Auto Enrolment and Implications for Business Owners
What is Auto Enrolment:
The proposed auto-enrolment pension scheme aims to address the need for increased participation in pension funding among the private sector workforce. The primary objective is to ensure that all workers have access to a workplace pension, supplementing the basic state pension. Currently, only about 35% of the private sector workforce actively contributes to supplementary pension schemes, and the government aims to raise this to 70% and beyond.
While increased private pension funding is absolutely necessary, the terms around the pending auto enrolment are not ideal when compared against an employer chosen occupational pension scheme.
Scheduled to go live at the end of 2024, the auto-enrolment scheme will target employees aged between 23 and 60, earning €20,000 or more across all employments, and not already contributing to an existing employer pension scheme. The scheme is designed to automatically enrol eligible employees, making it an opt-out system rather than opt-in.
The proposed design of the scheme, still subject to specific draft legislation, involves matching contributions from both employers and employees. In the first year, a total contribution of 3.5% of an employee's salary is proposed, with a 1.5% contribution each from the employer and employee, and an additional 0.5% state contribution.
There are a number of key differences between the auto enrolment scheme and an occupational pension scheme, notably, under auto enrolment, the state contribution serves as a 33% uplift of the employee contribution in lieu of income tax relief. Below you can see how earners on the higher rate of tax will end up with a significant loss of tax relief under enrolment when compared to an occupational pension scheme.
The phase-in of the scheme includes a planned increase in contribution requirements every three years. Over the course of ten years, the total contribution is expected to reach 14%, comprising 6% each from employers and employees, and an additional 2% from the state. These contributions will apply only to earnings up to €80,000. The proposed structure significantly reduces the tax advantages of pension funding to those on the higher rate of tax.
Our View:
In addition to the difference in tax relief, we see a number of limitations;
The proposed investment structure will involve a very limited listing of investment funds and little (to no) advice provided to employees.
When establishing your own scheme you have the ability to choose the investment provider (e.g. Zurich Life, Irish Life, Aviva etc) and the advising brokerage (the role we play in researching the market, tracking performance, advising employees on their options, assisting company HR/payroll staff etc), with the flexibility to change provider and/or broker if unhappy -this promotes market competition and in turn improves outcomes for your employees.
Proposed auto enrolment restricts early acess to employees until normal retirement age. In an occupationl pension scheme, members can access their pension upon leaving service as early as age 50.
Our advice:
It is prudent for business owners to get advice on their options with regard to establishing their own occupational pension scheme ahead of auto enrolment.
Establishing your own scheme (or amending your current scheme) in compliance with the government proposal, will avoid the need for you and your employees to invest the mandated arrangement.
For employers, the ability to customize the pension offering, enhance employee engagement, and demonstrate a commitment to employee well-being remains crucial, especially considering the specific contribution requirements and limitations of the government mandated scheme.
While auto enrolment is seen as a ‘better than nothing’ approach to pension funding, it is not ideal.
Employers who proactively establish their own pension scheme may find strategic advantages in terms of administration, investment choice, cost management, compliance, and attracting and retaining top talent.
As veteran advisors in the occupational pension scheme space, we are happy to elaborate on the above and help business owners understand how pending auto enrolment will affect their business.
Author: Rachel O’ Shea, BSBA, QFA
Senior Consultant & Protection Manager
Direct Dial: 021-4521328 | Mobile: 087 1728001| E: roshea@olearylife.ie | W: www.olearylife.ie
*The above is based on current pension legislation as of the date of this post.