Auto-Enrolment Pension Scheme

Introduction

In March 2022, the government approved a historic auto-enrolment pension scheme designed to encourage workers to save for their retirement. 750,000 workers between the ages of 23 and 60 will be enrolled in this scheme. The initial cost to the employer will be 1.5% of the qualifying employee salary with the qualifying salary capped at €80k. This is to rise to 6% over a 10-year period. Over time this will likely be a 6-figure cost to many of Ireland’s SMEs.

The experience across the water is that not surprisingly the vast majority stay receiving the employer contribution when auto-enrolled, driving up overall enrolment rates, with UK enrolment rates in the private sector more than doubling since the launch of the scheme, from 42% to 86% between 2012 and 2022.

Concerns have emerged around the scheme and the burden it may place on small businesses, many of whom may struggle to meet their financial requirements under the scheme. Unsurprisingly, this has led to employer groups campaigning for an initial delay of the scheme, which is due to be rolled out in 2024. As we approach the end of the year and budgets have to be set for FY24, CFOs around the country are wondering if it will be delayed yet again.

When Will the Scheme Begin

Following a number of delays, the scheme is set to come into effect in September 2024. There are several concerns around the scheme, with the Small Firms Association citing that many of their members will find it challenging to meet their obligations and highlighting ‘multiple challenges within the business environment’ in recent months. This has caused employer groups such as IBEC to campaign for the delay of the introduction for two years after the legislation is passed.

According to a survey undertaken by pension trustees Independent Trustee Company, more than half of pension advisers believe it will be at least two to three years before the scheme comes into operation.

Purpose of Scheme

The purpose of this scheme is to encourage younger people to participate in supplementary pension provisions giving them the assurance of retirement income. However, a recent survey from Standard Life’s Retirement Pulse found that almost 80% of the population had little to no knowledge about the scheme that is set to come into effect in September 2024. Furthermore, half of those who are currently working without a pension scheme are completely unaware of the scheme.

From an employer’s perspective, the scheme should minimise the administrative burden as they will not need to manage an occupational pension scheme.

How to Prepare Your Business

In order to comply with this scheme, it is essential that employers track and record employee data as part of the overall payroll function. With the scheme set to begin in September 2024, it is essential to conduct reviews of several areas of your business in order to be adequately prepared.

Key considerations should include:
• Making relevant alterations to payroll systems/software to ensure a smooth integration takes place.
• From a financial planning perspective, it is also important to account for employer contributions in budgets for FY24 and all periods thereafter. It must be noted that employer contributions will be deductible against corporation tax.
• Employment contracts should be reviewed by solicitors to ensure they account for the new provisions.

Companies are also obliged to fully inform employees about the scheme. Thus, your organisation must provide details on the value of the contributions employees will make, tax implications, fund options and the value of employer and State contributions.

It needs to be communicated that:
• Employee contributions are taken from net income;
• There are no tax reliefs in respect to the contributions; and
• Employees will be entitled to receive a benefit-in-kind tax exemption in respect of their employer’s contribution.

How Will The Scheme Be Implemented? 

Per the Department of Social Protection, the scheme will follow a phased implementation over the next ten years. The rate of contributions will gradually increase over the period, with a correspondingly higher cost to the employer.

• 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).

Outlook

In conclusion, this article has shed light on the critical topic of auto-enrolment and pensions for Irish employers and employees, highlighting several key takeaways for businesses and individuals alike.

To summarise:
1. Legal Obligations: Auto-enrolment is a legal requirement in many regions, mandating employers to provide pension schemes for their employees. This will be due to begin in Ireland from September 2024.
2. Financial Planning: It underscores the importance of financial planning, helping employees secure their future through regular contributions.
3. Employee Benefits: Auto-enrolment can boost employee satisfaction and retention, as it demonstrates an employer’s commitment to their long-term financial well-being.
4. Compliance Challenges: Businesses must navigate complex regulations to remain compliant, necessitating careful planning and ongoing monitoring. Management teams should start planning ahead for this scheme and calculate it within their annual budgets.
5. Retirement Security: Ultimately, auto-enrolment is a vital step towards ensuring retirement security for all, emphasising the need for proactive engagement and informed decision-making.

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