Introduction

It appears Ireland is now set to introduce a mandatory pension scheme to encourage employees to provide for additional retirement income to supplement the State pension. One of the key proposals of the Roadmap for Pensions Reform 2018 – 2023 (“the Roadmap”) published by the Government, and addressed in my paper last year, is the introduction of an Automatic Enrolment Scheme (the “Scheme”) by 2022.

As reported by Harry McGee in the Irish Times, today, Minister Doherty sought, and received, Cabinet approval for the Scheme yesterday, Wednesday, 30th October.

Background

Despite some criticism, the auto-enrolment 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. State Street Global Advisors, an international financial services company, has conducted detailed research in the pension market in Ireland and states that only 15% of Irish pension scheme members are optimistic about their financial situation in retirement. Ireland is one of only two OECD countries without a mandatory earnings –related element to retirement saving.

Regina Doherty, Minister for Employment Affairs and Social Protection, has described auto-enrolment as “perhaps the most fundamental policy reform in a generation” for Ireland’s pension sector. At present, fewer than 47% of all workers have a workplace or private pension, which reduces to just 35% in the private sector alone.

Minister Doherty confirmed in February 2019 that the Government will push ahead with plans to introduce an auto-enrolment programme in 2022.She also confirmed that the Department of Employment Affairs and Social Protection had received more than 100 written responses to its consultation on the shape that auto-enrolment should take in Ireland from employer and employee representatives, pension industry bodies, academics and advocacy groups.

The Minister said: “While, as a general principle, we have identified a unanimous consensus on the need for increased retirement savings, there is also a diverse range of views on the preferred manner and means of delivering the auto-enrolment solution."

She confirmed that, “The feedback received during the consultation process will be used to inform the preferred operational structure for automatic enrolment.”

Consultation Process

The feedback has been largely unanimous on the need for increased retirement savings as previous efforts to encourage people to save for their retirement have failed. However, there is a diverse range of views on the preferred manner and means of delivering the auto-enrolment solution. In particular, there has been criticism of the Government’s proposal for auto-enrolment in terms of the proposed exclusion of certain groups of workers, including those under the age of 23 and over the age of 60, those earning below €20,000 a year, and the self-employed. These would not be automatically enrolled but would be able to opt in to the system.

In examining the written responses to the consultation, the following issues were raised across the board:

Beginning the Process Earlier The Government has indicated that, in order to avail of the scheme, an employee must be 23 years and over. The rationale behind the decision is that many individuals would be on a lower wage and may be more likely to change jobs or cease work for a period of study prior to this age. However, the Irish Congress of Trade Unions (ICTU) would like the age trigger to be aligned with the PRSI minimum age threshold of 16 years of age. This, in particular, would impact on young people who have chosen to begin their working careers at an earlier stage and would not be able to put their money into the retirement saving scheme. Alternatively, Irish Life has suggested the age of 18 and warns that if people are working for five years and then start paying into a pension, they’ll “see a drop in their earnings and most likely seek to opt-out of the system”. Include Lower Earners The Government’s proposal is that a person will be enrolled in the scheme once their earnings hit €20,000 per annum. Critics comment that this is too high and excludes a large share of workers such as those working part-time, with multiple low paid jobs, and on non-standard contracts. It has been widely noted that including these types of workers would ensure that employees working in certain sectors, such as the childcare sector, would have the opportunity to save. Furthermore, the ICTU states that this would have the “added benefit of narrowing the gender pension’s gap”. Include over 60s The current system does not envisage enrolling individuals who are over 60 years old, however some critics have called for the inclusion of older workers. Age Action says “consideration should be given to encouraging those without pension coverage and over the proposed maximum age of 60 years to register”. Given the increasing retirement age, it makes sense to include the older age bracket and allowing people to join over the age of 60. Standardise Tax Relief Auto-enrolment gives rise to two different tax incentive systems for private pension savings. The current system provides for tax relief of 20% on pension contributions if the employee earn less than €35,300 and 40% if the employee earns more than this and pays tax at the higher rate. Auto-enrolment offers a Government incentive of €1 for every €3 you save, equal to tax relief at a rate of 25%. Critics have expressed concern at having both systems in operation. Lower the Amount Employees pay Another frequently mentioned concern is the amount paid by employees as some have expressed the concern that 6% from gross income every year is not an insignificant sum, particularly if an employee is on €20,000 and would have to give up €1,200 of their gross income a year. The Irish Association of Pension Funds has stated that it might be wiser to set the maximum employee contributions at 4% or 5% of net salary. In a similar vein, employers are also worried they won’t be in a position to contribute 6% of salary once the introductory period ends. Include the Self-Employed and Homemakers Under the proposal, the self-employed will not be automatically enrolled but do have the choice to opt in. If the self-employed are kept out of auto-enrolment, some critics have warned that employers may seek to hire people on such a basis to avoid having to make pension contributions. As ICTU notes, it could “further increase the financial incentive for unscrupulous employers to use bogus self-employment arrangements”.

