*This article is an opinion piece that appeared in the Irish Times newspaper on 6 May 2024, written by Brian Mulcair, Head of Corporate Consulting in WTW Ireland.
IRELAND, May 6, 2024 — The much-heralded introduction of Auto-Enrolment in Ireland, is set to be the biggest development in pensions in a generation. Targeted directly at increasing the proportion of private sector workers with pension savings, Ireland will be following in the footsteps of several other countries including Australia, New Zealand and the UK, where the auto-enrolment model is already well established. In fact, Ireland is the last OECD country to introduce Auto-Enrolment (AE).
By adopting a proven blueprint, it is reasonable to anticipate that auto-enrolment will have a transformative effect on pensions coverage in Ireland. However, the Government has amended the blueprint in two key areas. Firstly, it is proposing two very different pension savings systems operating alongside one another – the existing retirement savings regime and the new central Government AE scheme and, secondly, it is not facilitating employers auto enrolling existing employees in their own occupational pension schemes.
The dual approach stems from the Government’s desire on the one hand, to express the auto-enrolment State incentive in an easy-to-understand manner (similar to SSIAs introduced in the early 2000s), while on the other, leaving the existing retirement savings system unchanged.
“It undoubtedly takes us into unchartered territory raising a number of important questions for employees such as, what are the main differences between the two systems and which is better?”
Brian Mulcair | Head of Corporate Consulting
However, it undoubtedly takes us into unchartered territory raising a number of important questions for employees such as, what are the main differences between the two systems and which is better?
For companies where pension provision does not currently form part of their benefits package the response may simply be to enrol all employees in the Government AE scheme, in which case, the existence of two systems will be largely academic. However, for companies already making pension benefits available to their employees, the issues around the dual system will be significant. It is also acknowledged that for many people, their employer’s pension scheme will represent a better option compared to the Government AE scheme.
One of the key differences between the two systems centres around contribution levels. Under the Government AE scheme, employee and employer contributions will both start at a rate of 1.5% of gross earnings capped at €80,000, with the 1.5% rate eventually rising to 6% after 9 years. There is no flexibility to pay contributions above these set rates. In comparison, for employer defined contribution schemes, industry surveys reveal average contributions rate of 5% from employees and 7% from employers and there is flexibility to pay additional contributions.
Another key area of difference involves State incentives. The €1 for every €3 Government top up under the Government AE scheme needs to be compared with the income tax relief available under the current pensions system. The value of the incentive under the existing system is worth twice that proposed under the new AE system for a higher rate (40%) tax payer.
Another key aspect relates to the uneven routing between the two systems. The current draft legislation provides that if an eligible employee is found not to have a contribution being paid to an employer scheme then they will be auto enrolled straightaway into the Government AE Scheme.
There are many employers that have high quality voluntary pension schemes where employees have decided not to join either through a lack of engagement or perhaps affordability reasons. The Department of Social Protection has confirmed that employers will not have the ability to auto enrol these employees into their company schemes. This will result in employees being defaulted into the Government AE Scheme even if that Scheme is inferior to what is available to them from their employer. Many employers will put in place active communication campaigns to encourage sign up in their own schemes ahead of the AE system going live but it is a shame that employees can’t be auto enrolled.
“Whatever one thinks about the merits or otherwise of the dual approach, given there are such fundamental differences, it is essential that employees consider which is the better pension option for them.”
Brian Mulcair | Head of Corporate Consulting
Whatever one thinks about the merits or otherwise of the dual approach, given there are such fundamental differences, it is essential that employees consider which is the better pension option for them. Otherwise, employees may regret in years to come that they missed an opportunity to join a high-quality employer scheme which could have given them a far better retirement outcome.
The advent of auto-enrolment is very welcome and should address the long-standing problem that not enough people are saving for their retirement. It is important, however, that employees don’t let themselves be defaulted into a Scheme that is inferior to what might otherwise be available to them.
