Auto Enrolment: How do I handle it?
By Jennifer Cashman
18 December, 2018
Ireland’s ageing population, and the challenges presented as a result, is a topic that continues to dominate both the headlines and HR practice and there have been a number of significant developments in that regard during 2018.
To set the context, according to a report published in August 2018 by the Department of Finance, “Population Ageing and the Public Finances in Ireland”, (“the Report”), Ireland’s old-age dependency ratio – the number of retirees as a fraction of the number of workers – is set to double over the coming decades, from 21 per cent at present to a peak of around 46 per cent in the middle of this century. Put another way, there are currently around 5 persons of working age for each person aged 65 and over; by 2050, the equivalent figure will be just over 2. The Report outlines that this will involve increased outlays in demographically-sensitive components of public expenditure, such as pensions and healthcare.
The Report sets out that in many advanced economies – the US, EU, Japan – a demographic turning point has already been reached: the number of people of working age has peaked and is on a clear downward trajectory. As a direct result, economic growth rates are slowing and demographically-sensitive public expenditure is rising in many of these countries. The challenges currently facing policymakers in these regions provide a useful snap-shot of the challenges that demographic change will bring for Ireland in the not-too-distant future. While Ireland’s demographic structure is relatively favourable at present, shifting demographics in the coming decades will result in a slower pace of economic expansion and put significant pressure on the public finances.
The Report notes that a range of policy reforms, such as increases in the State Pension age, have been implemented to mitigate the costs associated with the ‘greying’ of the population. However, according to the Report, an increase in both the employment rate of older workers (for instance by linking retirement age to life expectancy) and of those of working age (by addressing barriers that weigh on female participation rates) could help to mitigate the impact of population ageing on the public finances. However, additional measures – including fiscal restraint in non-age related spending – will be necessary to safeguard the sustainability of the public finances.
As outlined in my Review of the Year 2017, 87% of the Citizens Assembly recommended the introduction of some form of mandatory pension scheme to supplement the state pension and 88% said that the pension should be benchmarked to average earnings. This concept of a mandatory pension scheme, or auto enrolment, derives from a concern that most Irish workers are not saving enough, or indeed at all, for their retirement years and that many people will be faced with a serious reduction in their living standards when they retire.
It seems as if a mandatory pension scheme is now indeed on the horizon and, in that regard, as the snow was falling in late February, the Roadmap for Pensions Reform 2018 – 2023 (“the Roadmap”) was published by the Government. The Roadmap is an ambitious five year pension’s roadmap, proposing reform in a number of key areas of the Irish pension system.
One of the key proposals in the Roadmap is the introduction of an Automatic Enrolment Scheme (the “Scheme”) by 2022. In short, the Scheme would require employers who do not have a private pension scheme in place to enroll employees automatically into a retirement savings scheme.
On 22 August 2018, Minister Doherty launched a public consultation process and a high level draft of the auto enrolment proposal. The public consultation process invites private individuals, employers and representative groups to share their feedback on the draft proposal.
The draft proposal for a new Automatic Enrolment Retirement Savings System together with other supporting documents is available on www.welfare.ie/consultations.
The Scheme envisages that PAYE workers, aged between 23 and 60, who earn more than €20,000, will be subject to auto-enrollment to a pension scheme in 2022 if they are not already members of a Scheme. It is thought that this will affect over 850,000 workers.
The Scheme involves workers having to pay up to 6% of their gross pay towards their pension annually. As the law currently stands, there is no obligation on employers to contribute to or provide a pension scheme for their employees. Employers will also be required to make a matching contribution, with the State also contributing at a lower level. It is proposed that the State will contribute €1 for every €3 saved by the employee.
As published, the Scheme would initially require employees and employers to make a 1% contribution in 2022 which would increase every year until a 6% contribution is achieved by 2027.
It has been acknowledged that the proposal is designed to generate discussion and will undergo amendment if required following the public consultation period. That public consultation ended on 4 November last and Government officials are currently reviewing the feedback received during that consultation, all of which will be used to inform the final design of the scheme.
This proposal is a significant development and would bring Ireland in line with other OECD countries who have mandatory earnings related elements to their retirement saving in place at the moment. As it currently stands, Ireland is one of only two OECD countries without some form of pension contribution or auto-enrollment scheme in place.
In anticipation of auto-enrolment, it is worth looking to the UK where auto enrollment commenced in October 2012. Prior to the scheme commencing, the UK’s pension scheme membership was in steady decline. Membership had decreased around 10% between 1997 to 2012. It was also noted that over 11.3 million people were not making contributions to their own private pension schemes. The scheme itself has been rolled out gradually in the UK, with the larger employers being the first to enroll, and smaller employers being phased in in October 2017. This was determined by the payroll size of companies. By way of example, companies with over 50,000 employees on their payroll commenced the process in 2012, while companies with between 30 – 58 employees began the process in 2015. The scheme applies to employees over the age of 22 and below the stage pension age who earn above £9,440 per annum.
The UK legislation specifies certain minimum levels of contribution levels for employers who can also choose to increase their contributions, if they so wish. The minimum contribution levels for employees is set at 2% in total. The contribution levels are now at 8% as of October 2018. This 8% is broken down with the employer contributing 3%, the employee contributing 4% and the remaining 1% is tax relief. There is an obvious risk however, that this minimum contribution of 8% will lead employees into a false sense of security that they will have a pension, but the contribution itself may not be sufficient to allow the retiree’s to live comfortably.
