The Overview of The Intended Scheme
Last Tuesday, 29th March 2022, the Minister for Social Protection, Heather Humphreys, announced the unveiling of the first pension auto-enrolment scheme in Ireland with a target roll out date of Q1 2024.
It is estimated that this scheme will cost the State almost €3 billion in the first decade of its operation. Contributions to the scheme will be made by the individual workers, their employers and the State on an increasingly graduated basis over the first 10 years starting from 3.5% in total in year 1 rising to 14% in total by year 10.
It is also intended that any employee who joins the new auto-enrolment arrangement will be able to continually maintain their personal holding should they change employers over their lifetime career. This means that the only changes that will occur is the name of the employer who will deduct ongoing employee contributions as well as a different ongoing employers contributing. The core pre-existing investment holdings before a job move will remain unchanged.
Employees who are existing members of an occupational pension scheme sponsored by their employer will not be automatically enrolled for the employment to which that pension relates. If, however, such pension schemes are not used by other employees then it would appear that the employer may have to operate an auto-enrolment scheme in parallel to its existing schemes as well.
What Is The Intention of The Scheme And How Will It Be Run?
The target employee group is set to be circa 750,000 private sector workers, over the age of 23 and under the age of 60 who earn more than €20,000 p.a. It is intended that this group will be automatically enrolled into such a pension scheme on the first day of their employment if they had not already signed up to an existing occupational pension scheme. Those that are younger than 23 can opt in if they so wish. For those that continue to work beyond the targeted State Retirement Age of 66 the State will not contribute to the scheme. Employers will only have to match contributions by the employees up to a maximum earnings base of €80,000 p.a.
The scheme has three main elements:
- The creation of a “Central Processing Authority” that manages:
- The collection of pension contributions,
- The oversight of the investment of these contributions
- The distribution of the final pension fund to the future pensioners
- The appointment of four “Registered Providers”. Put simply these will be four fund management institutions that will have to undergo a tendering process to be included and once included no other fund management companies will be allowed to participate in the scheme until, most likely, a review process of their performance takes place at some stage in the future.
- The agreement on the design of the intended investment funds for which these fund management groups will use, namely:
- A Conservative Fund consisting of mainly (most likely short term) Government Bonds, Cash or Cash Equivalents
- A Moderate Risk Fund consisting of (most likely longer term) Government Bonds, high quality company shares and equity indices.
- A Higher risk fund consisting of broader equity exposure and property
- A Default fund which will operate on a Lifestyle/Lifecycle basis
It is likely that the “Central Processing Authority” (CPA) will be overseen by the Department of Social Protection, albeit at arm’s length through separate management arrangements. They will effectively be entrusted with the transfer of funds to the “Registered Providers” which the CPA itself will have to monitor in terms of fund performance and charges on the assigned monies.
Each member of the auto-enrolment scheme will have the above 4 styles of funds to choose from, irrespective of the fund manager. Once the style is chosen the money will be split evenly among the four fund managers so that an average investment return will be achieved and then spread back to each member that selects that particular approach. The rationale for such an approach is to ensure that a consistent investment return is achieved for each member of the overall scheme for each scheme member and that no individual member is compromised by the random selection of an individual fund manager. Where employees do not exercise choice as to the fund type (1 of 4) they will be invested automatically into the Default Fund i.e. the Lifestyle/Life Cycle basis fund.
Employees will be free to opt out of the system at the end of a minimum membership period (during the 7th and the 8th month of membership) and on each occasion during the first ten-year period that contribution rates increase. In any event, employees will also be free to suspend making contributions at anytime. There will, however, not be a refund of any contributions up to the date of opt-out. Instead, their contributions will stay in their pension pot, as will all the employer and State contributions up to the date of the date of opt-out.
Where an employee opts out, they will be automatically re-enrolled after two years, after which they may opt out should they so wish. Where such opt outs or suspension occur their employer’s contribution and the State’s contribution will also stop until such time as they re-enrol.
Employees who are involved in the scheme will not have any direct contact or relationship with the Registered Providers (fund managers) – the CPA will be the single customer for the Registered Providers.
Unlike other occupational pension scheme, employers will not need to establish a scheme, procure a pensions provider or pensions administrator or, if they have an existing trust arrangement, select an investment option for the contributions.
Employers will, however, need to ensure that their payroll processes are able to take instructions for enrolment as well as enabling the calculation and remittance of both employer and employee contributions to the CPA. Where an employer fails to implement a payroll instruction for enrolment, and/or deduct and remit contributions as required, they will be subject to an administrative penalty initially and to prosecution as a criminal offence if sustained.
How Much Will This Cost Employers?
Where an employer has an existing scheme that is subscribed to by all of its staff, and would continue to be so subscribed, then there will be no additional charges.
Where the employer operates different level of remuneration and benefits for different levels of staff then the costs in cashflow terms for those employees not involved in a pension scheme will be a further 1.5% p.a. of those employee remuneration in years 1 to 3 following the commencement of the national scheme. In years 4 to 6 the employer costs will increase to 3% p.a., years 7 to 9 will grow to 4.5% p.a. and from year 10 onwards the employer contribution will be 6% p.a. So ,in total, the first 3 years’ contributions will be 3.5% p.a. from the employer, employee and the State. This rises to 7% for years 4 to 6, 10.5% for years 7 to 9 and 14% thereafter.
