Design principles for Ireland’s auto-enrolment savings system 

Ireland’s new automatic enrolment retirement savings system will be introduced in 2024.  The new Auto Enrolment Bill will be published in March 2024 and is expected to pass into law soon thereafter.

Auto Enrolment will operate in parallel with and complement the existing occupational pension scheme system.  The Government expects c.800,000 new pension savers will be created.

This article provides a summary of the main features of the central Auto Enrolment system.

• All employees will be automatically enrolled into the system if they are: 

             - Not already contributing to an occupational pension scheme

             - Aged between 23 and 60

             - Earning over €20,000 p.a.

• They will be permitted to opt out both prior to being automatically enrolled, and also at certain times after joining 
• Non-eligible employees can also opt-in if they wish
• Employers will be required to match the rate of contribution paid by employees up to a maximum earnings threshold of €80,000 p.a.
• The State will pay a top-up of 33% of the employee contribution. 
• Contributions will be introduced on a phased basis as follows:

• The State top-up arrangement will mean that the AE system will not be part of the current tax relief structure applicable to occupational schemes.  Employee contributions will be deducted from after-tax income.  The AE system will also be exempt from tax as a Benefit-in-kind.  Employer contributions will remain eligible for offsetting against corporation tax.
• Employee contributions are fixed (at least initially) – it will not be possible for members to pay additional voluntary contributions in the AE system or to pay an amount less than the set contribution level.
• Employees can suspend contributions at any time
• There will be a choice of 4 investment funds:

          • “conservative” (mainly Government bonds, or cash/cash equivalent);

          • “moderate risk” (Government bonds, blue-chip equities, stock exchange indices);

          • “higher risk” (e.g. equities & property); and

          • “default” (operating on a lifestyle basis)

• Employees will be able to make fund switches at any time during the savings phase
• Draw down of benefits will be at the State Pension age only; benefit options at retirement will be in line with the existing range of options under current Revenue rules
• There will be a maximum “envisaged” annual fund management charge of 0.5%
• Benefits/account information and management will be available through an online portal
• Individuals will remain in the AE system when they change employment (i.e. ‘pot follows member’)

• A Central Processing Authority (CPA), initially set up under the Department of Social Protection, but ultimately regulated by the Pensions Authority, will be responsible for operating, coordinating, supervising and developing the AE system.
• The CPA will tender for four commercial investment companies to become ‘registered providers’ (RPs). RPs will provide investment options and act as investment managers.
• Benefit drawdown options will be through existing commercial providers.
• The CPA may also tender for third party administration and accounting support.
• Employers will need to ensure that their payroll processes can support AE instructions and contribution remittance.
• Savers will have no direct contact with RPs – all interactions will be through the CPA.
• Savers will not choose their fund providers – contributions will be pooled by the CPA and allocated according to fund type among the RPs.  Financial returns from the RPs for each fund type will also be pooled and allocated to savers accounts.

• It is clearly welcome to finally see some substantive movement to implement these reforms – auto-enrolment has been very successful in other countries in terms of materially increasing pensions coverage.
• But – there remains a lot to be finalised before the targeted first auto-enrolments happen in 2024.  And because of that (and the pace at which matters have progressed to this point) our view is that the Government’s timetable above remains quite optimistic, primarily because:

          - Legislation still needs to be drafted and then must go through the full legislative process in the Oireachtas;

          - It is uncertain what kind of political support the final design has;

          - None of the operational structures are yet in place

• This will be a parallel system – i.e. it will sit alongside the existing occupational pension scheme system which will continue to use the current tax reliefs.  Members of existing occupational schemes cannot join the AE system unless they leave their existing scheme.
• The Department will apparently be making recommendations on what prescribed standards and contribution levels will apply to occupational schemes to allow them to be exempt from the AE system.  It is surprising that these issues have not been specifically addressed as part of the overall design principles.  Employers therefore cannot yet fully consider the relative advantages and or disadvantages of the AE system as compared to their existing pensions arrangements.
• A parallel system will likely give rise to greater confusion for individuals.  It is not yet clear what (if any) choices employers and employees have between an occupational pension plan and the AE system.  This needs to be clarified when the requirements for occupational schemes to be AE exempt are developed.  Otherwise members will face a decision on which of the systems will better suit them individually, particularly given the State top up vs tax relief approach. 
• The system will not cover the self-employed or unemployed – although the Government has not ruled out the system evolving to cover this in future.
• The availability of only four investment funds is disappointing – the Government clearly want to promote greater simplicity, but this would mean less choice for employees in the AE system than they would get in a typical occupational scheme.
• There are no references in the Design Principles to member communications beyond provision of benefits information.  We consider this a key part of supporting member engagement with their pension scheme and helping improve outcomes.
• The decision to restrict employees from making additional voluntary contributions through the AE system (at least in the initial phase) is also disappointing.  It remains to be seen how employees who wish to increase their pension saving will be able to do so.

We are likely to know a lot more, including further details on potential impacts on occupational pension schemes, once we have seen the first draft of enabling legislation.  This is expected in the second half of this year. 

For now, there is no action for you to take other than to note the current direction of travel and what is on the horizon.  However it is likely that regardless of which system is used (occupational pension or AE), employers should be cognisant of the likely requirements to match member contributions as set out in the table above from 2024. 

Full details can be found at this link:

Launch of the final design principles of automatic enrolment (AE) retirement savings for Ireland (Department of Social Protection, 29 March 2022)