Ireland is the only OECD country that doesn’t yet operate an Auto Enrolment or similar system as a means of promoting pension savings. The new system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension.
Under Auto Enrolment employees will have access to a workplace pension savings scheme which is co-funded by their employer and the State. A key feature of the system is that although participation is voluntary, so that people don’t have to participate, it operates on an ‘opt-out’ rather than an ‘opt-in’ basis.
In order to encourage workers to participate, those people who choose to remain in the system will have their pension savings matched on a one-for-one basis by the employer. The State will also provide a top-up of €1 for every €3 saved by the worker. This means that for every €3 saved by the employee, a further €4 will be invested by the employer and the State combined.
Commenting at the announcement of the final design, Minister Humphreys said:
“We all know that people are living longer. While this is very positive, we also want people to be able to enjoy their retirement years with some financial security.
“However, for many people retirement seems a long way away and they think they have a lot of time before they need to think about a pension.
“Some people may be of the view that the process of putting aside a little each week to provide for their retirement years is something to be considered next year, or maybe even the year after next.
“However, that is not the case. If people want to retain a reasonable standard of living in retirement, they need to start saving as soon as possible.
“This major reform in the Irish pensions landscape is intended not just to get people saving earlier but to support them in that saving process by simplifying the pension choices and importantly by providing for significant employer and State contributions as well.
“What we are doing today is putting in place a system whereby people can save for their retirement.”
According to figures from the Central Statistics Office, the rate of supplementary pension coverage is around 56% of the working population. This is based on the Pension Coverage Survey 2021. It is estimated that this figure may be as low as 35% when the private sector is considered in isolation. As a consequence of this low supplementary pension coverage rate, many retirees could suffer an unwanted reduction in living standards when they retire.
The aim of Automatic Enrolment is to address this pension coverage gap. It will apply to all employees who meet certain age and earnings criteria and who do not already have an occupational pension plan. Employees will make contributions from their salary, which their employer will be required to match while the State will make a top-up contribution.
Minister Humphreys continued:
“Automatic Enrolment has been part of the national conversation on pensions for some 25 years or more.
“In 2014, the OECD identified Auto Enrolment as a key pensions reform to be implemented. In 2017 87% of the members of the Citizen’s Assembly recommended that the government should introduce a form of mandatory pension scheme to supplement the State pension.
“The government listened and in 2018 we published a ‘strawman’ model for consultation. Based on the responses received there is a clear consensus, that an Automatic Enrolment system is needed.
“In addition, we engaged with national and international experts to learn about best practice, and this is reflected in the final design.
“There has also been considerable engagement with industry bodies, employer and employee representatives, advocacy groups, as well as members of the public.
“The design principles agreed by Government today, which will now form the basis for drafting the necessary legislation and putting the necessary operations in place, reflect the feedback received.”
The Minister added:
“During the consultation process we received feedback that we should simplify the pensions savings choice proposed in the strawman, under which savers would be asked to choose from 12 different funds, and instead to provide for a pooled approach to savings and returns.
“We also received feedback that it would take time for workers and employers to adjust to the new system and that the phasing-in period for making contributions should be extended.
“We have responded to this feedback.
“Under the final design savers can choose from one of four types of fund; all contributions to that fund and all returns from that fund will be pooled. This means that although we will allocate contributions across different investment managers each person who chooses a particular fund type will receive the same return as every other person opting for the same fund-type.
“We have also changed the phasing-in period so that rather than increasing by 1% every year, contributions will increase by 1.5% every three years to ultimately reach the maximum level of 6% at year 10.
“These changes have improved the design and will make it easier for both employers and employees to understand and to participate in the system.”
Details of the design of the Automatic Enrolment Retirement Savings System are being published today at www.gov.ie/AutoEnrolment.
Key features include the following.
all employees not already in an occupational pension scheme, aged between 23 and 60 and earning over €20,000 across all of their employments, will be automatically enrolled
with the system set up by 2023 for employee enrolments in 2024, the introduction of Auto Enrolment will be very gradually phased in over a decade, with both employer and employee contributions starting at 1.5%, and increasing every three years by 1.5% until they eventually reach 6% by Year 10 (2034). This steady phasing allows time for both employers and employees to adjust to the new system
matching contributions will be made by employers to those contributions made by employees up to a maximum of €80,000 of earnings. This recognises the value employers gain through their employees having additional security in retirement and assists employees with the cost of accumulating pension savings
the State will also top up contributions by €1 for every €3 saved by the employee, up to a maximum of €80,000 of earnings. This is in addition to the €3 that will also be contributed by the employer
this means that for every €3 saved by an employee, a further €4 will be contributed to their pension pot by their employer and the State – that is every €3 contribution by an employee automatically grows to €7 before it is invested, or, put another way for every €1 saved by an employee their savings account will be credited with €2.33
these employer and State contributions will incentivise people to stay in the Auto Enrolment system and will reduce the cost to individuals of saving for retirement
the system will be voluntary but will operate on an ‘opt-out; rather than an ‘opt-in’ basis
eligible employees will be automatically enrolled/ ‘opted-in’ but will have the choice after six months participation to opt-out or suspend participation
employees will have a range of four retirement savings funds to choose from
three funds will have differing risk/return profiles. In addition, a default fund based on what is known as a ‘life-style’/’life-cycle’ investment profile will be provided
people who do not express a preference for any fund will be enrolled into the default fund
administrative costs and burdens are to be kept to an absolute minimum for both employers and employees through the establishment of a Central Processing Authority (CPA) to administer the system
employers will not have to invest in the establishment or procurement of an occupational scheme for their own business. They will simply be required to facilitate payroll deductions
importantly, people moving between jobs will not have to change pension scheme or join a new scheme. They will remain members of the Auto Enrolment scheme on a ‘pot-follows’ the member’ basis. In addition, people with multiple employments will have their pension savings consolidated into one ‘pensions-pot’
services will be provided and supported through an easy-to-use online channel where participants will see their savings pots grow quickly and substantively
Minister Humphreys said that implementation of Auto Enrolment will commence immediately and will continue throughout this year and next:
“There is much to be done, with legislation required to set up the system on a statutory footing, the Central Processing Authority to be established to operate the system, and a communications campaign to ensure people understand it. It is an ambitious timeline, but one that is achievable.
“I am extremely proud to introduce this once in a generation policy that will have a truly meaningful impact on people’s lives.
“When implemented, the new Auto Enrolment system will enable employees to accumulate enough resources to maintain high personal living standards in their retirement.
“In this way, Auto Enrolment will significantly increase the wellbeing, financial security and independence of our future retirees. Retirement should be a time when people can reap the rewards of a long working life and that is what Auto Enrolment will help to provide for generations to come.”