FORMAL ANNOUNCEMENT

Yesterday, Minister Doherty formally announced the Scheme and received Cabinet approval to press ahead.

In an important change borne out of feedback received during the consultation process, the ambition of the scheme has been scaled back. Instead of the employee reaching the 6 %contribution of salary within six years (with a 1% increment each year) the plan has been varied to reach it within ten years.

The new proposal is an initial 1.5 % contribution to be increased by 1.5% every three years to bring it to 6% in nine years rather than six.

Under the original proposals, the State was going to provide an additional 2% per cent to the savings as an incentive measure. However, Ms Doherty said that was one of five areas not yet been fully resolved. She said this issue generated much debate within the consultation process and was the subject of ongoing discussions with Minister for Finance Paschal Donohoe.

The following elements of the auto enrolment design have been settled on in principle by Government. In this regard, it should be noted that these elements may be subject to some change as work progresses in finalising the approach to other areas of design, the phasing of implementation and the development of the necessary legislation.

Target membership

Current and new employees aged between 23 and 60 years of age and earning €20,000 or above per annum (across all employments) will be automatically enrolled.

Those earning below €20,000 per annum (across all employments) and those employees aged under 23 and over 60 will be able to ‘opt-in’ to the system.

There will be no employee waiting period before enrolment.

Employees who are existing members of a pension scheme/contract which meets prescribed minimum standards and contribution levels will not be automatically enrolled for the employment to which that pension relates.

Contributions

During the phased roll-out of AE, employees will be required to make initial minimum default contributions of 1.5% of qualifying earnings, increasing by 1.5 percentage points every 3 years thereafter to a maximum contribution of 6% at the beginning of year 10.

Employers will be required to make a matching (tax deductible) contribution on behalf of the employee at the specified contribution rate.

Employer contributions will be limited to a qualifying earnings threshold of €75,000 – which will be reviewed over time.

Policy for opt-out and re-enrolment

Contributions during the first six months of membership will be compulsory.

Member opt-out of the system will be facilitated in a two month ‘opt-out window’ (between the start of the 7th and the end of the 8th month).

Members who opt-out during this opt-out window will receive a refund of personal contributions paid up to the point of opt-out.

Additional opt-out windows will be available six months after each increase in the contribution rates.

Thereafter, a limited number of ‘Savings Suspension periods’ will be facilitated for members who wish to temporarily cease making contributions. Employer and State contributions will also cease in this scenario.

Members who opt-out will be automatically re-enrolled after three years but will have the ability to opt-out again under the same circumstances outlined above.

Early access to accumulated retirement savings may be provided on the grounds of ill health and enforced workplace retirement.

Administrative arrangements and organisational approach

A Central Processing Authority (CPA) will be established by the State and will be responsible for sourcing, on a competitive basis via an open tender, a limited number of Registered Providers to provide a defined suite of retirement savings options.

The CPA will establish minimum standards for service delivery and product features required of all providers, e.g., the number of investment fund options for members, service response times, etc.

Employees will be automatically enrolled with the Central Processing Authority by their employer on commencement of employment.

