Employers, Be Prepared as Pension Auto Enrolment is Coming!
At the National Pensions Summit last February, Minister for Social Protection Heather Humphreys outlined the planned introduction of pension auto enrolment to be effective from 01st January 2025 and we now outline some key takeaways of Auto enrolment.
Currently, only about 35% of the private sector workforce actively contribute to a supplementary pension scheme, and the government aims to raise this to 70% and beyond to reduce the over reliance on the State Contributory pension for a large cohort of employees in retirement. The Automatic Enrolment Retirement Saving System Bill will provide for an auto enrolment pension system to be established “where employees, subject to certain parameters, are auto-enrolled into a quality-assured retirement savings system, with freedom to opt-out. Its purpose is to increase supplementary pension coverage.” Many employers are rightly concerned about the introduction of the auto enrolment pension system since its introduction largely coincides with high inflation, increases in the minimum wage and the introduction of statutory sick pay.
- Eligibility Criteria: The Scheme is open to all employees aged between 23 and 60, who earn over €20,000 per year, and who are not already enrolled in an existing occupational pension scheme. Drawdown of the benefits under the Scheme will be at the State Pension age, currently age 66.
- Mandatory Participation Period / Employee Opt-out Options: Once enrolled, an employee must remain on the Scheme for a minimum period of six months after their enrolment until the opt-out window opens in months seven and eight. Opt-out arrangements are only available during the first ten years of AE while the contribution rates are being phased in. The option will no longer apply once the final contribution rate of 6% is reached.
- Contribution Levels: The Minister explained that auto enrolment will be introduced on a phased basis, and while the proposed design of the scheme is still subject to specific draft legislation, involves matching contributions from both employers and employees. In the first year, a total contribution of 3.5% of an employee's salary is proposed, with a 1.5% contribution each from the employer and employee, and an additional 0.5% state contribution.
The contribution rates will increase from the 10th year to 6% from both employers and employees and an additional 2% from the State capping the total contributions at 14%.
The Eolas Money View:
There are a number of key differences between the proposed auto enrolment scheme and a traditional occupational pension scheme. Notably, under auto enrolment, the state contribution serves as a 33% uplift of the employee contribution in lieu of income tax relief which will benefit employees who pay tax at the standard rate of 20%. However, employees on the higher rate of tax (40%) will end up with a significant loss of tax relief under enrolment when compared to an occupational pension scheme.
In addition to the difference in tax relief, we see a number of limitations;
- The proposed investment structure will involve a very limited listing of investment funds and little (to no) advice provided to employees by financial planner such as Eolas Money.
- When establishing your own scheme, an employer has the ability to choose the pension provider, has the advantage of your pension scheme advisors, Eolas Money in this case, providing regular employee clinics, managing retirement claims and assisting company HR/payroll staff etc. with the ongoing management of the scheme.
- Proposed auto enrolment restricts early access to employees until normal retirement age, 65 or 66. However, in an occupational pension scheme, members can access their pension upon leaving service as early as age 50.
Eolas Money’s Advice:
This is an exciting but challenging time for pension providers, investment managers, employers and employees. While the planned introduction of an auto enrolment system later this year is welcome in principle, it is expected that employers will face a range of practical difficulties in dealing with auto enrolment. Therefore, it is critical for business owners to get advice on their options regarding establishing their own occupational pension scheme ahead of auto enrolment and defining the costs of such a scheme.
By establishing your own scheme (or amending your current scheme) in compliance with the government proposal, will avoid the need for you and your employees to invest the mandated arrangement of auto enrolment.
For employers, the ability to customize the pension offerings, enhance employee engagement, and demonstrate a commitment to employee well-being remains crucial, especially considering the specific contribution requirements and limitations of auto enrolment. Employers who proactively establish their own pension scheme may find advantages in terms of administration, investment choice, cost management, compliance, and attracting and retaining top talent.
As Financial Planners to many business owners and their employees, Eolas Money are happy to discuss the above and help business owners understand how pending auto enrolment will affect their business. Please contact Jim Stapleton at jim@eolasmoney.iejim@eolasmoney.ie or 087 2924131 to discuss your options.
