On 29 March 2022, the Government approved the introduction of the Automatic Enrolment (AE) Retirement Savings System. This follows from the Government’s ‘Roadmap for Pension Reform 2018-2023’, a strawman proposal on AE in 2018 which we reviewed here and the subsequent update on AE issued by the Government in 2019 which we covered here.
What Has Been Announced?
The Government has announced the AE’s system final design, which is expected to commence from January 2024. The AE system will result in employees between the ages of 23 and 60 who earn more than €20,000 and who are not already enrolled in an occupational pension scheme, becoming automatically enrolled in the AE retirement system.
The AE system will be brought in on a phased basis over ten years to allow employees and employers to adjust to AE. The phased implementation and contribution rates are as follows:
|
|
Employee Contribution |
Employer Contribution |
State Top-up |
|
2024-2026 |
1.5% |
1.5% |
0.5% |
|
2027-2029 |
3% |
3% |
1% |
|
2030-2032 |
4.5% |
4.5% |
1.5% |
|
2033+ |
6% |
6% |
2% |
Employer contributions and State top-ups will be based on a cap of a maximum gross employee salary of €80,000. Employees may opt-out of the AE system after six months if they do not want to contribute to their pension. Employees who opt-out will be refunded their contributions and will be removed from the pension scheme for two years before being automatically re-enrolled again. Employer contributions and the State top-up will remain in the pension pot but stop until a participant is re-enrolled.
What’s New?
The scope and role of the Central Processing Authority (CPA) have been laid out by the Government. The CPA will be an independent statutory body regulated by the Pensions Authority. It will be established on an administrative basis within the Department of Social Protection in the second or third quarter of 2022 pending the establishment of the CPA as a statutory body. The CPA will be responsible for, amongst other things, contribution collection, compliance, the allocation of pooled contributions to registered providers (RPs), the allocation of pooled investment returns to participants, and the overall administration of the AE system.
The nature, function and funds offered by RPs has also been clarified. RPs will provide investment options and act as investment managers for the AE contributions. RPs will be required to offer four fund types: conservative; moderate risk; higher risk; and default. A default option is in place for employees who do not nominate a preferred fund type and will follow a “lifestyle” approach. There will be four RPs selected by the CPA through a tender process.
Finally, the State has opted for a top-up basis of financial incentive rather than a system of tax relief. The view of the State is that the top-up basis is more transparent and treats everybody equally regardless of their marginal tax rate. The State will contribute 33 cent for every €1 that an employee pays into their AE fund.
What’s Next?
Legislation to set up the AE system is expected to be in place by the third quarter of 2023 in anticipation of its commencement in the first quarter of 2024. It remains to be seen how the AE system will facilitate employees who are currently in an occupational pension scheme and wish to switch to the AE system. AE will have a financial impact on employers who do not currently operate occupational pension schemes. Employers should continue to monitor developments over the coming months to ensure they are adequately prepared.
Contact Us
For more information on the AE system, please contact Ian Devlin, Ciara McLoughlin or your usual William Fry contact.
