A pension expert says employers need to be proactive in preparing for the transformative changes which will be brought about by auto-enrolment. John Kearney, a Director at financial planning firm Provest, was addressing an Industry Insights event hosted by Cork Chamber of Commerce in Cork City today.
The Automatic Enrolment Retirement Saving System Bill passed all stages of Dáil Éireann on May 22nd last. The legislation has now moved to Seanad Éireann for their consideration and the aim is to have the system up and running for employee enrolments from January 1st, 2025.
Mr Kearney is welcoming auto-enrolment as he believes it will narrow the gender pensions gap, significantly increase the numbers saving for retirement and will result in people not being solely reliant on the state pension. However, he says there are a number of areas that need to be addressed in more detail such as the imposition of tax on Retirement Benefits, the manner in which Retirement Benefits can be administered, clarity on the fee structure and whether or not the pension assets accumulated under auto-enrolment system will count towards the Standard Fund Threshold.
He says employers will have a number of issues to consider and may need to discuss the scheme in detail with their employees to avoid confusion.
“Under auto-enrolment, pension contributions are calculated from gross earnings and this can create uncertainty and lack of control for employers when it comes to forecasting their future costs and budgets. Under an Occupational Pension Plan, pension contributions are generally a function of basic salary.
“Many employers have high-quality voluntary pension schemes where employees have decided, for whatever reason, not to join. The Department of Social Protection has confirmed that employers will not have the ability to auto-enroll these employees into their company schemes. This will result in employees being defaulted into the auto-enrolment system even if it has an inferior benefit structure to what is available to them from their employer. Many employers may decide to put in place comprehensive communication campaigns to encourage employees to opt into their own schemes in advance of January 1st to avoid running two schemes in parallel.”
Mr Kearney adds that one possible means of attracting employees to join an existing occupational pension scheme could be to make it non-contributory from the employees’ perspective with the employer only paying a pension contribution on behalf of the employee.
Employees between the ages of 23 and 60 who earn in excess of €20,000 per annum from all employments, and who are not already participating in a qualifying pension scheme, Occupational Pension Plan, or trust RAC will need to be automatically enrolled in the new auto-enrolment system.
The National Automatic Enrolment Retirement Savings Authority (the AE Authority) will be established as an independent body to administer the AE system. The AE Authority will give notice of the determination and the enrolment date to the employer, triggering a request for the employer to give notice of the auto-enrolment to the employee.
Employees under age 23 and over age 60 or those earning below the €20,000 threshold, will be able to opt-in on a voluntary basis.
The level of required auto-enrolment contributions will be gradually phased in over a decade, with both employer and employee contributions starting at 1.5% of gross earnings and increasing every three years by 1.5% until they eventually reach 6% by year ten. When allowance is made for the proposed Government top-up, this will lead to a total contribution being paid to a member’s pension account of 14% of gross earnings from 2034 (6% employee, 6% employer, 2% Government top-up). The maximum gross earnings that need to be referenced for contribution deduction purposes is €80,000.
