The introduction of auto-enrolment (AE) from January 1st is one of the most significant Irish policy developments in a generation.
Every worker in the State will now have the opportunity to contribute to a pension and save towards a better retirement. In practice that means about 800,000 people, who are not currently members of pension schemes, will be brought into the pension savings net.
Amid Ireland’s oft-discussed demographic challenge, this is a welcome step. With people living longer, and the birth rate on a downward trajectory, the State has a job to do to ensure adequate retirement cover for its ageing population.
AE is an important first step on this journey, but it is not the only one.
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Since AE has been enshrined in legislation, the Government has embarked on a big awareness campaign to inform people of the impact the new policy will have for them.
Yet Irish Life research, and that of other firms in the pensions industry, confirms that overall awareness and understanding of AE remains low.
Research we carried out with Red C last month found just two-thirds of full-time workers had even heard of AE, while only a third knew when the scheme would begin. This was an improvement on the previous wave of research we carried out in March, but it is clear that a large knowledge gap remains.
This is suboptimal when it comes to addressing the demographic challenge. Why? Because when people feel empowered and engaged with their pensions, that tends to lead to better retirement outcomes for them and, by consequence, the public finances. Goal-setting for retirement, formulation of a strategy to achieve these goals, and continued monitoring are key ingredients for getting the best possible outcome.
A knowledge and engagement gap stymies all of these ingredients.
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There are other key ingredients too, however, and the reality is that, by its nature, AE is not designed to incorporate these.
For example, there is no ability to boost your pension pot via additional voluntary contributions. This is particularly disadvantageous for women returning to the workforce after a period of maternity or unpaid leave, who will lack the facility to catch up on any contributions they have missed.
In addition, the quantum of contribution to AE pensions will be far lower than the typical contribution to a standard occupational scheme.
The initial combined employee and employer contribution rate is 3 per cent of salary (with a State top-up of €1 for every €3 contributed by the employee) giving a total of 3.5 per cent of earnings. Whereas a standard occupational scheme tends to be in the region of 10 per cent, far more generous.
And so we come to the key question that employees and employers should ask themselves in the final months leading up to AE’s introduction: do they wish to opt for the AE system or are they better off with an AE-compliant occupational pension of the type that is already widespread across the workplace?
The simple answer is that it depends on the circumstances, but in general our experience has been that, for employers with existing pension schemes, the best option is to extend these schemes to cover all those workers who need to be enrolled.
This avoids the difficulty and complexity of operating two parallel schemes within the business, with different employees enrolled in each.
For workers, the advantage of an occupational plan is that they generally have more generous employer contributions, more flexibility around AVCs and investment options, and additional benefits such as access to personalised advice.
Higher earners get significantly better tax reliefs in addition. But in order to make a decision on what works best and how, they should approach their employers or a good adviser – knowledge and engagement is key.
To get ready for the first AE contributions to be made in January, there will be a lot of logistical work that takes place in December. This will include a “lookback” test by the National Automatic Enrolment Retirement Savings Authority (NAERSA).
It will go through revenue payroll data up to the end of November to see who has been contributing to a pension and who has not over the latest three months, and, from there, they will enrol non-participating people into a scheme automatically, with payments from January.
To have comfort that employees won’t get defaulted into the AE models by accident, firms need to ensure all new joiners to an occupational plan have their first contributions processed through payroll by the end of November.
This requires a lead time of several weeks for standard payroll processing, and, for some monthly-paid plans, this means sign-up must be completed by the end of October to meet the deadline.
As for employees who wish to get ready, our advice is act now to understand what type of pension is best for you, and speak to your employer accordingly.
Oisin O’Shaughnessy is managing director, employer solutions at Irish Life
