What Is Auto-Enrolment?
The government has announced details of a new auto-enrolment pensions savings scheme which comes into effect in September 2024. It’s designed to encourage workers to save for their retirement and make it more straightforward for businesses to offer a workplace pension option.
Currently, only around 35% of employees in the private sector have a supplementary retirement saving scheme.
This article will advise small and medium-sized employers and HR and payroll teams on what auto-enrolment will mean for them and their employees, how auto-enrolment will work, when it will begin and how it will be phased in.
An estimated 750,000 employees (not including the self-employed) earning more than €20,000 per annum and aged between 23 and 60 and who are not already enrolled in an occupational pension scheme, will be automatically enrolled in the new system.
The accumulated funds plus investment returns will be paid to participants upon their retirement in addition to the State pension, and the drawdown will be linked to the State pension age, which is currently 66.
Key elements of auto-enrolment:
- All employees will be automatically enrolled into the system if they are:
– Not already contributing to an occupational pension scheme
– Aged between 23 and 60
– Earning over €20,000 p.a.
- They will be permitted to opt-out both before being automatically enrolled and also at certain times after joining.
- Non-eligible employees can also opt-in if they wish
- Employers must match the contribution rate paid by employees up to a maximum earnings threshold of €80,000 p.a.
- The State will pay a top-up of 33% of the employee contribution.
- Contributions will be introduced on a phased basis as follows:
Employer/employee contributions
Initial contributions will be 1.5% of gross income. This amount will be increased on a phased basis over 10 years with 1.5% added every 3 years until a total of 6% is reached.
As an employer, you’ll match your employees’ contributions and the pension will also be topped up by the State at 33%, with employer and State contributions capped at €80,000 of earnings.
Here’s how contributions will be raised over the 10 years:
Employee:
Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%
Employer:
Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%
State:
Years 1 to 3: 0.5%
Years 4 to 6: 1%
Years 7 to 9: 1.5%
Years 10+: 6%
For each €1 saved by an employee, €2.33 would be credited to their pension savings account comprising their €1 personal contribution, plus €1 from their employer, plus €0.33 from the State.
So for every €3 an employee contributes, they will receive a further €4 into their pension pot.
The added incentives are aimed at encouraging workers to remain in the scheme by reducing their costs of saving for retirement.
Detailed examples of projected earnings for different life and work situations can be found in the Department of Social Protection document, The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System.
Opting in/out option
All eligible employees will be automatically enrolled in the scheme.
However, participation is optional and operates on an opt-out basis.
Employees who have been automatically enrolled can choose to opt out or suspend their participation after six months.
Those who opt out will be auto-enrolled after two years have elapsed and they can opt out again after another six months.
If an employee opts out, they’ll receive a refund of their (employee) contributions, but employer and state contributions will remain in their pot.
Members will be able to pause their contributions after 6 months of saving, suspending their contributions for a maximum of two years.
They won’t receive a refund on what they’ve saved so far and can restart their saving at any time before the auto-enrolemnt
Moving jobs
The scheme will be set up on a ‘pot follows the member’ basis, so an employee’s pension is not linked to their employment but follows them as they move jobs.
This means workers will not have to join a new scheme each time they change employer and those with more than one employment will have their pension savings combined into one pot.
Participants of the new scheme will be able to access their accounts via an online portal run by the CPA.
They can view account balances, contributions and investment returns and update information or suspend their payments.
