Ireland is the only OECD country that doesn’t yet operate an Auto Enrolment or similar system as a means of promoting pension savings. The new system is designed to simplify the pensions decision for workers and make it easier for employers to offer a workplace pension.
Under Auto Enrolment employees will have access to a workplace pension savings scheme which is co-funded by their employer and the State. A key feature of the system is that although participation is voluntary, so that people don’t have to participate, it operates on an ‘opt-out’ rather than an ‘opt-in’ basis.
In order to encourage workers to participate, those people who choose to remain in the system will have their pension savings matched on a one-for-one basis by the employer. The State will also provide a top-up of €1 for every €3 saved by the worker. This means that for every €3 saved by the employee, a further €4 will be invested by the employer and the State combined.
Commenting at the announcement of the final design, Minister Humphreys said:
“We all know that people are living longer. While this is very positive, we also want people to be able to enjoy their retirement years with some financial security.
“However, for many people retirement seems a long way away and they think they have a lot of time before they need to think about a pension.
“Some people may be of the view that the process of putting aside a little each week to provide for their retirement years is something to be considered next year, or maybe even the year after next.
“However, that is not the case. If people want to retain a reasonable standard of living in retirement, they need to start saving as soon as possible.
“This major reform in the Irish pensions landscape is intended not just to get people saving earlier but to support them in that saving process by simplifying the pension choices and importantly by providing for significant employer and State contributions as well.
“What we are doing today is putting in place a system whereby people can save for their retirement.”
According to figures from the Central Statistics Office, the rate of supplementary pension coverage is around 56% of the working population. This is based on the Pension Coverage Survey 2021. It is estimated that this figure may be as low as 35% when the private sector is considered in isolation. As a consequence of this low supplementary pension coverage rate, many retirees could suffer an unwanted reduction in living standards when they retire.
The aim of Automatic Enrolment is to address this pension coverage gap. It will apply to all employees who meet certain age and earnings criteria and who do not already have an occupational pension plan. Employees will make contributions from their salary, which their employer will be required to match while the State will make a top-up contribution.
Minister Humphreys continued:
“Automatic Enrolment has been part of the national conversation on pensions for some 25 years or more.
“In 2014, the OECD identified Auto Enrolment as a key pensions reform to be implemented. In 2017 87% of the members of the Citizen’s Assembly recommended that the government should introduce a form of mandatory pension scheme to supplement the State pension.
“The government listened and in 2018 we published a ‘strawman’ model for consultation. Based on the responses received there is a clear consensus, that an Automatic Enrolment system is needed.
“In addition, we engaged with national and international experts to learn about best practice, and this is reflected in the final design.
“There has also been considerable engagement with industry bodies, employer and employee representatives, advocacy groups, as well as members of the public.
“The design principles agreed by Government today, which will now form the basis for drafting the necessary legislation and putting the necessary operations in place, reflect the feedback received.”
The Minister added:
“During the consultation process we received feedback that we should simplify the pensions savings choice proposed in the strawman, under which savers would be asked to choose from 12 different funds, and instead to provide for a pooled approach to savings and returns.
“We also received feedback that it would take time for workers and employers to adjust to the new system and that the phasing-in period for making contributions should be extended.
“We have responded to this feedback.
“Under the final design savers can choose from one of four types of fund; all contributions to that fund and all returns from that fund will be pooled. This means that although we will allocate contributions across different investment managers each person who chooses a particular fund type will receive the same return as every other person opting for the same fund-type.
“We have also changed the phasing-in period so that rather than increasing by 1% every year, contributions will increase by 1.5% every three years to ultimately reach the maximum level of 6% at year 10.
“These changes have improved the design and will make it easier for both employers and employees to understand and to participate in the system.”
Details of the design of the Automatic Enrolment Retirement Savings System are being published today at www.gov.ie/AutoEnrolment.
Key features include the following.
Minister Humphreys said that implementation of Auto Enrolment will commence immediately and will continue throughout this year and next:
“There is much to be done, with legislation required to set up the system on a statutory footing, the Central Processing Authority to be established to operate the system, and a communications campaign to ensure people understand it. It is an ambitious timeline, but one that is achievable.
“I am extremely proud to introduce this once in a generation policy that will have a truly meaningful impact on people’s lives.
“When implemented, the new Auto Enrolment system will enable employees to accumulate enough resources to maintain high personal living standards in their retirement.
“In this way, Auto Enrolment will significantly increase the wellbeing, financial security and independence of our future retirees. Retirement should be a time when people can reap the rewards of a long working life and that is what Auto Enrolment will help to provide for generations to come.”