The Government’s recent announcement on automatic enrolment is a hugely positive step forward at last. All going to plan, Ireland will have an auto-enrolment retirement savings system by early 2024 and it will be an historic and important day for our country when the first contributions are finally invested.
While the Government estimates that only 35 per cent of private sector workers currently have supplementary pension savings, it expects that an additional 750,000 people will be brought into the pension savings system via auto-enrolment. These impressive statistics clearly demonstrate the positive impact auto-enrolment should have.
The plan is for employees aged between 23 and 60 with earnings over €20,000 to be automatically enrolled into the system. Initial contribution rates for employees in 2024 will start at 1.5 per cent of earnings, rising to 6 per cent over the first 10-year phase-in period. Employers will have to match employee contributions on earnings up to €80,000. Most notably, the State will also add 33 per cent of the employee contribution.
So far, so clear. But auto-enrolment will be an entirely new retirement savings system that will have to operate alongside the current occupational pensions system. Because of this, some important questions remain for both employers and employees on how the two systems will compare, co-exist and interact – particularly when it comes to tax matters, contribution levels and investment choices.
Under the auto-enrolment system, the State subsidy of 33 per cent of the employee contribution equates to 25 per cent tax relief. By comparison, occupational pension scheme savers receive income tax relief on pension contributions at their marginal tax rate (ie 20 per cent or 40 per cent). This means that for those who pay income tax at 20 per cent, or whose earnings are not subject to income tax, saving in the auto-enrolment system will offer better tax treatment than the current system. It remains to be seen if there will be any levelling up for occupational pension scheme savers.
Fixed contribution rates
Auto-enrolment will also introduce fixed contribution rates payable by individuals, employers and the State – and these fixed rates will be lower during the initial transition phase. Not only does this mean that individuals cannot make additional voluntary contributions (AVCs), but employers also will not be able to contribute more within the auto-enrolment system than the stipulated maximum.
So, while auto-enrolment will increase the number of people saving, the proposed system’s inflexible contribution arrangements could make it a less attractive proposition for both employees and employers, and could even impact on the adequacy of retirement benefits.
Clarification on the investment fund structure is also needed. The current proposal provides a choice of four funds, which is limited compared with what most occupational schemes offer, and it is unclear how individuals will reduce risk as they approach retirement.
Moreover, other key features typically seen in occupational plans are not included under auto-enrolment, such as the provision of personal financial advice and the use of communications and technology to encourage participant engagement.
Auto-enrolment will inevitably serve a purpose for a certain type of employer and employee. But it is crucial that the Government does not introduce a parallel system that creates confusion or, worse, unnecessary complexity. Individuals already find pension saving complex.
Retirement benefits
Employers will certainly need to weigh up their options when considering how the auto-enrolment requirements will impact them and the questions that their employees might ask. Those who do not currently offer an occupational plan or contribute to a personal retirement savings account will need to assess whether auto-enrolment will provide a better total retirement benefits solution versus setting up their own pension plan via a master trust or a standalone scheme.
Those who do already provide an occupational scheme will likely need to ensure the scheme meets certain minimum standards (although the scope of these requirements won’t be known until later this year). While many schemes certainly provide more favourable contribution and other features than under the auto-enrolment structure, there are also schemes where this is not the case – such as schemes that do not require all employees to join or those that do not provide the level of matching contributions proposed under auto-enrolment.
More generally, it remains to be seen how auto-enrolment will impact employer pension contribution rates. In an environment where recruiting and retaining employees is a challenge, auto-enrolment may set a new floor for employer contributions. Employers who saw their pension benefits as a differentiator may wish to maintain their contributions gap relative to the auto-enrolment level.
The auto-enrolment plans are ambitious and have the potential to deliver significant benefits for future generations. But they must be delivered in a simple and straightforward way that properly complements, and does not ignore, the clear benefits of Ireland’s well-functioning and well-governed occupational pension system.
John Mercer is chief executive of Mercer Ireland