Employees (rather than employers) will be responsible for selecting a provider and a savings fund option. In the absence of any savings decision, the enrolled employee will be automatically allocated to the default fund of one of the Registered Providers on a carousel basis.

The initial contract period for service delivery by AE Register Providers will operate for a period of ten years.

The CPA will seek to set annual administrative, management and investment charges of no more than 0.5% of assets under management. This charges cap will apply to all providers.

Member account portability between employments will be facilitated by a ‘pot-follows-member’ approach.

Investment options

Each Registered Provider will be obliged to offer a similar range of ‘standard choice’ savings fund options including a default fund for those who elect not to exercise choice.

These funds will operate on a Defined Contribution basis.

These products may incorporate a ‘lifestyle’ or ‘target date fund’ investment approach and will be defined by reference to risk profile.

Members will be entitled to transfer funds accumulated in the automatic enrolment system (contributions plus investment returns minus investment and management fees) between the savings products.

Automatic Enrolment design features still under consideration

There are five main areas where work is continuing in order to produce design options for Government to consider. These areas are related to the design of:

the scope and role of the Central Processing Authority (CPA); the nature and functions of the Registered Providers; the investment framework and funds to be offered by Registered Providers (including, importantly, the design of the default fund); the decumulation or pay-out phase; and the State financial incentive.

In relation to the first our areas listed above, namely, the CPA, the Registered Providers, the wider investment framework for AE and the pay-out phase, the Department of Employment Affairs and Social Protection is receiving technical support from the EU-Structural Reform Support Service (EU-SRSS). While the project’s work programme provides for the various strands to progress in parallel, priority is currently being afforded to the operational arrangements of the CPA. In this regard, proposals for the design of the CPA will be prepared for Government before the end of the year. Proposals on the design of the nature of Registered Providers, the investment framework and the pay-out phase will be submitted to Government for consideration in Q1, 2020.

With respect to a State financial incentive, the Strawman proposal gave the illustrative example that the State could contribute €1 for every €3 contributed by the individual to their pension fund. However, the level of the State incentive and its interaction with the existing marginal rate of tax relief scheme for occupational pensions was one of the issues that generated much debate in the consultation process.

Although the proposed matching contribution approach, as set out in the Strawman document, was supported by a number of contributors to the consultation process on the basis of being equitable, with the incentive the same for all income levels, and easier to understand, concerns were raised by other stakeholders as to how such an approach might operate alongside the existing marginal tax relief scheme for private supplementary pension contributions.

While the issue of State incentives within wider supplementary pensions is under the remit of the Department of Finance, it formed part of the Interdepartmental Pensions Reform and Taxation Groups (IDPRTG) Consultation on Supplementary Pensions Reform, whose work on this issue was recently completed. On the basis of the findings from this review and the responses to the Strawman consultation, further work is being undertaken examining the design of the State financial incentive for the AE system and a set of options on how to proceed will be brought to Government in Q1, 2020.

Phasing of Implementation

The Roadmap for Pension Reform commitment is to commence the implementation of an automatic enrolment retirement savings system in 2022. While the full implementation of an AE system2 to give effect to this commitment was widely recognised in the public consultation process, and in the Department’s consultation with international experts, as extremely ambitious, it is believed that a phased introduction, similar to the approach taken in other countries is achievable.

For example, in the UK the approach adopted was to commence AE with larger companies being enrolled first, followed by smaller companies some years later. Implementation could also be phased based on employee characteristics, for example starting AE for employees only, and extending to the self-employed and those outside of the labour force in later years. Another option is to limit the number of investment options to a basic or default fund in the early years but expand the funds available over a number of years. Similarly transfers from private pension provision into AE and vice versa could be restricted for a number of years thus simplifying administration during the start-up period.

All of these options are currently being considered and a proposal will be finalised for consideration by Government in advance of bringing the necessary legislation forward for publication.

“We want to create a system where people can see [they can] get an advantage. The incentive has to be enough but not so much that it causes undue burden [to other taxpayers],” she said.

It is hoped that an auto-enrolment pension scheme will be far more successful in increasing private pension savings than the current arrangement where people have to actively manage their own retirement plans.