The long-awaited national auto-enrolment pension scheme looks as if it will finally get up and running in September 2025. This is not the first start date given for the scheme which was first proposed more than 20 years ago so a degree of residual scepticism is understandable.
The scheme is aimed at addressing the persistently low rate of supplementary pensions coverage among private sector workers. At present, about 800,000 employees, more than 40 per cent of the private sector workforce have no retirement income provision beyond the State pension.
As the name suggests, the scheme works by automatically enrolling employees in a centralised State run pension scheme with periodic opportunities to opt out. “The legislation provides for a pension scheme for eligible employees who currently do not have one, provided they earn more than €20,000 per year and fall between the ages of 23 and 60,” says Forvis Mazars Financial Advisory partner Hilary Larkin. “Under this legislation, all employees not already enrolled in an occupational pension scheme or equivalent will be automatically enrolled. It is estimated that this scheme will apply to almost 800,000 workers and drawdown will be aligned to the State pension.”
The scheme will be co-funded by employers and the state, she says. “Employee contributions will be matched by their employers, with an additional top-up from the State,” Larkin continues. “So, if an employee were to pay €3 into their pension pot, their employer must match their contribution and put in €3. At the same time, the State provides a €1 top-up, resulting in a total contribution of €7 for every €3 contributed by the employee. The state top-up contribution to the pension is designed to compensate for the lack of tax relief on employee contributions. Employer and employee contributions will start at 1.5 per cent of gross salary and gradually increase to the maximum contribution rate of 6 per cent from year 10 onwards.”
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The scheme is what is known as soft mandatory. “Membership will be compulsory for the first six months, after which members can choose to opt-out,” says Shane O’Farrell, director of Workplace Markets at Irish Life Employer Solutions. “Those who do opt-out will be automatically re-enrolled after two years.”
That process will repeat every two years in the hope that employees will eventually choose to remain in membership.
So far, so good. It appears simple and straightforward on the surface at least but that is not necessarily the case, particularly for employers who already offer an occupational scheme. “The existing occupational pension system works extremely well,” says Mercer director James Campbell. “Lots of employers have invested time, energy and money into making their pension plan a key part of their benefit offer. Now auto-enrolment comes along and complicates it.”
Dealing with two systems will present challenges for employers, Campbell continues. He explains that the auto-enrolment legislation says that when an employee is already saving into a pension, they are exempt from being enrolled in the new centralised system.
“The key priority for employers will be to identify who is and who is not covered by their own scheme,” he says. “If the employer offers a voluntary plan. People may have opted not to join it for very good reasons. The employer should now go to those employees and say that a mandatory scheme is coming, and they should join the company plan. Our experience is that employers with occupational schemes don’t want anything to do with the auto-enrolment scheme if they can avoid it. Employee engagement will be the biggest challenge and issue for them.”
Employers have good reason to wish to steer clear of the new scheme, says O’Farrell. “There are a lot of reasons that most organisations we are working with are looking to modify their existing workplace plan and avoid running both schemes in tandem,” he says. “Firstly, there is far more choice and flexibility within existing workplace plans when it comes to contributions, fund choice, retirement age and early retirement options compared to the auto-enrolment scheme. The tax relief incentive and lower cost today is also better for most people than the auto-enrolment bonus approach, especially higher earners.”
Added to that, running two plans at once presents a number of challenges, he says. “Firstly, ensuring that all employees have a consistent experience across things like the digital offering, member guidance provided, investment options and financial wellness supports will be very tricky. Particularly given the extensive supports provided in master trusts and existing workplace plans and the lack of information we have around what will be provided in these areas under the AE model.”
There are communications challenges too. “Identifying who belongs to which plan will be difficult for most organisations,” O’Farrell says. “Yet, they will need to be able to identity and separate the two groups to communicate different messages effectively to each audience, particularly when both plans are so different. If a company is not offering both options to everyone, they will need to manage that position carefully. The existing workplace plan will likely be the better option, so if everyone is not being offered both, those in the AE plan may feel overlooked or undervalued.”
Campbell points to some other issues. “The auto-enrolment scheme is very rigid and is not flexible. Members have no say in how it’s designed. There is also the difference in tax treatment which makes higher earners are worse off. In practical terms, running two schemes in parallel will require two different payroll systems. It will also involve additional reporting obligations. Employers will face the prospect of additional costs as well as compliance risk. That doesn’t mean the centralised system is not a suitable solution for many employers with lower paid or transitory employees.”
Despite those reservations, Campbell does welcome the new scheme. “It has been a long time in gestation and employers are pretty familiar with its design principles. At least we have a start date, and we can prepare for that. But employers would benefit if more details about how the mechanics of the scheme will work in practice were available. The overall objective of the scheme is to increase supplementary pension savings and it’s absolutely the right thing to do. The way it’s being rolled out could be better. It could have been better integrated with the existing system, but we are where we are. We should now make sure we get it in place by September 2025.”