auto-enrolment, both in terms of establishing the scheme and also in engaging with all employers in Ireland.
What should employers do to prepare for Auto-Enrolment?
Remember first of all that we're all over this! It may be very beneficial to contact us to discuss what might be best for you and your employees. While we won’t play a role in auto-enrolment, there are a number of areas for you to consider, where our thoughts may be helpful.
- How Auto-Enrolment will interact with your current pension arrangements: Just as one example, does your current scheme include all employees aged between 23 and 60 who earn over €20,000 p.a.? If not, you will likely need to include these people in your scheme or run the auto-enrolment scheme alongside your current scheme.
- Higher earners who are not in your current scheme: Under existing pension rules, marginal rate taxpayers get tax relief at 40% on pension contributions. They will be substantially worse off under auto-enrolment, where the government incentive equates to tax relief at a rate of 25%. How will you approach this?
- Update payroll systems: Auto-enrolment will require ongoing contributions from both employers and employees. You’ll need to ensure your payroll system can handle these deductions and that you can integrate seamlessly with the NAERSA’s systems.
- Educate your employees: While auto-enrolment aims to simplify pension savings, it’s essential to educate your employees about the benefits of the scheme, their contribution levels, and their right to opt out. By providing clear communication at the right time, you can help employees make informed decisions about their retirement savings.
- Stay informed: The auto-enrolment system is still being developed, and there will likely be updates and changes in the coming months. Stay informed about the latest developments and guidance from the government to ensure your business remains compliant and ready for the new system.
While the introduction of auto-enrolment may seem daunting, it is ultimately a positive step towards improving retirement outcomes for workers across the country. By engaging with this early, you can prepare your business for this new environment and help your employees secure their financial future.