The Introduction of Pension Auto Enrolment in Ireland
It is fair to say that the Irish Pensions System has already seen significant changes in 2022.
The introduction and implementation of new legislation, the EU’s IORP II Directive, has led to ongoing consolidation of pension schemes under Master Trusts. Master Trusts are essentially large, multi-employer pension schemes and for many employers are the obvious option to meet the new requirements in providing occupational pensions for their employees.
IORP II aims to improve the governance and communication standards of occupational pension schemes. The next challenge in improving pension adequacy is encouraging employees to join the schemes in the first place.
After years of debate (and delays), on the 10th of October 2022 the Minister of Social Protection announced the details an Auto-Enrolment pension system, to be introduced in 2024.
All employees not already in an occupational pension scheme aged between 23 and 60 and earning over €20,000 will be automatically enrolled in their pension scheme.
The new pension system will be gradually phased in over a decade, with both employer and employee contributions starting at 1.5% of gross salary, and increasing every three years, until reaching the maximum contribution rate of 6% from Year 10 onwards.
The State will pay an additional €1 for every €3 that the employee contributes.
While this is a welcome initiative and will improve pension coverage nationally (it is estimated that 750,000 employees will be enrolled initially); there are inevitable questions that need to be answered to ensure Auto enrolment is successful.
The the eligibility criteria regarding membership of existing pension schemes is not clear. Will employers and employees both have to pay at least 1.5% into existing schemes so that employees will not have to be auto-enrolled into a new scheme? Are there any other criteria to be met?
An additional concern is the introduction of a new system of incentivising contributions (in the form of the €1 for €3 top-up by the state). The current system of tax-relief available on pension contributions is very different to that proposed under auto-enrolment. Simplification is welcome, but marginal rate taxpayers might well be worse off under the new auto-enrolment system as proposed. Will two systems be run concurrently – one for employees in current schemes, and another for those auto-enrolled into new schemes?
It is very apparent that we are in a period of unprecedented change in the Irish pension system. Clear communication from the state will be critical throughout 2023 to answer these and other questions, and to help employers in managing this transition.
As always, we are here to help. If you have any questions or concerns about either IORP II or auto-enrolment, contact Harvest on 01 237 5500 or email justask@harvestfinancial.ie and we will be happy to assist.
