A Brief Comparison
Auto Enrolment (AE) in Ireland will require all companies to automatically include employees in the Government’s Auto Enrolment Retirement Savings Scheme and to contribute to their AE accounts, but only for employees who are not already participating in an “acceptable” employer pension scheme. The Department of Social Protection is expected to define in the coming months what will constitute “acceptable”. While we await this important detail we would anticipate most Defined Contribution savers should meet the necessary requirements at least in the early years of AE.
The latest news regarding the introduction of AE is that the Heads of Bill for AE have been passed and the detailed legislation (known as the General Scheme of Auto Enrolment (AE) Retirement Savings System Bill) is now being drafted. The Government’s intention is that AE is introduced in early 2024.
There are key differences between defined contribution (DC) pension schemes and the proposed AE system. These are set out in the following comparison.
In summary, DC schemes offer:
| Key Feature | Company Scheme (DC) | Government AE Scheme | WTW thoughts |
|---|---|---|---|
| Eligibility | Flexible - the employer controls who can join their scheme and when. Current eligibility rules may need to be amended. | Fixed – all employees between age 23 and 60 earning over €20,000 pa (from all employments) | Employers will need to analyse their work force to consider any currently excluded employees and consider whether to permit their enrolment in their DC scheme and which, if any, should be in AE. |
| Contribution Rates | Flexible - the employer sets the rates. Total employee contribution based on age related scale ranging from 15% to 40% of taxable earnings (capped at €115,000). |
Fixed - rates start at 1.5% company and 1.5% employee (2024) rising to 6% company and 6% employee (2034). Contributions will be calculated on the earnings of the employee up to €80,000. | Employers may need to review their DC rates given AE contribution rates over time. Note: the Government AE Scheme cannot accept contributions above the stated fixed amounts. This is a key drawback as additional employee or employer contributions will not be accepted. |
| AVCs and one-off contributions | Allowed | Not allowed | Greater flexibility in DC schemes. |
| Tax relief & Government Contributions | Relief available at employee’s marginal Income tax rate, i.e. 0%, 20% or 40% rate | Government contributes €1 for every €3 paid by the employee - equivalent to 25% tax relief | Higher rate taxpayers are significantly better off in a DC scheme, as they effectively get €2 for every €3 paid, i.e., twice the AE rate. AE Government contribution is higher for marginal 0% and 20% tax-payers. |
| Salary definition | Contribution based on Pensionable Earnings. | Contributions based on gross earnings. | Employers will need to review what earnings are pensioned in their DC schemes. |
| Retirement Age | NRA can be between 60 and 70. Members can early retire from age 50 onwards or earlier in circumstances of serious ill-health | AE benefits must be taken at State Pension Age. | AE is inflexible in terms of access to retirement savings, which may not suit employees or companies. |
| Retirement Benefits | Lump sum, pension and Approved Retirement Fund options. | No change. | Unlikely to be a key consideration either way. |
| Investments | Trustees choose range of funds for members. | Funds selected by Central Processing Authority. | Member has limited range of options and cannot choose fund manager. |
| Charges | Flexible - charges agreed with employer and trustee. Many large DC schemes have charges lower than the proposed AE cap. | Expected to be capped at 0.5% pa. Not currently clear what services are included. | Employers and members will need to assess Value for Money. Also need to consider support services available. |
A unique feature of the introduction of Auto-Enrolment in Ireland is the proposal to operate a dual pension system, with the Government’s AE Scheme operating alongside Company DC schemes. From the perspective of employees, the existence of two systems will inevitably mean that certain features of each system will appeal to some cohorts of employees more than others. For example, an employee above the salary threshold of €20,000 who pays no tax, will be attracted by the €1 Government top-up for each €3 of member contribution in the AE scheme, whereas a top rate tax-payer will prefer the Company DC route because of the higher tax relief and the greater flexibility around contribution levels and access to benefits.
While we await further details, ultimately it may be the case that the best solution for a lot of companies will be to offer their employees an “either/or” option between the two.
The above is based on our current understanding of the latest position with regards to AE. It is important to understand that final details of the AE scheme may change and will only be known once the final legislation is available along with guidance from the department.
Please contact your regular WTW consultant for further advice in relation to the potential implications of the new AE requirements.
