What is auto-enrolment and how will it work?

Mercer presented at Cii's Finance Leadership forum last month and have kindly put together this article for those who couldn't make it on the day.

Auto-Enrolment (AE) is a new occupational pensions regime which will introduce mandatory retirement savings requirements for the first time in Ireland.

The Government’s aim is to substantially increase the number of employees who are currently saving for their retirement – it has estimated that approximately 800,000 new pension savers will be created by AE.

Under the new regime, a new State-operated central savings system will be established into which employees will be automatically enrolled. This new central savings system will, however, exist alongside the current occupational pensions system. This means that employers will be permitted to use their own occupational pension plan (or a Personal Retirement Savings Account) to meet AE requirements instead of using the central system provided that plan meets certain minimum standards.

AE will have significant implications for many employers and for many will present a major compliance and operational challenge as well as give rise to material additional business costs.

It is vital that all employers understand the extent to which it might impact them and the immediate and longer-term implications for their business and their employees.

What is the current status of auto-enrolment?

The Minister recently confirmed that the new regime will commence in 2024. A Bill to introduce the new regime will be published and put before the Oireachtas in March and is expected to pass into law quickly thereafter.

The Government has specifically recommended that employers continue to presume that AE will happen from Q4 2024, and to plan and budget accordingly.

What are the key initial questions that employers will need to consider?

AE will affect all employers in some way, and some quite considerably. As part of the planning and budgeting process, employers will need to consider these important questions at the outset:

• Which employees will be affected, both at the outset and in the future?

• What are the immediate and longer-term business impacts and, in particular, how much could AE cost?

• What options are available to meet AE requirements and what key decisions will need to be made?

• How could existing benefit arrangements be affected?

• How will strategic decisions be communicated to workforces?

Which employees will be affected by auto-enrolment?

AE will apply to any employee who is aged between 23 and 60 and who earns more than €20,000 per year. (The Government has also recently said that it may move to remove the proposed age, and perhaps also salary, thresholds).

The definition of “employee” has yet to be confirmed, but we anticipate that this will cover all persons who are directly employed, including variable hours staff, seasonal workers, short-term contract workers and workers on leaves of absence. Agency workers could also be included where the employer is paying the agency worker. Employees who are not automatically in-scope will still have legal rights to opt in to the new AE system if they choose.

What can we expect to happen when the new autoenrolment regime commences?

The State will establish a new body called the Central Processing Agency. The CPA will run all facets of the new central AE system into which all employees will be enrolled unless the employer decides to use a pension plan as the AE vehicle. The CPA will also liaise with employers and payroll service providers.

Once the new regime commences, the CPA will check employee data to determine their gross remuneration and to see if pension contributions are being made by or in respect of an employee. If the employee’s remuneration exceeds €5,000 in the first 13 week period from the commencement of the regime, the employee will be deemed to be within scope and the CPA will issue an “AE payroll notification” (APN) to the employer / payroll provider. (This is similar to the existing Revenue Payroll Notification process where employers are notified to ensure the correct tax information is being applied to employees’ pay).

The APN will confirm the rate at which contributions must be deducted from the employee’s pay. At that point, employers must either ensure that the relevant contributions are deducted and made to the CPA with respect to the relevant period, or instead ensure that contributions are paid either by or in respect of the employee to the employer’s pension plan.

What are the key decisions to make before autoenrolment commences?

Before this process begins, employers are going to need to make a couple of key priority decisions: firstly, what approach will be used to meet obligations in relation to employees who are not currently contributing to a pension plan.

The answer to this will involve assessing whether employees are going to be better off in the central AE system or in the pension plan. Secondly, if employers do choose a pension plan as their AE vehicle, they will need to look at the options they have as regards contribution structures.

In time, employers should also consider whether there are any existing active members of the pension plan who may at some point be better off under the AE structure and, if so, what solutions might appropriate for that group.

Employers will also need to think about what changes might need to be made to the pension plan to accommodate the approach they decide to take.

Which approach should be used to meet auto-enrolment obligations?

