Ireland: Cabinet approves auto-enrolment retirement savings system design

Employer Action Code: Monitor

Retirement benefits from the Irish social security system (Pay-Related Social Insurance [PRSI]) are flat-rate amounts unrelated to earnings, which provide a very modest benefit (EUR 248.30 per week in 2019) at retirement. Benefits can be supplemented by individual and group retirement plans. While over 90% of large domestic and multinational companies surveyed by Willis Towers Watson provide retirement plans for their employees, the Minister responsible for pensions has confirmed that only around one-third of private-sector workers are covered by an individual or group plan. Since 2003, companies are required to offer employees the option to enrol in Personal Retirement Savings Accounts (PRSAs) if the company doesn’t offer a group retirement plan, but employees are not required to enrol in a PRSA or employer plan. In 2008, total assets in funded private pension plans equalled 33.8% of GDP (OECD data); in 2018, that figure was 33.9%.

The government moved to address the issue by proposing a general auto-enrolment mandate as part of a new workplace retirement savings system, outlined in a five-year pension reform road map in 2018 (see prior news coverage here). Following public consultations, the government has approved the development of legislation to launch the system in 2022, based on a design plan developed by the Department of Employment Affairs and Social Protection, outlined below.

In addition, regulations were recently issued bringing Ireland into compliance with the 2014 EU Pension Mobility Directive. The regulations address vesting and waiting periods for plan members who transfer between EU member states.

Key Details

• The system would be based on individual defined contribution (DC) accounts, managed by registered providers selected by the employee from a list administered by a proposed Central Processing Authority. Members who fail to select a provider would be allocated to the default fund of providers on a rotation basis.
• Auto-enrolment would apply to all employees (in the public and private sectors) between the ages of 23 and 60 earning EUR 20,000 or more per year, from the start date of the system’s establishment (or the start of employment if later).
• Participation by employees falling outside of those parameters would be voluntary. Employees covered by occupational retirement plans that meet prescribed minimum standards would be exempt from auto-enrolment.
• Employees would initially contribute at 1.5% of qualified earnings, fully matched by tax-deductible employer contributions on annual pay up to EUR 75,000 (initially). The employee base rate (and employer match) would increase by 1.5 percentage points every three years until reaching 6.0% (each). The state would also contribute at a rate or rates still to be determined (proposals are expected in early 2020).
• Opt-out windows of two months would apply six months after initial enrolment and six months after each contribution rate increase. Individuals who opt out would be entitled to a refund of their contributions. Automatic re-enrolment would apply after three years, but it would be possible to opt out again after six months. After that a limited number of saving suspension periods will be facilitated for members who wish to temporarily cease making contributions (which would also suspend matching employer and state contributions).
• Account balances would be fully transferrable between providers that would have to offer similar ranges of investment options (which may include lifecycle or target-date funds), including a default fund for members who make no election on investments. Administrative, management and investment annual fees charged by providers would be capped at 0.5% of assets under management.
• There is likely to be a phased implementation of the auto-enrolment regime due to the ambitious start date of 2022.

Employer Implications

Though designs vary, the typical retirement plan offered by multinational employers is a DC arrangement, jointly funded by employee and employer contributions at about 12% of base pay at the median (7% from the employer and 5% from the employee). The impact of the mandate may be modest for many employers that wish to use their existing plan as the auto-enrolment vehicle, especially if the auto-enrolment legislation aligns with the tax framework for group and personal pensions. That said, the to-be-determined prescribed minimum standards could require plan/fund changes in this situation (e.g., fee cap, default fund). Currently fees are lightly regulated and vary widely by type of investment management and strategy. Employers should monitor the development of legislation as further details are released.