Much like planting a tree, the best time to address the pensions time bomb was 20 years ago, the second best now. After protracted delays, the Automatic Enrolment Retirement Savings System Bill 2024 now awaits only the signature of the president to be enacted into law, with its provisions set to hard launch on 1 January 2025.
Introducing the bill in April, minister for social protection Heather Humphreys said that a lack of action on pensions auto-enrolment (PAE) had made Ireland ‘an outlier in terms of pension coverage for too long’. PAE was introduced in the UK in 2012 and, by 2024, Ireland was the only country in the OECD not to have any such system in place.
‘The introduction is ambitious given the amount of work required to be completed’
Broad scope
Government statistics make clear the broad scope of the changes ahead. Approximately 800,000 workers, representing 35% of private sector employees, will be eligible for PAE, which will be administered by a new public body, the National Automatic Enrolment Retirement Savings Authority.
PAE will target those aged between 23 and 60 who earn over €20,000 a year and who are not already part of a pension scheme. While many lower-paid and younger workers may shirk at an enforced cut to take-home pay, the sacrifice is balanced by employer match funding and a state top-up; for every €3 paid in by an employee, employers will contribute €3 and the state a further €1.
This, of course, also means a direct, new cost for employers. A report from Aon in April found over two-thirds of businesses expressing concern about the introduction of PAE, although just over a quarter took issue with the costs involved. More than four in 10 businesses said that they expected adjustments in future pay levels to mitigate the expense, while 30% planned to pass the cost on to consumers.
‘A loophole in the legislation could see large numbers of workers losing out’
A phasing-in process will, the government says, mitigate some of the pain as employers and employees adjust. By 2034, the maximum contribution rate of 6% by employees, 6% by employers and 2% by the state is expected to be implemented.
Ambitious timeline
After the decades-long wait for PAE, news of the legislation received an understandably warm welcome in the pensions industry. However, some have questioned the timeline. Kathy Keating, senior pensions consultant at LCP, says the implications for HR and payroll teams make introduction on 1 January 2025 ‘ambitious given the amount of work required to be completed before it can be launched’.
Jerry Moriarty, CEO of the Irish Association of Pension Funds, has also questioned whether the state’s administrative and investment management hurdles can be cleared in just a few months. ‘It is important that we get auto-enrolment under way as quickly as possible but we also need to be realistic about the prospects of that,’ he says.
Five key questions
Employers planning for auto-enrolment need to consider the following questions:
1. Do you currently have a pension scheme in place? If not, you need to weigh up the benefits of introducing a scheme versus relying on PAE. No employer should just default into an auto-enrolment solution without considering all options.
2. Should you have multiple options for employees? You will need to consider the direct-cost implications. Cohorts of employees might be financially disadvantaged by being in a PAE solution or a group pension arrangement.
3. Do you have employees with variable or seasonal earnings? If you do, there may be complications within your pension scheme in relation to minimum levels of contributions to be PAE compliant.
4. What is your communications plan? You will need to develop an employee communications plan for the upcoming changes in an easy-to-understand way.
5. Will you provide additional benefits? Death benefits are not provided under auto-enrolment. You may need to set up a separate plan to make this and other benefits available.
Source: Lockton Ireland
Concerns have been expressed, too, around possible unintended consequences. The Irish Independent reported the Irish Congress of Trade Unions (ICTU) voicing alarm about a ‘loophole in the legislation’ that ‘could see large numbers of workers losing out’.
This revolves around the approximately one in 20 employees who currently utilise a personal retirement savings account (PRSA). PRSAs do not require employer contributions; the ICTU says that, in the phasing-in period, those with PRSAs will continue to have ‘no employer contributions for seven years, while those enrolled into the auto-enrolment scheme will benefit from seven years of employer contribution’.
‘PAE will help bridge the pensions shortfall among private sector workers’
The cost of the state top-up to the taxpayer – expected to be around €760m annually when fully operational – has also raised eyebrows. However, Humphreys noted in the Dáil that this cost should be be considered in context. She pointed to the existing marginal tax relief on occupational pensions, worth around €1.8bn annually, which mostly benefits the higher paid.
Time to prepare
Alan Smith, benefits consultant at Lockton Ireland, says that while there will be some concerns, the positives far outweigh the negatives in what he says is a long overdue development. ‘Rather than poking holes, it’s time to acknowledge that PAE is coming, and employers need to prepare accordingly,’ he says. ‘PAE will lead to greater pension adequacy, better outcomes at retirement, and help bridge the pensions shortfall among private sector workers.’
Smith highlights a number of considerations for business in preparing for PAE (see box), noting that while the cost of contributions may be the most eye-catching, ‘there are many other key areas that employers will need to consider’. Communications are chief among these, he says. ‘Numerous recent polls and surveys highlight that many people are unaware of what PAE is and how it will impact them. Guidance and advice is hugely important.’
For employers PAE presents plenty of tough questions and hard choices
While the ultimate impact of PAE won’t be felt for a number of years, it is likely to be transformative for many, according to Michael Rooney, EY tax partner. His research concludes that PAE could deliver ‘a pot of close to €890,000 for a 23-year-old worker on the average industrial wage’. While not everyone will auto-enrol at the beginning of their career and inflation will eat into these sums, ‘the calculations are a clear indicator of what the scheme will mean’, he says.
If the positive impact of PAE is indisputable, the experience in the UK also suggests that its introduction alone won’t defuse the pensions time bomb entirely. Speaking to the Financial Times in June, Ian Bell, head of pensions at RSM UK, said of PAE in the UK that while it is often presented ‘as being a success, that depends how you define success’. He says that mandatory contributions need to rise from 8% to 12% for pension pots to be viable, an argument that will undoubtedly have resonance here in the future.
For now, the more pressing questions are around set up and implementation. PAE may be a default experience for employees, but for employers it presents plenty of tough questions and hard choices.
