Auto-enrolment set to change Ireland’s pension landscape

The Minister for Social Protection introduced to government the final design principles for a proposed auto-enrolment retirement savings system for Ireland. As the only remaining country within the OECD (Organisation for Economic Co-operation and Development) without a mandatory supplementary pension arrangement beyond the basic state pension, the objective of the proposed scheme is to ensure that every worker will have access to a workplace pension to supplement the basic state pension.

“The aim is to increase active participation of the private sector workforce in supplementary pension provision from a current level of approximately 35%, as measured by the Central Statistics Office, to the long since stated government policy objective of 70% and beyond,” explains Zurich Head of Corporate Life & Pensions Joe Creegan.

The proposal, which is scheduled to go live from the first quarter of 2024 will mean that all employees not already contributing to an existing employer pension scheme who are aged between 23 and 60 and earning €20,000 or more across all employments, will be required to automatically enrol in the new scheme.

According to Creegan, the proposed design, which is still subject to specific draft legislation to be passed by the Dail, envisages matching contributions from employers and employees, with a 33% uplift of the employee contribution from the state in lieu of income tax relief. The initial contribution proposed is 1.5% by both employer and employer and a 0.5% state contribution, totalling 3.5% of an employee’s salary, in year one.

The phase-in of the scheme will mean that contribution requirements will increase every three years by 1.5% for employer and employee, reaching a total contribution of 14% in year 10, made up of 6% each for employers and employees and 2% from the state. These contributions will apply to earnings up to €80,000.

While the proposed scheme is voluntary, the approach is opt-out rather than opt-in. Employees will be able to opt out after month six following commencement and after six months of each tri-annual increase within a two-month window, with employees to receive a refund of their own contributions.

Outside these timeframes the option exists to suspend contributions without a refund. In each case the employer and state contributions also cease. Employees will automatically be enrolled again two years after cessation with the option to further suspend.

Changes for existing pension schemes

“While the target market, estimated to be 750,000 workers may be those currently without an existing workplace pension, this legislation will highlight challenges for existing schemes that may not wish to operate two systems with the likelihood that the Department of Social Protection will make recommendations on the prescribed standards and contribution levels for pension schemes operating outside of auto-enrolment,” Creegan points out.

These standards may include:

• Ensuring existing schemes are compulsory
• Ensuring that employees can join the existing scheme from day one, if aged between 23 and 60, therefore no waiting period
• Ensuring contributions are at the level prescribed in the design, starting at 3.5% in total from 2024 and up to 14% from 2033 (to an earnings level of €80,000)
• Auto-enrolment may not facilitate additional voluntary contributions or early retirement before the state retirement age, currently 66.

EU Legislation that will affect your existing company pension scheme

While there is plenty to consider for existing pension schemes in terms of auto-enrolment, Creegan believes the implementation of IORP (Institutions for Occupational Retirement Provision) II in April 2021, which places increased governance requirements on all trustees of existing schemes, requires more urgent attention.

“The new IORP II directive is perhaps the most significant change to pension scheme legislation that we have seen in the last 30 years, and it will forever change how pension schemes are governed, how they manage risk and how the Pensions Authority will supervise the market,” he says. “Pension schemes will need to implement formal governance plans and adhere to strict trusteeship standards – far outstripping anything in place today. These changes alone will increase the time burden on companies, will place greater regulatory requirements on company Trustees, and will lead to an increase in costs associated with running the pension scheme.

Moving to a master trust

One solution that has come to the fore is the consideration of moving the company pension into a master trust.

“A master trust is simply a defined contribution (DC) company pension scheme set up under trust,” Creegan explains. “It differs from traditional DC pension schemes in that multiple employers all coexist under the one trust deed, hence the term master trust. A significant advantage for companies operating under a master trust arrangement is that they will not need to appoint their own trustee boards to manage the associated governance and compliance requirements.”

He adds that the master trust is responsible for the key areas of scheme governance such as reviewing investment performance and the scheme default investment strategy, monitoring, and reviewing the Registered Administrator performance, managing the relationships with Pensions Authority, Revenue and Financial Services & Pensions Ombudsman, along with trustee administration and governance reporting.

Zurich – Trust Active, Trust Excellence

“One of the key pillars underpinning the Zurich Master Trust is our recognised excellence in investment management,” he points out. “At Zurich, we always take a positive, active approach to managing money and we are widely recognised for our expertise in investment management, being voted number one for investment excellence for the last seven years by Brokers Ireland*. Our hands-on approach and long-term consistent track record of investment outperformance results in better retirement outcomes for scheme members. People retiring with Zurich have enjoyed better retirement pots as a direct result of our better investment returns.**”

Future proofing employee pensions

“This investment excellence and scheme governance pedigree, coupled with our first-class administration platform and our employee engagement solutions, is why more and more local and international companies choose Zurich as their company pension partner,” Creegan continues. “Businesses who choose the Zurich Master Trust will enjoy all the benefits of Zurich’s pension expertise, without the need to appoint their own trustee boards to manage the associated governance and compliance requirements. In an era of increasing scheme regulatory complexity and cost, the Zurich Master Trust future-proofs employee pension provision by bringing expertise and dedication to scheme governance to ensure better outcomes for employers and scheme members, especially when combined with the investment strength and financial security of a global insurance provider.”

To find out more, email joe.creegan@zurich.com or visit Zurichcorporate.ie

*Source: Awarded Investment Excellence in 2014, 2015, 2016, 2017, 2018 and Investment Provider Excellence in 2019 and 2021 by Brokers Ireland..

**Source: Zurich Life & MoneyMate, November 2021.