What Irish Employers Should Know About Auto-Enrolment

In 2023, The Oireachtas Social Protection Committee recommended changes to the pension age in Ireland. The Committee’s recommendation was that the “cut-off age of 70 be replaced with 75 and that the enhanced pension would keep increasing until the individual starts drawing down their pension or reaches 75, in light of the fact that life expectancy has increased from 65 to 82 years old.”

This month, further steps have been taken in Ireland to address our changing circumstances as a nation, culminating in government passing the Automatic Enrolment Retirement Savings System Bill 2024 to bring in a Pension Auto-Enrolment system, which will come into effect in January 2025, with approximately 800,000 employees set to be enrolled in this scheme in 2025.

 

Auto-Enrolment is set to come into effect in the first quarter of 2025. The Automatic Enrolment Retirement Savings System Bill was approved by both Houses of the Oireachtas on the 4th of July, and the bill will be sent to the President to be enacted.

The Auto-Enrolment Scheme will mark a seismic shift for Ireland, as Ireland remains currently the only OECD country without a Pension Auto-Enrolment scheme or any equivalent.

 

In Ireland, only approximately 35% of employees in the private sector have a supplementary pension, as measured by the CSO. The Auto-Enrolment scheme was devised to support quality of life for Irish workers their term of employment, and to raise the current pension provision to 70% and beyond, as long stated by the government.

Currently, anyone without a private or work pension relies on the State pension upon reaching retirement age. This may mean that they will experience a drop in income upon retirement, which could affect their standard of living. With demographic shifts such as falling birth rates across Ireland means that we have an ageing population with fewer people of working age to support our retired population. Many workers anticipate relying primarily on the State pension for their retirement income, which will further strain the already burdened system. To address this issue, Auto-Enrolment is viewed as an effective solution that could encourage individuals to recognize the importance of saving for their retirement and become more financially conscious.

 

At present, the retirement age in Ireland is 66 years of age. This is the qualifying age for all State pensions, but you can choose to defer claiming your Contributory State Pension up to the age of 70.

According to The Pensions Authority, “occupational pension schemes, also known as company pension plans, are typically set up by employers to provide retirement benefits for members in the form of pensions, other taxable payments and tax-free lump sums within limits set by Revenue. Many pension schemes also provide death benefits payable to a member’s dependants on the death of a member.”

At present, there is no legal obligation on employers to provide occupational pension schemes for their employees. However, large businesses often have occupational pension schemes in place, although this isn’t quite the same when it comes to smaller businesses.

If you’re an employer who doesn’t have an occupational pension scheme in place, you must give your employees access to a type of pension plan known as a Personal Retirement Savings Account (PRSA).

There are various types of pension schemes, such as:

• Contributory: Both the employer and employee pay contributions towards the scheme.
• Non-contributory: Only the employer contributes towards the scheme.
• Funded: The most common type of pension scheme where contributions are put into a designated fund and benefits are paid from that fund.
• Unfunded: Benefits are paid out of current government funds.
• Defined benefit: The pension contributions an employee makes are set and the benefits they receive depend on the amount of the contributions they make.
• Defined contribution: Here, the benefit an employee is entitled to is established in advance.
• A hybrid of a defined benefit and defined contribution: This is when an employee can predict a certain amount of income, as in a defined benefit scheme. The remainder will be subject to defined contribution rules.

Now that we’ve covered occupational pensions, let’s look ahead to a new scheme employers have coming their way in 2025 - Auto-Enrolment.

 

Auto-Enrolment is a scheme by which certain employees who are not already paying into a pension saving scheme will be automatically enrolled in one.

A new Central Processing Authority will be set up to administer the auto-enrolment scheme which will see contributions come from the employer, employee, and government. Those who will be will be automatically enrolled are employees who are:

• Aged between 23 and 60.
• Not currently part of a pension plan.
• Earning €20,000 or more per year.

If an employee earns less than €20,000 per year or isn’t aged between 23 and 60, they can choose to join the pension plan if they’re not already part of a pension scheme. Regarding the maximum contribution, Citizens Information states that “both an employer’s and the government’s contributions are capped at €80,000 gross annual salary. This means for the first three years, the maximum amount an employer can contribute is €1,200 a year. This is because 1.5% of €80,000 is €1,200. The maximum amount the Government can contribute is €400 a year, which is 0.5% of €80,000.”

What this means is that, if an employee earns over €80,000, they can still contribute to the scheme. However, their employer and the government won't match their contributions on any income over €80,000.

 

Under Auto-Enrolment, employees will be required to make certain minimum contributions to a pension scheme. Employers are obliged to match these contributions, which will then be topped up by the State.

For every €3 contributed by the employee, a further €4 will be invested by the employer and the State combined. Contributions per year will fall as follows:

Contributions by Employee:

Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%

Contributions by Employer:

Years 1 to 3: 1.5%
Years 4 to 6: 3%
Years 7 to 9: 4.5%
Years 10+: 6%

Contributions by State:

Years 1 to 3: 0.5%
Years 4 to 6: 1%
Years 7 to 9: 1.5%
Years 10+: 2%

 

The aim of this scheme is to encourage retirement savings, and to reduce the burden of administration on employers. 

Therefore, employees will be automatically enrolled in the scheme but will have the option to opt-out after six months, but after two years, they will once again be automatically enrolled.

If an employee decides to opt-out of the scheme within months 7 and 8 after a change in contribution rates, they'll get a refund. This refund will be based on the difference between your own contributions at the old and new rates during the previous six months. This option is only available during the first 10 years as contribution rates gradually go up from 1.5% to 6%. There will be 3 contribution rate changes.

Related Article: National Living Wage in Ireland: What Employers Need to Know

 

The Auto-Enrolment Bill introduces a new pension savings system that employers must integrate. Employers have two main approaches:

1. Dual Scheme: Continue current pension plans and handle Auto-Enrolment compliance when notified. This may involve managing both Auto-Enrolment and existing schemes separately.
2. Single Scheme: Adjust existing pension schemes to meet Auto-Enrolment requirements, treating all employees as exempt from Auto-Enrolment.

Employers need to consider:

• Which employees fall under Auto-Enrolment.
• Payroll Considerations, looking at the cost and administrative impact.
• Employment law implications of auto-enrolling employees.
• Potential design changes to current pension plans.
• Employee relations issues due to different benefit levels between schemes.

Managing pension contributions is one thing; managing payroll is another. 

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