As advised above, employers will only have to match contributions by the employees up to a maximum earnings base of €80,000 p.a. This means that the 1.5%, 3%, 4.5% and 6% contributions over time will cap out at an earnings base of €80,000 but employees can add more to the fund if they wish to do so. However, employers will not be legally required to match contributions exceeding 6% over earnings of this amount.
Importantly, there does not appear to be a definition of earnings. Is it possible that this might include Benefit In Kind payments such as use of a car and or any medical insurance premium paid for by the employer? These are not normally deemed “pensionable earnings” until current pension legislation so it is unlikely that they will be so treated under this specific scheme.
Employer contributions will, as is the case currently, be deductible for corporation tax purposes.
The introduction of the auto-enrolment scheme will be complementary to and supplementary to the existing State pension entitlement. In essence, it is a second pension pot which will run parallel to the State scheme and will not replace it. It effectively forces employers to make a contribution to their employees’ future pension fund either directly through this new scheme or allowing them to join existing pension scheme arrangements.
What About Existing Pension Schemes?
Where an employer has an existing pension scheme in situ for ALL employees and contributions for ALL of these employees exceed 1.5% by employer and 1.5% by the employee then, it appears, that there will not be any impact going forward. Similarly in 4, 7 and 10 years’ time if the contribution levels are at those levels at that time, then no requirements on change will occur. We use the phrase “it appears” as we will not know for sure until the legislation is drafted and signed off in Leinster House.
This being said, if the contribution levels are at the minimum requirement level then a case might be made to use the new auto-enrolment scheme in order to pick up the additional 0.5% to 2% State contribution.
In the broader context going forward it will push employers to review their overall remuneration levels for their whole workforce. This might mean a decision as to whether they should raise existing contribution levels by both employer and employees so that all employees will take part in the existing scheme. Or will the employer maintain a high contribution level scheme for senior employees and then have a “Standard” offering for all other employees using the State Auto-enrolment scheme?
Bearing in mind the fact that it will take 10 years for the scheme to progress to full contribution levels the actual time pressure will allow each business remuneration models to be modified. The issue around what will be pensionable for the auto-enrolment scheme as well as the age range and salary range calculations will quite possibly have a bearing on the costings.
Even if the 14% contribution level was implemented immediately, in reality this is still a low level of contribution. Based on a 5% p.a. investment return and starting a pension at age 23 retiring at age 66 funding for a pension of 2/3rds final salary the annual combined contribution level required will be closer to 30% of earnings. For a 50 year old targeting age 66 with no previous pension funding this will be closer to 109% of earnings.
In its explanatory documents accompanying the launch there is reference to a pension pot of €583,000 per person in 43 years’ time. While this is laudable one should bear in mind the European Central Bank’s inflation target of 2% p.a. One the assumption that such inflation rate might prevail then the value of €583,000 would produce the equivalent of a current value pension fund of circa €249,000. Based on current average mortality rates this fund would have to provide an income for a further 20 years at least.
Under the new scheme there will not be an earlier draw-down option from the State pension age. As such those who might want to retire earlier the use of current pension products, irrespective of funding levels may be the best option.
Similarly, contributions from the State will stop after the State pension age, targeted at age 66, under the proposed arrangements. Considering that many including business might still want to work after age 66 means that they will still have to fund their own pensions anyway.
In addition, because of the drive for simplicity there are only 4 investment options open to employees participating in the new arrangements. In our experience those arranging pensions and, indeed, ongoing investments always need personal guidance on the right approach to investment risk and timing. No advice will be given to anyone who signs up to this scheme. It is merely a State assisted savings vehicle with exposure to risk assets but employees will be left to their own devices, so to speak, in whether they make the best long term decisions for the management of this pension pot.
What Will Be The Actual Timeline Of Rollout?
The intended timeline has been specified in the launch document as follows:
The target for the auto-enrolment scheme is to accept its first contributions within the next 24 months and one might be forgiven for thinking that everything will run according to plan. As with all projects of a national scale we would feel that despite the best intentions of all it will not be an easy project to manage.
Of most importance in terms of launch is the actual design of the software that will manage every aspect of the scheme. This is not a simple job to be completed in a two year period considering the scale of the tasks at hand and the complexity of actual administration behind the scenes despite the fanfare of the simplicity that is being promoted to the public.
Accounting, payroll management and investment management are, in theory, simple issues but in practice over an intended market of at least 750,000 employees and all their employers as well as the monitoring of employees’ rights will generate a multi layered, multi-faceted system that will take a number of years to design, beta test, launch and tweak. Ask any investment management company that is trying to launch new products or rescale its business operations. One thing that will be certain is that it will generate a lot of consultancy work for the private firms that specialise in business systems and software development.
According to a report in yesterday’s Irish Independent, “the Government has privately conceded that the new auto-enrolment pension scheme is needed for the increasing number of older people who will still be renting when they retire”. This, in itself, is a considerable political football that will be seized upon by opposition parties and may make the passage of any legislation though Leinster House a difficult proposition or indeed force other refinements of the intended scheme. Noticeably, at this stage, there has been relatively little comment from all political parties but this may be the calm before the storm, so to speak.
The political element is relevant as the whole scheme is dependent on specific legislation being drafted which will then be needed to be voted through the Dail and Seanad. The project timetable allows for up to 9 months for the legislation to be discussed and passed through the Dail. While the Department of Social Protection will be the effective management overseer for the State and it will use the current eTenders procurement website, the reality is that there are a lot of moving parts which are more likely to take 3 years to manage through to public launch so, in our opinion, 2025 is more likely to be the more realistic launch date.
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