The Irish Government has now passed the primary legislation to implement its Auto-Enrolment Pension Scheme (“the Government AE Scheme”) to help employees who are not already in a company pension plan, save for retirement and simplify the process for businesses who currently do not offer pension plans to their employees. WTW has created a guide which provides employers with an overview of how the new AE Scheme will operate and the preparation steps that employers should take in advance of the AE Scheme going live.
The AE Scheme is designed to boost retirement savings amongst workers from a position where just 35% of private sector employees currently have supplementary retirement savings.
The AE Scheme is a defined contribution pension scheme where employees’ contributions are matched by their employers, supplemented with a top-up from State funds. The information below summarises the key features of the scheme.
Eligibility
All employees aged 23 to 60 earning over €20,000 annually across all their employments, will be automatically enrolled into the AE Scheme. However, employees for whom contributions are being paid to an employer pension plan will be excluded.
Employees outside the age and salary criteria can opt-in.
NAERSA will issue notifications to employers in respect of any employees who must be enrolled in the AE Scheme, which will include employees on probation, part-time, or casual contracts.
Contributions
| Years / rates | Employee* | Employer | Government | Total |
|---|---|---|---|---|
| 2025 – 2027 | 1.50% | 1.50% | 0.50% | 3.50% |
| 2028 – 2030 | 3.00% | 3.00% | 1.00% | 7.00% |
| 2031 – 2033 | 4.50% | 4.50% | 1.50% | 10.50% |
| 2034+ | 6.00% | 6.00% | 2.00% | 14.00% |
*It is important to note that the employee’s contribution will be deducted from their after-tax pay. The eventual 6% employee rate is therefore equivalent to contributions of 7.5% and 10% of gross pre-tax earnings for standard rate and top rate tax-payers respectively.
Opting Out
Accessing Benefits
Employees will have to wait until they reach the State Pension Age of 66 before they can access their benefits under the AE Scheme. While initially retirees will be able to draw their benefits as cash, the precise options applying on retirement in the medium to long term have yet to be developed. However, the options are expected to be similar to those available to members under company DC plans.
Fund Choices
Employees will be able to choose from four retirement savings funds, based on their risk tolerance: a Conservative fund, a Moderate risk fund, a Higher risk fund, and a default Lifestyle/Life-cycle fund if no preference is expressed.
Changing employment
The AE Scheme retirement saving account will be allocated to the individual throughout their career. This means that if an employee leaves an employment that was utilising the Government AE Scheme and joins a new employment that also uses the Government AE Scheme then contributions under the new employment will commence into the same AE Scheme account. We refer to this as “pot follows member”.
There are a number of significant differences between the AE Scheme and occupational pension schemes which are summarised on the following table:
| Government AE scheme | Employer scheme |
|---|---|
| Set contribution rates and €80,000 earnings cap | Significant contribution flexibility |
| Government top-up incentive (€1 for €3 of employee)equivalent to 25% tax relief | Marginal income tax relief (0%, 20% or 40%) |
| Low, medium and high-risk funds with default lifestyling | Typically, wide range of investment funds |
| Can’t access benefits until State pension age (66) | Can access benefits from age 50 |
| Retirement account follows member | Retirement account stays in employer plan by default |
The Government AE Scheme is quite inflexible in many ways. For example, there is no ability for employees or employers to pay higher levels of contribution to the AE Scheme so the maximum contributions in the first 3 years will be 1.5% employee / 1.5% employer. Many employees and employers may desire to pay higher contribution amounts than this to provide for their retirement.
There will also be quite a restrictive range of investment funds available compared to those typically available under an employer DC Plan. Finally, there will not be the ability to access benefits before age 66 (save for the circumstances of severe ill health).
There has been significant discussion and debate around the different incentives under the Government AE Scheme (€1 top up for every €3 of employee contribution) versus DC pension plans (income tax relief at source). Below we examines the ratio of the total contributions paid into an employee’s retirement account under the Government AE Scheme and an employer DC Plan for each €1 of after-tax member contribution.
| Government AE Scheme | DC Plan (20% tax payer) | DC Plan (40% tax payer) |
|---|---|---|
| €2.33 | €2.50 | €3.33 |
This analysis assumes that the employee contribution is matched under the DC Plan on a one for one basis (this is typical and in some plans the ratio is higher). This demonstrates that existing DC Plan are typically more advantageous for employees and significantly more so for higher rate taxpayers.
At WTW, we are committed to guiding your business through the upcoming changes being introduced under this Government AE Scheme. We have established a new specialist AE team dedicated to assisting all our clients and we offer a two-phase service to ensure that your company adopts the correct AE strategy and then implements that strategy and communicates effectively with employees in advance of the new AE regime going live.
Implementation Planning
Employee Communication Plan
For more information and to get started, please contact your scheme consultant today or submit a contact us form and we will reach out to you immediately.
LifeSight, a pension solution that helps businesses to offer a high-quality pension to their workforce, now has €2billion of Irish retirement savings as assets under management, and counts more than 130 employers as its clients.
