The Irish Government has announced the principles of the proposed Automatic Enrolment Retirement Savings System (the “auto-enrolment system”) for Ireland. The auto-enrolment system will require employees who meet certain criteria to be automatically enrolled into a workplace pension scheme by their employers.
Although a lot of the detail in relation to how the auto-enrolment system will operate has yet to be confirmed, in this article we provide a high-level guide for employers in relation to how the auto-enrolment system might work, once introduced.
This is one of a number of initiatives, including the introduction of statutory sick pay and gender pay reporting, that will create more onerous obligations on employers in Ireland this year.
What is auto-enrolment?
Auto-enrolment is a system whereby employees who do not have an occupational pension are automatically enrolled into a workplace pension scheme which is co-funded by their employer and the State.
The pension scheme will be administered by a Central Processing Authority (the CPA) rather than by the employer. This does not replace the State pension, payable from age 66, which is funded through Pay Related Social Insurance (PRSI) contributions paid by the employer throughout the working life of the employee.
Eligible employees will be automatically enrolled in the pension scheme but will have the choice after six months of participation to ‘opt-out’ or suspend participation. Those who opt out will be automatically re-enrolled after two years.
Who will the auto-enrolment system apply to?
The auto-enrolment system will apply to all employees aged between 23 and 60 and earning over €20,000 across all their employments, and who are not already members of an occupational pension scheme.
Employees outside the age and earnings band thresholds designated for auto-enrolment will be able to opt-in to the auto-enrolment scheme.
What if the employer already has an occupational pension scheme/Personal Retirement Savings Account (PRSA) in place?
The guidance issued by the Government provides that the auto-enrolment system will not apply to employees who are already members of an occupational pension scheme.
However, it is not clear what qualifying criteria or minimum standards the occupational scheme must meet in order to dis-apply the auto-enrolment system.
We anticipate that, similar to the UK system, employers must make certain minimum contributions into the occupational scheme in order for auto-enrolment not to apply. In addition, there may be employees of the organisation who have not joined the occupational pension scheme, which means that the employer may have some employees on the auto-enrolment scheme and some who are not.
Rather than having an occupational pension scheme, many small to medium-sized enterprises currently offer employees access to a PRSA (to which they are not obliged to contribute), and it is unclear what this proposal will mean for these arrangements.
In circumstances where the PRSA is offered on a non-contributory, voluntary basis it is unlikely to be sufficient to exempt employees from the auto-enrolment system.
Employers who currently operate an occupational pension scheme may be required to make further changes and/or introduce certain minimum employee and employer contributions in order for the auto-enrolment system not to apply.
Depending on the requirements, and the proportion of the workforce who are currently members of the employer’s occupational scheme, employers may look at terminating their current pension arrangements (where this is possible) and enrolling all employees in the auto-enrolment system.
Alternatively, employers could make it compulsory for all employees to join their pension scheme so that they don’t have two groups of employees in two different schemes. Otherwise, operating two different schemes could give rise to an administrative burden for employers and could complicate their benefits offering.
Any material changes to the employer’s current pension scheme and/or pension contributions will require employee consent. However, where the changes are beneficial to employees this is unlikely to be an issue.
How might the auto-enrolment system operate in practice?
Contributions will be paid by employees, and matched by employers, as a percentage of the employee’s gross earnings. The State will also provide a top-up contribution. The rates of contribution will be phased-in gradually over a decade as follows:
Employer contributions and the State top-up will be capped at a maximum of €80,000 of an employee’s gross earnings. Employees may contribute on earnings greater than €80,000 if they wish.
What does the auto-enrolment system mean for employers?
Employers will not need to establish a separate pension scheme, procure a pensions provider or pensions administrator, or select a savings option for their employees. However, they will be required to enrol their employees in the auto-enrolment system.
Once enrolment has been completed, the guidance says that employers will not be required to carry out any assessments of eligibility or engage with pension providers or products. The CPA assumes these administrative responsibilities. The Government has said that the aim of the auto-enrolment scheme is to reduce the administrative burden on employers as much as possible.
However, it’s difficult to see how that can be achieved, as employers will need to carry out some sort of assessment in order to determine which employees it must enrol in the auto-enrolment scheme, and of course, there will be a certain amount of administration and management required in terms of arranging the contributions to the scheme.
Employers will be required to facilitate payroll deductions and the guidance says that they should ensure that their payroll process is able to take instruction for enrolment and is able to calculate and remit both employee and employer contributions to the CPA.
While employer contributions will be deductible for corporation tax purposes, this proposal is likely to result in not an insignificant additional cost to employers, based on the contributions required, and as set out above.
Similar to the UK, the Government may require employers to provide certain information in relation to the auto-enrolment system to employees within a certain time period.
The UK system also sets out certain safeguards for employees that prohibit an employer from encouraging or forcing employees to opt out of the scheme, or making recruitment conditional on an employee opting out of the scheme, which could be part of the Irish system.
It may be necessary for employers to update the pension clause in their employment contracts once further details in relation to the auto-enrolment system are known.
Failure of the employer to implement a payroll instruction for enrolment, and/or to deduct and remit contributions as required will be subject to administrative penalty initially and to prosecution as a criminal offence if sustained.
When will this come into operation?
The Government has said that implementation of the auto-enrolment system will commence immediately and will continue throughout this year and next.
It is envisaged that the auto-enrolment system will be set up by 2023 and ready to take employee enrolments in 2024.
The introduction of auto-enrolment will be very gradually phased in over a decade (as set out above). This steady phasing is to allow time for both employers and employees to adjust to the new system. However, it appears from the guidance that auto-enrolment will apply to all employers regardless of size from the date it comes into operation.
What can employers do now?
Employers can review their own pension scheme arrangements and what if (any) contributions they and employees make to the pensions scheme or any PRSA.
Once the draft legislation has been issued (which is anticipated to happen later this year), employers will be in a better place to start making arrangements for the auto-enrolment system.
The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System – available here.