Government Announces New Design Principles for Ireland’s Auto Enrolment Savings System
On 29 March, the Department of Social Protection announced the publication of its paper titled “The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System” (the “Paper”). This announcement follows from the publication of the Roadmap for Pensions Reform 2018 – 2023 (the “Roadmap”) (found here) which set out six goals for reform in the pensions sector by 2023. The building of a new auto enrolment savings system (“AE system”) was included as the second goal in the Roadmap, and is now intended to commence in the first quarter of 2024, with legislation expected to be enacted in the third quarter of 2023. Some key features of the AE system proposed are as follows:
- while the system is not mandatory, it will be “opt-out” rather than “opt-in”;
- auto-enrolled employees will benefit from an employer and State contribution;
- pensions will be transferable between employments; and
- the administrative burden on employers to source, set up and administer occupational pension schemes will be eliminated, with a significant role envisaged for the Central Processing Agency (see below).
The Paper can be found here, and its key elements are outlined below.
Eligibility, Opt-In and Opt-Out
Current and new employees aged between 23 and 60 years of age and earning €20,000 or more per annum, who are not members of an employer pension scheme, will be automatically enrolled into the AE system. Those who are not between the ages of 26 and 60 or who earn less than €20,000 may opt-in, but will not be automatically enrolled. Employees who are active members of an existing occupational pension scheme sponsored by their employer will not be automatically enrolled. Failure by an employer to implement a payroll instruction for enrolment, or to deduct and remit contributions as required will be subject to an administrative penalty initially and to prosecution as a criminal offence if sustained.
Members may opt-out six months after enrolment during a two-month window (i.e. within months seven and eight). Members may also opt-out six months after a contribution rate change. This option to opt-out following a contribution rate change will only be available in the first ten years of membership. Participants may suspend their participation at any other time outside of these defined periods. Where a member opts-out or suspends contributions, they will be re-enrolled after two years.
Members will be required to make an initial contribution of 1.5% of gross earnings, rising to 3% after three years, 4.5% after six years, until reaching a maximum contribution rate of 6% in the tenth year. These contributions will be matched on a “one-for one” basis by employers. Employer contributions will be calculated on up to €80,000 of the member’s earnings, with this earnings’ threshold subject to review every five years.
The State will make contributions amounting to 33% of member contributions. This will also be capped at €80,000 of the member’s earnings. The current tax relief system will continue to apply to those making occupational pension contributions to approved schemes outside the AE system.
The Central Processing Authority
A new body, the Central Processing Authority (“CPA”) will have overall responsibility for the operation, coordination, supervision and development of the AE system. It is intended that the CPA will become a statutorily independent body regulated by the Pensions Authority.
The CPA will be responsible for procuring four registered providers who will be required to offer a defined set of fund options to members. It will also be responsible for collecting and allocating contributions on a pooled basis to members’ fund choices. It will pool investment returns from each fund type (see below), ensuring members who have chosen the same fund type receive the same weighted average return proportionate to the contributions made. The CPA will also provide fund administration and accounting services for members. It is envisaged that it will provide and operate an online portal for employees and employers, enabling members to indicate fund choice, exercise opt-out and suspension arrangements and update personal information.
There will be one AE pot for every member and the CPA will hold and manage that pot centrally. It will also specify a maximum permitted annual administration and investment charge. It is envisaged that this will be up to a maximum of 0.5% of assets under management. This charge cap has come under criticism for being too generous, however, currently, the Government anticipates that the tender process for registered providers (see below) will see more competitive rates emerge.
The CPA will tender for four commercial investment companies to become registered providers, which are expected to be contracted for up to seven years. The precise fund structures will be settled closer to the launch of the AE system, but registered providers will be required to offer four broad fund types: conservative, moderate risk, higher risk, and default.
Members may select any fund type. Those who do not select a fund will be automatically allocated to the default fund. While the option to allocate contributions on a partial basis across funds may not be a feature when the AE system is initially rolled out, it is expected to form part of the AE system at a later phase. The CPA will pool all pension contributions according to fund choice and allocate the contributions among the registered providers. Investment returns from the same fund type across each of the different registered providers will also be pooled and allocated to pots of the individual members who have selected that fund type.
Questions to be Answered
Despite statements in the Paper that employees already in an occupational pension scheme will not be automatically enrolled in the AE system, it is unclear how the AE system will deal with employees currently in an occupational pension scheme who wish to switch to or also enrol in the AE system. Further detail is required regarding the State contribution, given that conventional occupational pension schemes benefit from a tax relief structure, rather than a State top-up and it remains to be seen how these two structures will interact.
Death-in-service benefits are often provided under the terms of group occupational pensions schemes on a tax favourable basis. Related income protection benefits may also be provided in respect of long term illness. It appears that such benefits will not form part of the AE system.
Further clarity on the interplay between the new AE system and existing pension schemes will be necessary to ensure employers do not fall foul of wider employment obligations such as those set out in the examples below:
- breach of contract claims or constructive dismissal claims could arise where an employer already offers a pension scheme with more generous terms but seeks to close that scheme to future accrual and move its existing employees onto a less favourable AE system for future service. This could also arise, for example, where the employer’s contributions under the AE system are the same or greater than the pre-existing pension scheme but where other benefits, such as a death-in-service benefit, cease.
- ring-fencing a more generous existing pension scheme for existing employees and applying the AE system to new starters, effectively creating two-tier pension provision, may be a catalyst for industrial or workplace unrest.
Despite these uncertainties, there is cause for cautious employer optimism. The envisaged structure of the AE system creates a very broad and prominent role for the CPA. As a result, the administrative burden placed on employers is expected to be minimal. As noted above, draft legislation is expected in the third quarter of 2023, with the AE system expected to commence at the beginning of 2024.
If you have any questions in relation to the impact of the proposed AE system, please contact a member of the McCann FitzGerald LLP Employment, Pensions and Incentives Team.
Also contributed by William Shanahan
This document has been prepared by McCann FitzGerald LLP for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.
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