Auto Enrolment shines spotlight on pension coverage and adequacy

AE has definitely succeeded in shining a spotlight on the pensions issue and has generated unseen levels of interest in the topic recently.

We have seen evidence of that in the increased number of enquiries being received from employers wishing to set up a pension arrangement for their employees, or to make improvements to their existing arrangements. From conversations we have had with recruiters and employers, it is also evident that there is a heightened focus on retirement benefits and an impressive level of understanding in relation to pensions on the part of candidates.

Auto Enrolment is aimed at addressing the needs of the vast swathe of the Irish workforce which currently has no occupational pension provision. According to government figures, there are approximately 750,000 workers over the age of 23 and earning at least €20,000 per annum* currently in that position.

At present, they face the prospect of their sole income in retirement being the
State Pension (Contributory) of €14,419.60 per annum at the current maximum rate*.

Auto enrolment will therefore represent a major step forward. But it must be borne in mind that it will not necessarily provide a solution for everyone and in many cases will offer benefits that are actually very different and may not suit those already enjoyed by members of workplace pension schemes.

Contribution levels to the Auto Enrolment System will start at an extremely low level and won’t reach the same levels as those of many workplace schemes for several years.

What do employers need to do now?

Our message is that employers need to pre-empt the arrival of auto-enrolment. Unless they establish some sort of Pension Arrangement which provides contributions and benefits at least equal to those required under AE, then the Employers will have no option but to ensure that their Employees are Auto enrolled in the government proposed AE system.

Of course, there is also a large cohort of smaller firms operating in some sectors which do not currently have a pension scheme in place and probably have no intention of establishing one. The auto enrolment system will certainly play an important role in boosting the retirement incomes of workers in those firms.

Why Master Trust makes sense

A Master Trust is simply a defined contribution company pension scheme set up under trust. It differs from traditional Defined Contribution pension schemes in that multiple employers all coexist under the one trust deed, hence the term ‘Master Trust’.

At Zurich, over the last year we have seen a majority of our employer clients transition from their older pension models into the Zurich Master Trust solution. While this change was initially driven by the introduction of IORP II (Institutions for Occupational Retirement Provision) directive, the benefits brought about by the Master Trust model have certainly been evident for employers.

Companies that moved, now outsource all the governance and administrative obligations to the Zurich Master Trust. The Zurich Master Trust is designed to comply with the enhanced member communication requirements contained in IORP II as well as with the new obligations in relation to investment strategies.

The Master Trust option was very attractive for the many hundreds of mid and large sized employers where the additional costs and governance requirements associated with IORP II compliance could have detracted from enhancing member benefits in the long run.

AE uncertainties

There are many unknowns and uncertainties swirling around the auto enrolment proposal at present. AE is due to launch towards the end of 2024, with the first workers expected to be enrolled in the system from January 2025**, this has yet to be confirmed. The tender for appointing the company to run the AE system is still ongoing and investment managers have not been appointed yet.

There is also a very clear difference when it comes to tax relief. An employee paying income tax at the 40% rate effectively receives tax relief at the marginal (highest) tax rate. However, if they become a member of the Auto Enrolment system the State will provide a top-up equivalent to 33% of the employee contribution***, so in this scenario (based solely on tax relief alone), employees on the higher rate of tax would appear to be better suited to joining an Occupational Pension Scheme.

That scenario changes in favour of Auto Enrolment if the employee is paying tax at the standard tax rate of 20% (compared to the State top-up to Auto Enrolment which is equivalent to 33%).

Again, this highlights the potential utility of the new AE system for employees in lower paid areas of the economy. Indeed, it is estimated that approximately 200,000 of the aforementioned 750,000 people without a pension**** tax relief are higher rate taxpayers who would potentially be better placed with a traditional pension route, like a Master Trust, rather than the AE model. This is something that needs to be considered by all.

Attracting and retaining employees

Employers need to consider their options carefully at this point. Employees and job candidates have become a lot more sophisticated in terms of their pensions knowledge and this is having an increasing influence on their choice of employer.

Companies offering a DC pension scheme with competitive contribution levels will enjoy a distinct advantage in the talent market while also enjoying an enhanced employer brand. And they can achieve that with the Zurich Master Trust which offers market leading active investment performance, governance expertise and streamlined administration, all in a highly cost-effective package.

To find out more about the Zurich Master Trust, visit zurichcorporate.ie.

*State Pension (Contributory) (citizensinformation.ie)

**gov - Auto-enrolment (www.gov.ie)

***The Design Principles for Ireland’s Automatic Enrolment Retirement Savings System, Department of Social Protection, March 2022

****IAPF Summer Conference 2023

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as at April 2024 and may change in the future.