Significant employer implications of new government auto-enrolment policy shift

Following discussions with Department of Social Protection officials, the Irish Association of Pension Funds (IAPF) released a statement this week that says that the government is accelerating plans to introduce AE minimum standards for occupational pension plans far sooner than originally anticipated.

 
In summary, the government intends to introduce a requirement for pension plans to provide a minimum total contribution rate of 3.5% of the employee’s gross remuneration in order for employees to be exempt from auto-enrolment into the new central retirement savings system, My Future Fund. At least 1.5% of this must be paid by the employer. The remaining 2% must be paid by either the employer or the employee.
 

This new approach would have material implications for many employers. The update below sets out what has happened and the issues we think employers will now need to consider.

Background and current position

AE establishes a new State-operated retirement benefits savings plan called “My Future Fund” (MFF), into which all employees aged between 23 and 60 and earning more than €20,000 annually will be auto-enrolled unless they are already saving in an occupational pension plan, PRSA, Trust Retirement Annuity Contract, or Pan European Pension Plan (known as “qualifying pension plans”). This means that where an employee is either paying, or receiving employer, contributions via payroll into a qualifying pension plan they will be fully exempt from having to join MFF.
 

The government has always intended to introduce mandatory “minimum standards” for qualifying pension plans in line with legislative requirements. This was to ensure that pension plan terms are “at least as favourable” as those under MFF.
 

However, the government had not planned to introduce the minimum standards for the first few years of AE. According to its website, and as required under legislation, standards were to be introduced by NAERSA (the AE supervisory authority) “by the end of year six” at the latest and following consultation with the Pensions Authority.

 
In the meantime, employers have been explicitly told by the Department of Social Protection on its website that “any pension contribution greater than zero will be enough to exempt an employment”. Employers across Ireland who provide occupational pension plans and who, for lots of reasons, intend to use these plans to meet their AE obligations, have for many months been planning, preparing, budgeting and taking actions for AE readiness in good faith on this basis.

Why has the government shifted its policy position?

It appears the government have become concerned in recent weeks with evidence that suggests that some employers have been compelling employees to join their pension plan at a low contribution rate to ensure they are exempt from MFF, meaning that they could be receiving less favourable terms than would be available in MFF, and with no option to ever join MFF.

They see the acceleration of minimum contribution requirements as a way to discourage this activity and ensure employees are properly protected from unfavourable treatment.

What is now being planned?

The government is now bringing forward mandatory minimum standards for occupational pension plans far sooner than originally planned.
In particular, in order for an employee to be exempt from automatic enrolment into MFF, they will need to be in a pension plan that provides a minimum total contribution rate of 3.5% of the employee’s gross remuneration. At least 1.5% of this must be paid by the employer. The remaining 2% must be paid by either the employer or the employee.

This would essentially bring the total contribution rate available in a pension plan in line with what would be provided to participants in MFF in Years 1 to 3 taking into account the employer and employee contribution (both 1.5%), plus State top-up (0.5%). (It is notable that in setting this minimum, the government is not taking into account the tax reliefs currently available on employee contributions under the existing occupational pensions system).

When would these regulations be effective from?

The government has said that regulations would be published by mid-December, although it is unclear from when they would actually be legally effective, particularly taking into account the need for NAERSA to update systems to carry out the necessary compliance checks. This remains an open question.

There is also a specific process the government must go through: it must consult with the Pensions Authority and the approach must be approved by NAERSA.

We are also aware that industry stakeholders have already proposed a lead-in period of at least 12 months before any minimum contribution requirements come into force, a view with which we agree.

What would this mean for employers?

Until we see any official details announced by the government, it is unfortunately not possible to give employers definitive guidance on what actions they should be taking and within what timeframe.

However, if legislation is introduced as is now anticipated, in order to be a qualifying pension plan and for an employee to be exempt from auto-enrolment into MFF, plans would have to meet the minimum contribution requirements.

Employers would need to take action to review minimum rates applicable to affected employees and, where necessary, take actions to level up the rates in order to be compliant. Engagement with employees on these changes would also be strongly recommended.

It is unclear at this stage whether legislation will allow employers the power to automatically enrol employees into their plans at the rates required. At present, it is not possible for an employer to include an employee in their plan and start deducting contributions from their pay; the employee’s consent is required. Without such power, where an employee does not consent to pay at the required rate for any reason, the employer would be forced to make up the minimum rate shortfall, or have the employee join MFF.

What should employers do now?
Until we have a definitive position, our advice at this stage is to avoid any knee-jerk reactions. We are continuing to analyse the implications for employers of this policy shift and as soon as further details are known we will have a better idea of the likely actions that will be needed and within what timeframe.

 
Mercer will also be engaging with the Department of Social Protection and with NAERSA to raise concerns and seek clarifications on key points over the coming days. In particular, given how much work has been done by employers to date, it is disappointing and concerning that a significant policy change is being made at such a late stage and there are potential risks of unintended consequences as a result.

In the meantime, should you require any assistance, please contact Mercer https://www.mercer.com/en-ie