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A New Automatic Enrolment System

  • Ireland
  • General

27-09-2018

The Government has published its Strawman Public Consultation Process for an Automatic Enrolment Retirement Savings System for Ireland.

What is this?

It is a document which sets out a proposal for how the new auto-enrolment or “soft mandatory” pension system will be implemented in Ireland, and invites feedback from interested parties.

Why is this important to you?

At a policy level, the proposal addresses a major gap in the current Irish pension system in that earnings or work related pension provision is purely voluntary, with no mandatory earnings related system. 

For employers, the proposals have significant financial implications, as an employer will be required, in due course, to pay 6% of gross payroll on wages up to €75,000 into the new scheme on behalf of its qualifying staff. 

Qualifying staff will be staff aged between 23 and 60 and earning over €20,000 per annum, who are not already in a pension scheme operated by the employer.

Even if the employer has an existing pension scheme for which membership is voluntary, the new system will “sweep up” those employees who have chosen not to join that scheme.

In addition, there is the potential administrative burden for the employer of complying with the new system, if it is not set up so that compliance is straightforward.  The UK auto-enrolment system was introduced with complex eligibility rules, which created notorious payroll difficulties for UK employers.

For scheme trustees, the implications are indirect.  Trustees will want to ensure that the new system properly recognises the existing occupational pension system and does not damage it.  Trustees may also be concerned that the cost of providing mandatory pension benefits to all staff may impact on the available funding for the employer’s existing occupational schemes.  

For providers, the new system is obviously both an opportunity and a potential threat, and they will need to consider carefully its implications.  In particular, the concept of a tender process whereby a small number of providers will be awarded contracts to invest contributions made to the new system may have a significant impact on the current investment market.

For employees, there is the prospect of paying contributions which do not attract tax relief at marginal rates, in accordance with the current system.  A standard level of tax relief will be provided by a Government contribution, which for higher rate tax payers is less than the relief currently available in the voluntary system.

Finally, a new Government agency will be established to receive and administer workplace contributions to the system.  This will take the State into new territory which has to date been the preserve of specialist private sector pension administrators.

If any of these points resonate with you, you should review the Consultation document further, and ensure that your representative body (eg the IAPF, IBEC, the American Chamber of Commerce, ICTU) knows your views and is responding to the consultation process.

The key features of the proposed automatic enrolment system are appended to this briefing. 

A few interesting points arise:

The carve out for existing scheme members is unclear

Employees already contributing to a pension scheme or contract which meets prescribed minimum standards and contribution levels will not be automatically enrolled.  No details of the proposed minimum standards or contribution levels are provided.  As regards contribution levels, many occupational schemes have an employer contribution level of at least 6% of gross earnings. 

However, a much smaller number of those schemes would have a combined employer and member contribution level of 12% of gross earnings. 

Will the €20,000 threshold for eligibility be based on salary only or will it include variable elements of pay?

The Consultation document refers simply to employees “earning over €20,000”.  This implies a total earnings threshold.  This could be difficult for employers to administer, as employees with a base salary below €20,000 could fluctuate in and out of a €20,000 total earnings threshold when other elements of their pay are taken into account.  This was one of the issues which arose in the UK, and created significant difficulties for employers.  It may be simpler to assess the threshold on base salary only.

After the initial opt out, is the employee locked in until retirement?

Apparently so.  The initial opt out comes quite early in the process, and there is no specific provision made for a subsequent opt out.  The rationale for limiting the opt out window to two months is that it will support higher retention rates and will reduce administrative burdens.  For people concerned about their ability to sustain continual payments, there will under prescribed circumstances be limited “Saving Suspension” periods to facilitate members who wish to temporarily cease contributions. 

The only concern about this is that it could incentivise younger members to opt out, to avoid being locked in until they are sure they are ready to retirement save for the rest of their working lives.

What happens to contributions made, where an employee opts out at the initial “opt out window”?

While the member will receive a refund of their own contributions paid into the system (net of management charges), controversially the employer’s contributions will not be returned to the employer.  Instead, they will be transferred to the Central Processing Authority (the “CPA”), to be set off against its administrative costs.  This could be a contentious aspect of the proposals for those employers who might anticipate high opt out rates among their employees.

What is the Central Processing Authority’s role?

This is a new authority which will be established to administer a number of functions under the system.  It will be responsible for sourcing the AE Registered Providers who will invest the monies collected under the system.  It will also be responsible for receiving contributions initially from employers, and remitting these to the AE Registered Providers.  It will also establish a CPA Portal so that members can keep track of their contributions.  The exact breakdown of administrative services between the CPA and the private sector Registered Providers is a little unclear, but it does seem clear that the CPA will be carrying out functions connected with the administration of pension contributions which a Government Agency has not previously carried out.  In particular, the CPA is intended to operate as a single contribution clearing house.  This is a very complex function, and the document itself recognises that the collection and allocation of member contributions is one of the most “challenging” aspects of the administration of a defined contribution pension scheme. 

Is the proposed tendering process for investment providers likely to be attractive?

The Government will obviously want to ensure that the tender process is pitched at the right level, so that it attracts sufficient high quality providers, but also ensures that the charging structure of the successful tenderers is competitive. 

