Guest Article: ‘Automatic Enrolment’ retirement savings – a good idea?

Guest Feature | Thu 11 Oct | Author – Business & Finance

A good start, but successful pension reform remains to be seen, reports Wendy Doyle, Tully Rinckey

It has been recently reported that just 47% of all employees and 35% of private sector employees have a supplementary pension in Ireland. In light of this, Strawman proposals for an “Automatic Enrolment” Retirement Savings Scheme set to launch here in 2022, have been released for public consultation by the Government. Incredibly, Ireland is only one of two OECD countries without mandatory earnings related element to retirement savings.

It has been proposed that automatic enrolment will supplement the existing State pension and complement existing private pension provisions, will entail a defined contribution model with personal accounts and enrolled employees may retain the freedom to opt out if they choose. In essence employees, employers and the State will make contributions to the members’ accounts.

The current Strawman proposals are:

  • All employees earning over €20,000 and between the ages of 23 and 60 who don’t have a pension arrangement will be automatically enrolled into a Defined Contribution scheme.
  • Employees will have the option to opt out if they wish.
  • Employees earning less than €20,000 or outside the age group stipulated and those who are self-employed will have the option to opt in if they wish. If they opt in, their employer (where applicable) and the state would be required to make contributions as well.
  • Initially it is proposed that employees will make contributions of 1% of earnings. This would auto escalate by one percentage point each year until year six when the contribution rate will be fixed at 6%.
  • For the first time, there will be a mandatory employer contribution to the employees account. Employers will be required to make contributions matching those of their employees with the same increments in the same timeframe subject to a maximum of €75,000 of earnings. Such employer contributions will be tax-deductible.
  • For the purposes of the Strawman proposals, the State incentive is presented as a contribution worth €1 for every €3 the employee contributes towards their retirement savings account. When the employee contribution ultimately rises to 6%, the State contribution will rise to 2%. It is aimed at people on lower- to middle-income brackets where the current tax relief arrangements may be less favourable than for higher earners.
  • The system would be overseen by a Central Processing Agency (“CPA”) which will be statutorily independent.
  • Employers will be required to register their employees within the CPA, deduct the contribution through payroll and hand it over to the CPA.
  • It is proposed that a tender will be run to select a maximum of four Registered Providers who will provide three different savings fund options based on risk (low, medium, high risk). The CPA would then re-tender for Registered Providers every five to 10 years. It is also proposed that an open market approach could be adopted where those in the broader retail market could apply to the CPA to be registered as an Automatic Enrolment provider as long as their products complied with the specified standards.
  • The CPA would allow employees to choose the Registered Provider or retirement savings fund and for those who don’t register a choice, a default fund option provided by one of the Providers will be selected on a “carousel” basis.
  • It is proposed that the Strawman will facilitate limited “Savings Suspension Periods” and employer/State contributions would also be suspended during this time.
  • At the payout phase, retirement income will be based on the customer choice of the standard drawdown options such as lump-sum, annuities, Approved Retirement Funds, etc.

Whilst the proposals go some way towards helping employees to supplement their state pension, if eligible, on retirement, a number of concerns have been expressed to date including why those over 60 have been excluded when statistics show people are living longer and working longer. In addition, what protections are in place for employees if an employer tries to force them to opt out? To date, an employer has only been required to provide an employee with access to a Personal Retirement Savings Account (“PRSA”) only and therefore an employer could now face increased challenges as a result of the proposed scheme.

Interest groups and stakeholders should submit views and concerns before 4th November 2018 to the Department of Employment Affairs and Social Protection. It remains to be seen whether the new proposals will go some way to delivering on the Government’s roadmap and indeed commitment to pension reform 2018-2023.

Wendy Doyle is a Partner in Tully Rinckey’s Dublin Employment, Litigation and Intellectual Property and Data Protection practices. She brings extensive experience from practising in large organisations, such as PricewaterhouseCoopers, its associated law firm Landwell Solicitors, William Fry Solicitors and Deloitte.