“Our rapidly ageing population is going to place an intolerable strain on the state pension,” — John Kearney of Provest on auto-enrolment

Thought Leadership | Tue 24 Jan | Author – Business & Finance

John Kearney is Director of Corporate Business Development at financial planning firm and pension consultants, Provest, and says that while auto-enrolment will result in less people depending on the state pension in retirement, there are a number of limitations to the proposed scheme.


Auto-enrolment will have a significant impact on pension savings in Ireland and while the overall effect will be positive, in that it will reduce the number of people solely reliant on the state pension in retirement, there are a number of challenges that people need to be aware of.

The Government gave auto-enrolment the go-ahead during 2022 and it is envisaged the system will become operational with the first enrolment of participants in early 2024.

Auto-enrolment scheme

Under the proposed scheme, employees aged between 23 and 60 and earning over €20,000 who are not already in a workplace pension scheme, will be automatically enrolled in the new auto-enrolment scheme. Workers can then opt-out after six months but there will be a mechanism in place that enables them to be enrolled once again after two years.   

Contributions will start at 1.5% of gross income, being increased on a phased basis over a ten-year period to 6%. For every €1 saved by the employee, the employer matches this with a €1 contribution, subject to an upper limit on salary of €80,000. The State will also make a contribution at a rate of €1 for every €3 saved by the employee which is equivalent to 25% tax relief.

The objective of the auto-enrolment scheme is to ensure that every worker will have access to a workplace pension to supplement or complement the state pension.  It is estimated that the scheme will benefit 750,000 workers save for retirement to ensure they are better prepared for life after work.

This is most welcome as it will significantly increase the number saving for retirement and will result in people not being solely reliant on the State pension in retirement.

Our rapidly ageing population is going to place an intolerable strain on the state pension.  While there are currently between four and five people working in proportion to the number of pensioners, this figure is expected to fall to two working people to every pensioner in 2050.

Limitations

However, there are limitations that need to be considered with the proposed scheme.  There is a lack of flexibility to increase payments or make lump-sum contributions to cover any periods of unpaid leave or career gaps.

This could result in worse retirement outcomes, particularly for women, and potentially widen the existing gender pension gap further.

John Kearney, Director of Corporate Business Development, Provest

Auto-enrolment will be tax inefficient for higher paid taxpayers. Higher rate taxpayers currently get tax relief on their contributions to an occupational pension scheme at 40% and the equivalent relief they would get on contributions to the auto-enrolment pension scheme will be less than that.

Higher earners are therefore likely to find it more beneficial to join their employer’s workplace pension scheme rather than the auto-enrolment scheme.

As auto-enrolment may result in a dual pension scheme, this may create confusion and unnecessary complexities resulting in increased employee benefit costs. Employers should consider whether it would simply be easier to auto-enrol all of their employees into their existing occupational pension scheme to avoid the complication of administering two pension schemes in 2024.

Under the proposed scheme, employees will have the choice to invest contributions in one of four funds with contributions being invested in a default option if an employee does not express a preference.

Moving forward

A more extensive range of funds will be available to employees under an occupational pension scheme subject to prudential rules on what is suitable for pension scheme investments.

Additionally, the auto-enrolment scheme is inflexible in terms of access to retirement savings as they can only be taken in line with the State Pension Age and this does not make any allowance for early retirement which may not suit employees or employers.

For most employees, unless more choice is given on contributions, the retirement age and fund choice, it will not be an attractive proposition, relative to existing Defined Contribution occupational pension schemes.

All employers should consider the proposed auto-enrolment scheme in the context of any current discussions relating to salary planning and pension plan redesign.

Ireland is the only country within the OECD without a mandatory or quasi-mandatory retirement savings scheme.  Auto-enrolment has proved successful in other countries such as Australia and New Zealand.

When the UK introduced auto-enrolment in 2012, pension coverage was below 50% including public sector workers.  It now stands at approximately 80%.  According to the Central Statistics Office just 56% of employees in Ireland have an active pension with that dropping to 35% in the private sector.

In summary, the introduction of the auto-enrolment retirement scheme in 2024 is a positive development, will significantly increase the number saving for retirement and will result in people not being solely reliant on the state pension in retirement.

However, there are limitations that need to be considered by both employers and employees and further details are expected from the Department of Social Protection to assist in this regard.


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