So, how has the implementation process in the UK gone? In the first year, which was focused on the largest employers, over 1,100 employers registered. This, in turn, meant that over 6.7 million employees were automatically enrolled. According to Charles Counsell, the executive director of the Pensions Regulator in the UK, one of the key lessons learned was that employers “will have [their] own unique challenges depending on [their] structure – we advocate starting 18 months ahead”. The planning ahead referred to the importance for employers to be aware that they need to set up a plan and must bear in mind the “capacity of the pension industry and adviser availability”. A recommendation would be to seek out this information at least 6 months in advance of starting the planning process. Employers should bear in mind that, if the Irish auto enrolment legislation mirrors that of the UK, they will have to register and provide the relevant data to their providers. This will ultimately be a time consuming task. Payroll software will also need updating for the implementation of this scheme. Again, this should be done 6 months in advance. The importance of effective communication with employees in relation to the scheme was also noted, particularly when the UK legislation makes it clear that employers cannot induce employees to opt out.
In terms of positive outcomes from the implementation of the scheme in the UK, 73% of all employees are now active members of a pension scheme. The extra annual contributions by 2019-2020 are set to be valued at approximately £19.7 billion which is all down to auto-enrollment. A noted negative side of the scheme is that many employees are too close to retirement to begin saving into their pension. A further negative noted from the UK’s implementation of auto enrollment was the complexity of the employers’ guidance which extends over hundreds of pages. The rules were also quite complex.
By way of further example of a system that works well, it is worth mentioning the collective defined contribution plans implemented in the Netherlands. The Dutch collective funds are commended by many commentators in the UK for their transparency in costs and scale. Interestingly, the weakest point of the Dutch pension scheme, according to Michael Visser, a pension’s specialist at Tilburg University in the Netherlands, is “the pension provision for [the] self-employed”.
While the prospect of implementing auto-enrollment in Ireland is a significant development in terms of pensions and retirement here, from the above we can see that there is much to consider prior to rolling out the Scheme. It will be interesting to see the recommendations arising from the consultation phase once it ends and the output is published.
Questions received during the Annual Review
1. Can you auto enrol employees onto the existing company pension scheme or do you have to use one of the nominated providers under auto enrolment?
It is unclear at this point how existing pension schemes will sit side by side with auto enrolment and we will not have clarity until we see draft legislation. However, if we look to the UK, on which our scheme is likely to be heavily modelled, the following is the position. Employers in the UK are able to comply with their obligations by using an existing qualifying pension scheme. It is important that the pension scheme shows and delivers good outcomes to the employee’s retirement savings which means that an employer’s existing scheme may not be appropriate as it may have been designed for the needs of higher paid and more senior employees. To be a qualifying automatic enrolment scheme, a scheme must meet the qualifying criteria and the automatic enrolment criteria. This means that the pension scheme must meet certain minimum standards, which differ according to the types of pension scheme. The scheme must not contain any provisions that prevent the employer from making the required arrangements to automatically enrol, opt in or re-enrol the “job holder” and/or require the job holder to express a choice in relation to any matter, or to provide any information in order to remain an active member of the pension scheme.
The second point above means, for example, that the pension scheme has default funding to which the pension contributions attributable to the job holder would be invested. The job holder should have a choice of other funds if they wish.
Whilst we will not know exactly how our own automatic enrolment scheme in Ireland will sit side by side with existing schemes, it is likely to be similar to the UK provisions above.
2. If the State is going to contribute to automatic enrolment pensions, is there a plan to abolish tax relief on contributions to existing pension schemes?
This is a concern that has been raised by many commentators in relation to automatic enrolment. In circumstances where the Government is making a contribution to automatic enrolment as opposed to providing tax relief, the fear is that tax relief on existing pension contributions will be abolished. However, it is important to note that no proposals have been set out which suggest that the Government intends to abolish tax relief on existing pension contributions. Therefore, as things currently stand, there is no such plan in contemplation as far as we can tell.
3. Will part time and casual workers be covered by automatic enrolment?
Yes, there is no reason why part time and casual workers would not be covered by automatic enrolment. It is anticipated that cover will extend to all employees but again we will have to wait to see what definitions are contained in the legislation.
4. If your business has a mandatory pension from age 25 with one year’s service, would it be prudent to amend the age in advance of automatic enrolment?
As things currently stand, the proposals with regard to automatic enrolment are just that, proposals. In relation to the age at which employees will be automatically enrolled, the proposal is that eligible employees will be those between the ages of 23 and 60. If that remains the case, then it would seem that it may be prudent for employers to have a look at their existing occupational pension schemes because it is unlikely that they will meet the criteria for qualifying pension schemes if they do not have the same eligibility criteria as automatic enrolment. It will be prudent to start having conversations with your pension advisors in relation to the existing scheme and the ability to change the eligibility requirements but no final decisions should be made until we have more definitive news on what should our automatic enrolment system is likely to take.
5. Why does automatic enrolment stop at age 60 if employers can’t get State assistance until at least age 66?
At the moment, the proposal is that eligible employees, who will be automatically enrolled, are those between the ages of 23 and 60. However, employees outside of that age bracket are not excluded as such. Instead, they will have the option to opt in to automatic enrolment, whereas all eligible employees will have to opt out.