Based on what we know so far, Mercer’s view is that where an employer currently provides an occupational pension plan this will likely be, for most employers and many employees, a better total retirement benefits solution for both the employer and employees than the State’s central system.

However, it is understood that employers will not be able to simply enrol their affected employees into their own pension plan – the consent of the employee will be needed. If the employee does not consent, they will be automatically enrolled into the State’s central system. This presents a real conundrum for employers who will want to avoid the administrative complexity of having to operate two parallel retirement benefits arrangements for employees, not to mention the potential confusion this could create for employees.

This places an even greater emphasis on the importance of an effective employee engagement process, where the merits of joining the pension plan can be outlined and the employee’s agreement to join the plan obtained.

Employers that do not currently provide an occupational pension plan will need to carefully consider which approach will suit them and their employees best.

Employers who have smaller workforces, or who employ staff on lower incomes and/or typically for shorter periods, may actually find the central system a more suitable option – although there are occupational pension plan products available in the market (such as Master Trusts) which could provide additional options and more flexibility than is available under the central system at a broadly comparable cost.

How much could auto-enrolment cost?

This is a key consideration and many prudent employers are already undertaking preliminary cost analyses. There may be initial costs to address relating to implementing AE requirements. These will need to be considered as part of budgeting for commencement in 2024.

However, the principal immediate and ongoing cost consideration relates to payment of employer contributions in respect of all affected current and future employees. This will be the case irrespective of the vehicle that is chosen to meet AE requirements.

Employers will also need to understand how contribution costs will increase over time. Under the AE design, contribution rates will be lower initially but will be increased on a phased basis over the first 10 years of the regime. For the first 3 years, a total rate of 3.5% of gross earnings will apply. This total rate then rises to 7% in Year 4 of the new regime, 10.5% by Year 7, and 14% by Year 10. The employer’s share of this total required contribution rate will be 1.5%, 3%, 4.5% and 6% respectively at each staged increase (the employee pays at the same rate and the remainder of the total contribution is made up of a State top-up). These minimum rates will be relevant not just to any employee not already enrolled in the plan, but also to any other employee who is in the plan but not currently contributing at the minimum level required.

Costs will ultimately depend on the options chosen by the employer during the implementation phase and may also be different for those members who are actively contributing, employees included in the plan for death benefits only, and future hires. These options will need to be carefully considered at an early stage.

What 'minimum standards’ will apply to pension plans being used to meet auto-enrolment requirements?

The Government has said that when AE commences it will only check to see if there are active contributions going into a pension plan (or PRSA) for or on behalf of the employee. Once resources permit, it will then start checking to ensure that employees who have been included in pension plans are “no worse off” than they would have been in the central AE system in retirement savings terms – i.e. if the pension plan they are in is not building the same level of retirement savings in net terms then that pension plan will not be acceptable as an AE vehicle.

In time, we understand that pension plans will also have to meet additional ‘minimum standards’ in order to be a qualifying pension plan for AE purposes. At present, the Government has said that it is focused on establishing the new regime and setting up the central system. The minimum standards will therefore not be legislated for in this initial phase but will likely be introduced after the first increase in mandatory contributions occurs.

What should employers be doing now?

The introduction of Auto Enrolment is a significant event for employers. As per the Government’s recommendations, the planning and budgeting process for the commencement of AE should start now, looking at the issues and key questions discussed above. In particular:

• Make sure you have identified all of the employees who will or could be affected by AE;

• Make sure you fully understand all of the potential cost implications

• Consider what approach to meeting AE obligations will suit your organisation best in the initial phase

• Consider the potential impacts on your existing pension plan (if relevant)

• Start formulating your strategy for effective communication to employees of your decisions. 

We already know enough about the design of AE to make reasonable assumptions to inform those decisions, and it is important that employers know where they stand.

Join Cii & Mercer in Cork on 22 February 2024 to learn more about Auto-Enrolment

For more information on auto-enrolment and what it might mean for your organisation please contact marketing.ireland@mercer.com