by Eleanor Cunningham, Partner and Head of the Pensions & Incentives Group at McCann FitzGerald LLP
Approval of the General Scheme of the Automatic Enrolment Retirement Savings System Bill 2022 (the “Bill”) was announced back in October 2022 by the Minister for Social Protection, Heather Humphries, in what she described as “generational reform in the Irish Pensions landscape…turning the present system on its head”. Due to launch later this year, this briefing examines the key features of auto-enrolment, and what employers operating in the private sector should consider.
The Bill lays out the framework for automatic enrolment (“AE”) into a retirement savings scheme (the “Scheme”), co-funded by employers and the State, for an initial 750,000 private sector workers. All private sector employers must comply with AE. The eagerly anticipated roll-out of an AE Scheme, first espoused in 2007 in the Department of Social and Family Affairs (as it was then called) ‘Green Paper on Pensions’, follows multiple reviews and proposals for reform of the Irish pensions system. As was noted in the Report of the Commission on Pensions, the Irish population is enjoying increased longevity and consequently, people are spending less time in employment and more time in retirement.1 In tandem with this, changes in the old age dependency ratio mean that a smaller proportion of working age people will have to fund the pension payments of an increasing pensioner population.2 The purpose of the Scheme is to address these issues. The Scheme, which is expected to be up and running in late 2024, will create a system whereby participation will be voluntary and the onus will be on employees to take action to opt-out if they do not wish to partake.
Main Features of the Bill
AE will be phased in over the course of 10 years. The Scheme will see employers match contributions made by employees, which are further topped up by the State. Contributions will start at 1.5% of employee gross salary and increase by 1.5% every three years up to a maximum of 6% from year 10 onwards. The State will top up the contributions by €1 for every €3 contributed by the employee, allowing for a maximum contribution rate of 14% (6% employee + 6% employer + 2% State). Both an employer’s and the Government’s contributions will be capped at €80,00 gross annual salary.
Employers will need to consider the terms of any existing pension arrangements in place to see how they interact with AE, and whether they are sufficient to avoid employees being automatically enrolled in the new Scheme.
Eligibility criteria for AE
The Scheme is open to all employees aged between 23 and 60, who earn over €20,000 per year, and who are not already enrolled in an existing occupational pension scheme. An employee who does meet these requirements may voluntarily opt-in by applying to the Central Processing Authority (the “CPA”) to become a participant of the Scheme. Drawdown of the benefits under the Scheme will be at the State Pension age. Again, interaction with any existing occupational schemes or pension arrangements should be considered by employers.
Mandatory participation period / opt-out options
Once enrolled, an employee must remain on the Scheme for a minimum period of six months after their enrolment until the opt-out window opens in months seven and eight. Opt-out arrangements are only available during the first ten years of AE while the contribution rates are being phased in. The option will no longer apply once the final contribution rate of 6% is reached.
Non-interference from Employer
An employer may not penalise an employee for applying to the Scheme and may not screen out future employees at the job application stage on the basis that they want to be a member of the Scheme. Up to €5,000 may be awarded to an employee where a successful claim is brought against an employer.
Establishment of the CPA
The purpose of the CPA is to act as the custodian and administrator of the AE system in order to provide participants, or their dependants or legal personal representatives, with relevant benefits accrued under the Scheme, in respect of service as an employee. The CPA will be a body corporate and will be responsible for the operation, coordination, supervision, and development of the AE system and will owe fiduciary duties to participants of the Scheme in the discharge of its functions.
Investment Management and Strategy
The CPA, in its role as custodian, will procure up to four commercial financial investment companies through a competitive tendering process to become “registered providers” for the CPA. The registered providers will provide investment options and act as investment managers for AE contributions. The registered providers will invest contributions for the CPA and aim to provide returns on those investments over time. Employees may invest in: (1) a default fund, for those who wish not to choose how their savings are invested; or (2) alternative funds, whereby three options are provided to the employee based on their individual risk appetite.
On 3 May 2023 the Oireachtas Joint Committee on Social Protection Community & Rural Development and the Islands (the “Committee”) published its pre-legislative scrutiny report on the Bill (the “Report”). In its pre-legislative scrutiny of the Bill, the Committee held meetings with officials from the Department of Social Protection, The Pensions Authority, the ESRI and stakeholders from ICTU, Irish Life, IBEC, and Insurance Ireland. The Committee put forward 21 recommendations of which many concerned barriers to entry and sustainability:
(a) The minimum age requirement for entry onto the Scheme is 23 years. High attendance rates at third level education are used to justify this requirement. This has, however, been criticised by parties such as ICTU as being exclusionary to those who do not attend third level education and work in a trade, for example. Therefore, the Committee recommended that the minimum age requirement be reduced from 23 to 16 years.
(b) The Committee highlighted that lower income workers and people working part-time may also be excluded from the scheme as the minimum salary requirement for AE is €20,000 per year. The Committee acknowledged that this could disproportionately penalise women. Therefore, the Committee recommended that the lower income threshold of €20,000 be removed.
(c) The Committee recommended that a minimum percentage of the funds should be invested in Irish renewable energy developments in order to ensure our Climate Action obligations.
(d) The Committee recommended that the investment funds be prohibited from investing in fossil fuels or the arms industry.
It remains to be seen whether the Government will take the recommendations of the Committee on board in the draft legislation, which is expected to be published in the coming weeks. The Scheme will no doubt bring welcome change to the Irish pensions landscape, however, there remain many details to be confirmed in the meantime. Despite these outstanding issues and questions, the “AE train is now very firmly on the tracks and leaving the station”, according to Minister Humphries. Employers in the private sector should consider how AE will impact their organisation, and whether any changes need to be made to existing pension arrangements.
- Report of the Commission on Pensions, pg. 51
- Report of the Commission on Pensions, pg. 9
About the author
Eleanor Cunningham is Head of the Pensions & Incentives Group. She is responsible for advising financial institutions, semi-state bodies, companies, trustees, committees and employees on various pension plans, employee share plans and other incentive plans.
Her practice includes advising international and domestic clients in both the private and public sectors. Relevant experience includes advising on a range of pension issues including scheme restructuring, liability management exercises, benefit design, trustee governance, scheme amendments, dealing with funding deficits and funding proposals, mergers, scheme wind-ups and the impact of pensions and other relevant legislation regarding pensions schemes and their operation.
She is Chairman of the Irish Association of Pension Fund’s DC Sub-Committee, an IAPF Council member, and a former Chairman of both the Association of Pension Lawyers in Ireland and the Irish ProShare Association. She is a member of the UK Association of Pension Lawyers, the International Pension and Employee Benefits Association, and the Global Equity Organisation.
Eleanor co-heads the firms Diversity, Equity and Inclusion Committee and is lead Partner for the vision and implementation of the firm’s policies and programmes.