In 2024, the Irish Government intends to roll out an auto-enrolment (AE) pension scheme for Irish workers. This new savings and investment scheme is designed to ensure a reasonable standard of living in retirement for all employees. This may include some employees such as secretaries and caretakers in the education sector who are not currently provided with retirement saving options by their employers.
AE aims to bridge the gap which often occurs between living standards before and after retirement. Ireland is reportedly one of the only OECD countries which does not currently operate an AE or similar scheme. Just 56% of those in employment have an active supplementary pension and just 35% of workers in the private sector have pension coverage.
Unfortunately, despite its benefits, AE will bring increased administrative burden and financial costs for some Boards of Management.
Features of AE and the impact on relevant school employees
AE has several design features, including:
1. Eligible population
The scheme will impact around 750,000 workers aged between 23 and 60, who are earning over €20,000 a year, and are not already enrolled in an occupational pension scheme.
2. Matching contributions
When introduced, AE will see Boards of Management automatically enrolling qualifying secretaries and caretakers into a pension scheme to which they would then be obliged to contribute. Boards of Management will make 100% matching contributions and the State will match 33% of the employee’s contribution. Therefore, for every €1 an employee saves, €2.33 will be credited into their pension savings account. Crucially, the system will operate on a “pot-follows-member” basis, meaning that participants will own one single AE pension pot across all their employments throughout their working lives.
Once fully established, secretaries and caretakers will be required to save 6% of their gross income in the AE pension system. The scheme will be implemented on a phased basis, with contributions beginning at 1.5% of gross earnings in 2024, rising by 1.5 percentage points every three years until it reaches the maximum contribution rate of 6% in year ten.
Participants will contribute to their AE fund out of their net income, i.e. after income tax has been deducted from their gross income. Therefore, tax relief will not be applied when participants contribute to their AE fund.
These contributions will be matched on a one-for-one basis by Boards of Management contributions. These contributions will be capped at €80,000 of the employee’s earnings only.
3. Central Processing Authority
This system will be managed by a Central Processing Authority (CPA), which will be responsible for the overall administration of the system. The CPA will carry out several functions, including administering the funds when members reach retirement age, providing a portal to allow employees to access and select from the available scheme options. It will also set up a system to enable those individuals who fall outside the defined age and income bracket to “opt-in” to the system.
4. State top-up
The State will contribute 33 cents for every €1 that a person pays into their AE savings account.
5. Role of registered providers
There will be a tender process for the four commercial investment companies that will become Registered Providers for the CPA. The types of investment funds which will be on offer are still to be determined, however, it is expected they will fall into four categories- conservative, moderate risk, higher risk, and default.
6. Opt-outs and suspension
As set out above, the AE system will be voluntary. However, the system will operate on an ‘opt-out’ rather than ‘opt-in’ basis. Workers will be given two opt-out options; six months following enrolment, or six months following a contribution rate change. It should be noted that where a participant opts out or suspends their contributions, they will be automatically re-enrolled after two years, after which they can opt-out or suspend contributions again.
7. Pension drawdown
The access which members will have to their pension fund will be limited to the current State Pension arrangement, which is 66 years of age. Initially, it is not expected that there will be pension drawdown options available for members, but this may be revised as the system matures.
Employers that do not currently operate a pension scheme for any of their employees, including those in the education sector e.g. Boards of Management, now need to consider the administrative implications, e.g. the need to facilitate payroll deductions, and to budget accordingly for the financial impact of AE. There may be some tweaks before the system is fully operable, however, the current timeline expects to make the first enrolments from January 2024. The time to consider and start planning for the additional cost and administration is now to ensure adequate preparation.
The content of this article is provided for information purposes only and does not constitute legal or other advice. It is based on the facts at the time of writing.