First proposed as far back as 2006, auto-enrolment in workplace pensions schemes is about to become the legal reality for large numbers of Irish workers. Anyone who earns more than €20,000 a year and who is aged between 23 and 60 will be subject to automatic enrolment in a new pension system unless they currently pay into a company or private pension scheme. The changes will mean a significant shake-up for the usual payroll operations of thousands of Irish employers. Read on to discover what the changes to pension rules in Ireland will mean for finance directors, payroll clerks and business owners alike.
What Is Auto-Enrolment in Ireland?
Auto-enrolment is not dissimilar to other pension schemes that have come into existence in various European states over the last decade or so. The idea is to ensure that people save some of their income for their retirement, thereby reducing their reliance on the state pension. Although there is nothing stopping workers from saving for their retirement through a number of different financial products, including private pensions, the Irish government identified that too few people were setting aside enough to enjoy a financially secure retirement. Instead of making it voluntary for Irish workers to save for their retirement, the new scheme will make it automatic.
For qualifying workers, enrolment in the scheme will be automatic and, initially, constitute a small change they’ll notice on their payslips. Note that a contribution to a worker’s pension fund of €3 will be topped up by the government by €1 so long as the employer matches their employee’s contribution. This means that if a worker were to save €30 a week in their pension fund, the money going in each week would be €70.
How Will Auto-Enrolment Work?
The new pension arrangements in Ireland will be run by an independent body, known as the Central Processing Authority (CPA). According to the government, employers who use the CPA-run scheme and not a private pension provider will no longer face the same level of administration it takes to run a company pension scheme. Initially, the idea is to phase in contributions into the scheme so that workers don’t notice too dramatic a drop in their net incomes. Workers are allowed to pause their contributions under certain circumstances but, if they’re still eligible, auto-enrolment will reoccur within two years. Opting out of the system is usually only possible after workers have made at least six months of contributions.
Workers will be allowed to put their pension pots into one of four CPA-administrated funds. These will offer different potential rates of growth and are based on the level of financial risk that people want their funds to be exposed to. Finally, workers who earn less than €20,000 a year or who are outside of the aforementioned age bracket will also be allowed to join the CPA scheme if they wish to do so by electing to opt in.
When Will the Auto-Enrolment Workplace Pension Scheme Come Into Effect?
Auto-enrolment has been talked about in Ireland for many years. According to the latest reports, plans to have the scheme up and running by 2024 are still on track. Nevertheless, the scheme looks set to come into existence by the second half of 2024 at the earliest which has led some to question the timescale. Even if the current deadline is missed, most commentators agree that auto-enrolment will be the reality for workers and employers by 2025 at the latest.
How Should Businesses Prepare for Auto-Enrolment?
The rationale behind auto-enrolment is that it will save employers time because the CPA will deal with all of the investing and administrative aspects of workplace pensions. However, there is nothing to stop a company from running its own pension scheme, if wanted, something that could become an attractive proposition among businesses that want to sell their pension scheme as superior to the CPA-run ones, a perk that is offered to help recruit high-calibre staff. That said, Irish employers will need to think about the wording of employee contracts. Currently, many Irish workers have contracts that make no mention of pensions or pension contributions so employment contracts may need to be updated or appended to so that they’re in step with the new system.
Equally, some degree of financial planning may be needed given that auto-enrolment will require employers to make contributions to their workers’ pensions on a like-for-like basis. Businesses that have a large workforce may find that their longer-term financial planning needs to alter quite dramatically given the figures involved. Although employer contributions will only be set at 1.5% for the first three years of auto-enrolment, this will go up to 3% in year four, 4.5% in year 7 and, if everything goes as planned, as much as 10% by the time auto-enrolment is ten years old.
It will also be important to think about payroll since all of the necessary deductions and related tax issues will need to be included in future payslips. Fortunately, Quantum Payroll software is already geared up for auto-enrolment and businesses which use it will not need to do anything other than manage which of their employees is eligible for the scheme given their various ages and income levels.
Financial Security for Employees: A Summary of Auto-Enrolment Legislation
The idea of securing workers’ futures with a single pension scheme that will be available to everyone throughout their career should lead to better retirements and the standard of living among older people in Ireland. Although some workers may be resistant to having to save some of their income, the benefits involved should outweigh any initial negativity. From an employer’s perspective, knowing that all workers have their own pension pot could make it easier to hire the right staff. This is because employees won’t necessarily be so inclined to stick in their current position as their pension pots will move with them throughout their careers no matter how many jobs they’ve had in the course of their working lives.