Auto-enrolment

Auto enrolment planned to commence from 1 January 2025

In a significant move forward, Minister Humphries published draft legislation for the Automatic Enrolment Retirement Savings System 2024 on 5 April. This represents a milestone in the Automatic Enrolment (AE) journey, further solidifying key aspects of the approach to AE implementation and regulation. 

The AE Bill largely conforms to previously published features of the AE system, and the Government has indicated a possible start date of 1 January 2025. Once commenced, any employee who is not currently participating in a pension scheme — and who meets the age and earnings eligibility requirements — will be automatically enrolled in the AE system. Organisations are considering whether to adopt the AE system or an alternative pension structure.  

Understanding AE

Under the AE system, eligible employees will be automatically enrolled into a personal account where contributions from the employees themselves, their employers and the government will accumulate.

The AE authority

The National Automatic Enrolment Retirement Savings Authority (NAERSA) will be established as an independent body to administer the AE system. NAERSA will act in the interests of participants, ensuring the smooth operation of the system and safeguarding contributions made by employees, employers and the government.

A Board of Authority, supervised by the Pensions Authority, will be set up to hold NAERSA to account. The Board will report to the Minister, who will appoint five to eight members.The Financial Services and Pensions Ombudsman’s services will also be available to participants. 

Eligibility criteria

Eligibility for AE is determined by age, earnings and pension coverage. Employees aged between 23 and 60, earning more than €20,000 yearly across all employments in a pay reference period, and not in an exempt employment, will be enrolled into the system. 

NAESRA will determine the pay reference period, but it is expected to be a rolling period of 13 weeks. This means an employee not in an exempt employment, earning more than €5,000 over 13 weeks, will be enrolled. An exempt employment refers to one where there is an active employee or employer contribution to an approved pension scheme during the pay reference period. Employees who don’t meet these criteria can opt into the system if they wish.

Contribution structure

The AE system’s contribution structure is designed to increase gradually over time. The contributions, based on gross earnings (up to an €80,000 limit), are split among the employee, the employer and the government. 

The employee and employer contributions start at 1.5% yearly and rise to 6% yearly after 10 years. The government top-up starts at 0.5% yearly and rises to 2% yearly after 10 years. The employer contributions qualify for corporation tax relief, and the government top-up is in lieu of any tax relief on employee contributions, which are not relieved for tax, USC or PRSI.

Investment management

NAERSA will appoint one or more investment managers to manage the investment of contributions. The investment managers will provide three risk levels for the personal accounts: higher, medium and lower. The risk levels are based on a scale of one to seven, where one represents the lowest risk and seven represents the highest risk. NAERSA will assign each participant’s contributions to the appropriate risk level based on their age, unless the participant selects a different risk level or more than one risk level.

Payment of benefits

The payment of benefits from the AE system will depend on the participant’s circumstances. In normal circumstances, the participant can withdraw their balance as a lump sum or apply it for the purchase of an annuity, an approved retirement fund or a similar arrangement, at or after their pensionable age. That is currently 66. 

In exceptional circumstances, such as incapacity or ill-health, the participant can apply for early payment of their balance, subject to NAERSA’s approval. There is no current provision to permit early retirement except on the grounds of ill health. 

If the participant dies, their personal representatives can withdraw their balance. Any unclaimed balances will be transferred to the Dormant Accounts Fund, from which they can be reclaimed by a person or people who can prove they’re entitled to do so.

Compliance and enforcement

Authorised officers of the NAERSA, with various powers and duties, will oversee compliance with and enforcement of the AE system. The officers can issue compliance notices or fixed payment notices to employers who fail to enrol, pay or deduct contributions — or who hinder employees from, or penalise them for, participating in the system. 

The officers can also inspect and audit employers and employees to ensure they’re adhering to the system. The legislation lists several offences and penalties for non-compliance, ranging from fines to imprisonment, depending on the severity and nature of the breach.

Employer considerations

For most employers, not all employees are automatically enrolled into an existing pension arrangement.  They need to decide what pension structure to adopt for those employees not in a pension arrangement, but who would be eligible for AE.  

There are a range of differences between the existing occupational pension regime and the AE design. Some of the factors to take into account in the decision process include:

1. Administration and payroll
With AE, payroll changes will be needed, and these will need to be tested and validated for those impacted. NAERSA will issue an AE payroll notification and will be responsible for collecting the contributions.

2. Costs
This will depend on the contribution design of any existing pension scheme and the relativity between pensionable earnings and gross earnings (subject to the cap of €80,000). Employers may also consider alternative contribution designs in their existing scheme.
Any existing occupational pension scheme may have a two-year vesting where the employee doesn’t receive the value of the employer contributions in the event they leave the organisation within two years.  This will be important to consider where employers have significant turnover compared to the AE system where employer contributions are immediately attributed to the participant’s account.

3. Employee perception and suitability
How the AE system is perceived, particularly when there is already an existing scheme in place, will be important. Employers will need to be clear in their communications where two different systems may be adopted.   They’ll also need to consider which options suit different employee cohorts. 

4. Employer responsibilities
Under AE, where an employee is eligible, NAERSA will issue a notification to employers who need to give notice to the employee confirming their enrolment date. Employer contributions will also need to be remitted to NAERSA. NAERSA will be able to determine any other information they may need from employers to fulfill their role. 

A practical approach

As employers prepare for the changes, a sensible way forward includes:

• Reviewing existing eligibility
  Employers should review existing pension scheme eligibility and coverage. They should also consider the effect on new hire employment contracts.
  
• Considering demographics
  Employers should consider the profile of all employees (age, earnings, other employment and so on) and identify those not currently in a pension scheme who would be eligible for AE
  
• Assessing impact
  Employers should consider the effect of operating AE or an existing pension scheme in isolation (where applicable) or both an existing scheme and AE scheme. They should weigh up the options, costs, and respective pros and cons.
  
• Operational changes and communications
  Employers should consider the operational changes needed once any decision is made about which pension structure to adopt for which employee cohort. This will include payroll changes, HR policies and procedures, and finance. Employers will also need to review employee contracts and existing pension scheme eligibility conditions. And they’ll have to prepare communications for employees.