State to pay €1 for every €3 a worker puts into new auto-enrolment pension scheme
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About 750,000 workers who do not currently have a pension will be enrolled in a new workplace pension scheme from January 2024, it has been announced.
The Cabinet has agreed its long-awaited auto-enrolment pension scheme, which will cost the taxpayer €3 billion in its first year. Social Protection Minister Heather Humphreys has said this pension scheme will operate in addition to the State pension and will kick in at retirement age which is currently 66.
The State will pay €1 for every €3 an employee puts into their pension fund under the new auto-enrolment system approved by ministers.
The new system will see everyone earning more than €20,000 automatically signed up to make contributions for their retirement fund if they are not already in a pension fund.
All employees not already in an occupational pension scheme, aged between 23 and 60 and earning over €20,000 across all of their employments, will be automatically enrolled, but employees over 60 will also be eligible to enter. However, State contributions will stop at the retirement age of 66 in cases where people want to continue working.
Employers will be required to match employee contributions when the scheme is up and running. However, it is expected this will be done on a graduated basis given the financial impact it will have on employers.
Matching contributions will be made by employers to those contributions made by employees up to a maximum of €80,000 of earnings.
This recognises the value employers gain through their employees having additional security in retirement and assists employees with the cost of accumulating pension savings, the Government said.
Under the plan announced by Social Protection Minister Heather Humphreys, contributions will begin at 1.5% of salary but will increase to 6% of salary by year 10 in 2034. This steady phasing allows time for both employers and employees to adjust to the new system.
While participation in the new scheme will be voluntary and workers will have the ability to opt out, such opt-outs are temporary. After six months, an employee can opt out of payments but only for a period of two years at which point they will automatically be re-enrolled in the scheme.
Between the State contributions and employer contributions, for every €3 saved by a worker, a further €4 will be credited to their pension savings account. That means that every €3 contribution by an employee automatically grows to €7 before it is invested, or, put another way for every €1 saved by an employee their savings account will be credited with €2.33.
So for example, a worker earning €35,000 p.a. will accumulate a fund of €293,000 over their working life.
Employees will have a range of four retirement savings funds to choose from. Three funds will have differing risk/return profiles. In addition, a default fund based on what is known as a ‘life-style’/’life-cycle’ investment profile will be provided. People who do not express a preference for any fund will be enrolled into the default fund.
Ms Humphreys said administrative costs and burdens are to be kept to an absolute minimum for both employers and employees through the establishment of a Central Processing Authority (CPA) to administer the system.
Employers will not have to invest in the establishment or procurement of an occupational scheme for their own business. They will simply be required to facilitate payroll deductions.
People moving between jobs will not have to change their pension scheme or join a new scheme. They will remain members of the Auto Enrolment scheme on a ‘pot-follows the member’ basis. In addition, people with multiple employments will have their pension savings consolidated into one ‘pensions-pot’.
Launching the plan, Ms Humphreys said she 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. 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,” she said. “These changes have improved the design and will make it easier for both employers and employees to understand and to participate in the system,” she added.
The Irish Small and Medium association, ISME, has given a cautious welcome to the scheme but said there are still areas of weakness with the proposed AE system such as employer affordability and the continued apartheid between private sector and public sector workers.