The Consultation Document states that a maximum permitted annual administration and investment charge of no more than 0.5% of assets under management will apply.  0.5% is a reasonable cap for pure investment services.  However, it appears that the successful tenderers will also have to take on a number of administrative services, the scope or ambit of which is slightly unclear.  The document states that the successful Registered Providers will be expected to deliver retirement saving services via the CPA Portal which will encompass the full range of scheme services including account administration, investment management and member communication.  This level of administrative services, depending on what is proposed, could quickly become uneconomic to deliver at a 0.5% fee of assets under management, particularly in earlier years where there will be a huge number of members with very small investment pots.  Possibly, the idea is that the Registered Providers will offset the losses they make in initial years by the anticipated gains they will make in subsequent years when assets under management build up.  However, there is the issue of retendering, which will happen within a period of five to ten years.  The tendering process will need to be very carefully calibrated by the Government to ensure that it is attractive enough to draw in the high quality providers, while remaining competitive with other private sector retirement savings offerings.

Appendix - Summary of Key Features

The key features of the proposed automatic enrolment system are:

  • Employees/members will initially contribute a minimum of 1% of gross earnings.
  • The member’s minimum contributions will be increased on a phased basis from the system’s launch in 2022, increasing annually by 1% up to 6% from the beginning of year 6. Those enrolled in the Automatic Enrolment system in the years after 2022 will do so at the prevailing contribution rate applicable at that time (ie in 2024 all members, including new entrants, would make 3% contributions).
  • Employers’ contributions will match members’ contributions up to an eventual maximum of 6%. Employer contributions will be deductible for corporation tax purposes.
  • Employees, aged between 23 and 60, earning over €20,000 per annum and not already contributing to supplementary pensions, will be automatically enrolled.
  • Employees will be free to opt-out of the system at the end of a minimum membership period (during the 7th and 8th month of membership).  Members who opt-out will receive a refund of personal contributions (less management fees) to the date of opt-out.  Employer and State contributions (less management fees) will be transferred to the CPA as a contribution to its administrative costs.
  • Employees will be free to opt-out of the system at the end of a minimum membership period (during the 7th and 8th month of membership).  Members who opt-out will receive a refund of personal contributions (less management fees) to the date of opt-out.  Employer and State contributions (less management fees) will be transferred to the CPA as a contribution to its administrative costs.
  • Employees who opt-out will be automatically re-enrolled after three years but will have the ability to opt-out again under the same circumstances set out above.
  • In certain circumstances, limited member ‘Saving Suspension’ periods will be facilitated to allow members to temporarily cease making contributions.  Employer and State contributions will also cease during these periods.
  • Employees/members will be free to choose from a range of retirement savings options.
  • Where employees elect not to exercise choice and select a preferred provider or fund, their contributions (together with those of the employer and the State) will be allocated to the default fund of one of the Automatic Enrolment Registered Providers on a carousel basis.
  • The State will provide an incentive. Although the level of this incentive and the mechanism through which it might be paid will be finalised after the consultation process, the Strawman suggests a contribution equivalent to €1 for every €3 saved by the member.
  • Automatic Enrolment Registered Providers will deliver services on a Defined Contribution basis.
  • Two options are being considered. Option (A) is that all providers who meet specified standards could apply to the CPA to be registered as an automatic enrolment provider.  Option (B) is that the Government could tender for a select short-list of up to four Automatic Enrolment Registered Providers.  Subject to feedback on the consultation, the Government is minded to proceed on the basis of option (B), given the requirement to achieve scale efficiencies.
  • Each Automatic Enrolment Registered Provider will be required to offer a limited number of ‘lifestyle’ or ‘target date fund’ options, each of which may incorporate an evolving investment profile as the fund matures (eg low, moderate or high risk).
  • There will be a 5-10 year period of registration for the successful tenders, after which there will be a new tender competition.  Providers who are unsuccessful in renewing their registration will transfer their member accounts to existing/incoming providers.
  • Benefit draw-down will also be linked to the State pension age. Members will be able to draw-down their funds as a lump sum, annuity or other approved retirement products in line with pension and taxation law prevailing at the time of retirement. Administrative fees for all provider/fund options will be minimised through leveraging the scale of the CPA with a maximum envisaged annual management charge of c. 0.5% of assets under management.
  • Member account portability between employments will be facilitated by a ‘pot-follows-member’ approach.
  • Self-employed people and employees outside the age and earnings band thresholds designated for automatic enrolment will be able to opt-in.
  • A new CPA will be established. The CPA will establish minimum standards for service delivery and product features required of Automatic Enrolment Registered Providers.  Employers will collect contributions via payroll systems and transfer them to the CPA.  The CPA will remit the contributions to the Automatic Enrolment Registered Providers.
  • Supports will be introduced for employers in delivering on their obligations in the roll-out phase, as employers will be required to enrol employees and remit contributions to the CPA.
  • Administrative penalties will apply to employers who fail to comply with their obligations.  If non-compliance persists, employers will be subject to criminal prosecution.

 

Disclaimer

This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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