The government is planning for a roll-out of compulsory employee pensions in 2024. Emily Styles discusses the employer options with some pensions experts.
Pension auto-enrolment had been mulled by officials and politicians since 2006, but economic events always seemed to get the in the way. Now Heather Humphreys is the latest to minister to take up the challenge, and she has managed to progress AE to pre-legislative scrutiny.
"After decades of talking about Auto Enrolment in this country, I am pleased to say the AE train is now leaving the station ahead of its introduction in early 2024,” she declared recently.
Though the minister’s intentions are sincere, pension industry insiders are sceptical about the timeline for AE introduction. Design of the AE system will be complicated, not least because officials in the Department of Social Protection have decided on a standalone Central Processing Agency to oversee AE pensions.
Under the Humphreys proposals, when introduced AE will require workers to pay into a voluntary workplace pension scheme, co-funded by their employer and the state. All employees who are not already in an occupational pension scheme and who are aged between 23 and 60 and earning over €20,000 across all of their employments will be automatically enrolled.
Employees will have their savings matched on a one-for-one basis by their employers, and the state will also provide a top-up of €1 for every €3 saved. Employer and employee contributions will start at 1.5% in 2024, increasing by 1.5 percentage points every three years until reaching 6.0% in 2034.
Matching contributions will be made up to a maximum of €80,000 of earnings. Individuals will be permitted to opt-out of the scheme after six months, but they will be re-enrolled after two years.
The Irish Association of Pension Funds (IAPF) views the timeframe for AE introduction as challenging, and the organisation has issues with some of the design fundamentals too. As outlined by Humphreys, AE will only apply workers aged 23 and over.
People in this age cohort who have been in the workforce for some time would see an AE reduction in their salary. If they were enrolled on starting employment, their initial take-home pay will determine their spending habits, the IAPF argues.
Under the AE proposal outlined to date, the employee contribution will be on gross earnings and will therefore be a higher deduction from take-home pay than for someone with a contribution in an occupational scheme receiving tax-relief.
The IAPF contends that it is essential that the recommendations on prescribed standards and contribution levels for pension schemes outside AE are considered as soon as possible. There may be considerable changes required to existing schemes, and it will be difficult to establish equivalence in contributions when there is a different form of state incentive.
The immediate civil service challenge is to establish the Central Processing Agency. Its costs will be covered by an annual levy on AE pensions, currently mooted at 0.5%, though the IAPF believes that charge rate will be insufficient.
Richard Hales at Aviva Life & Pensions notes that there are alternatives to AE which allow for a contribution from the employee, the employer and the state.
“Consideration should be given to an occupational pension or a PRSA which may offer greater benefits,” he advises. “Aside from alternative arrangements, employers should consider the impact on payroll and engage with their payroll providers in advance. Employers should also discuss all options with affected employees.”
At Bank of Ireland, Bobby McDonnell says employers should undertake an audit of their current arrangements. “Some firms can have a range of pension arrangements and PRSA schemes. A good starting point is to establish which employees are members of schemes and what contributions are being made,” he says.
“Companies should put together a schedule of active and deferred scheme members as well as recording those who have been offered the opportunity to join and have declined. This should indicate which employees are already receiving benefits that comply with the proposed AE scheme.
"Once you have a good sense of your current status, you need to consider what benefits packages you want to provide and overlay what you will be required to provide under the proposed AE regime.”
McDonnell adds: “Some businesses are not waiting for the AE introduction and are starting already, with a view to gradually building up to a workable contribution package over time. AE needs to form part of budgets and cashflow forecasts for 2024, and it would be worthwhile to benchmark against what is provided by similar companies, particularly competitors.”
Stephen O’Hanlon at Irish Life advises that once the final AE details are known, a strong consideration for employers with existing occupational schemes will be which cohorts of their employees would benefit from AE, and which would benefit from their current occupational scheme.
“For example, higher paid workers will be better off in an occupational scheme, whereas AE will benefit lower paid employees, though the contribution rates are very low,” says O’Hanlon. “Any employer who operates an occupational scheme and who also participates in AE will therefore be likely to have employees with two different types of tax treatment.
“The burden on the employer from a HR perspective will be significant. For employers this ‘twin track’ taxation has real complexity and the potential for increased employee benefit costs. A key question therefore is whether it would simply be easier to auto-enrol their employees into the company’s existing occupational plan.”
The proposed AE scheme may also worsen the existing pensions gender gap. The lack of flexibility under AE to increase payments or make lump sum contributions to cover periods of unpaid leave or career gaps could mean worse retirement outcomes for women.
O’Hanlon explains: “For example, the AE proposal lacks clarity on what occurs with pension contributions during maternity leave. On the other hand, auto-enrolment into their existing occupational pension scheme would allow for flexibility on additional contributions and lump sums, and for setting salary entry points at much lower thresholds, avoiding excluding those who earn under €20,000.”
Colm Power says that NFP is advising corporate clients to roll out their own auto-enrolment plan.
“They are anxious to stay ahead of the curve to avoid government intervention,” says Power. “Our experience when working with clients that have introduced auto-enrolment in their company pension plans is that the number of members that opt-out is extremely low.”
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