Written by Wealthwise Financial planning based in Dublin & Leitrim.
What is Auto Enrolment?
It is now widely accepted that reform of the current, purely voluntary approach to retirement saving, is required to improve pension coverage to a desired level. Support for a mandatory or quasi-mandatory retirement savings system reflects the fact that whilst many people would like to begin saving for retirement, the complexities of the system and a lack of confidence in their knowledge of pensions or ‘choice paralysis’ prevents them doing so.
To address such barriers to saving, other countries have introduced reforms to automatically enrol employees into a retirement savings system. The evidence is that such reforms have been shown highly successful at gradually increasing pension coverage. Typically such systems are designed on a quasi-mandatory, ‘opt-out’ rather than on an ‘opt-in’ basis. In such systems all workers that satisfy some basic conditions are automatically enrolled into a supplementary retirement savings scheme but with an option to ‘opt-out’ after a minimum period. The evidence suggests that once enrolled, inertia reduces the likelihood of many members making a decision to opt-out of retirement saving7
By 2022, the Government proposes to develop and begin implementation of a State sponsored supplementary retirement savings system in which workers will be automatically enrolled.
In order to facilitate the design and development of a system for Ireland the Government published a draft or ‘strawman’ automatic enrolment design for public consultation in Q2 2018.
The main points included in the Strawman document were as follows;
- Employees will be automatically included in the new system once aged between 23-60, earn over €20,000 and are not already contributing to supplementary pensions;
- There will be an opt-in option for those who do not meet the eligibility criteria (e.g. those under the age of 23 or self-employed persons);
- Members could opt-out of the AE at the end of a minimum membership period (suggested to be 7 or 8 months after first joining);
- Employees contribute 1% of their gross earnings initially, increasing on a phased basis by 1% annually (up to 6% by year six of AE);
- Participation in AE would be incentivised by the State for employees – the illustrative approach in the Strawman suggests a contribution equivalent to €1 for every €3 saved by the member;
- Employers will match contributions up to an eventual maximum of 6% of member’s earning (to a ceiling of €75,000, increasing at 1% a year to a maximum of 6% from year 6);
- Employer contributions would continue to be deductible for corporation tax purposes.
Should we wait for 2022?
While the Government’s proposals are welcome, they are not due to be implemented until 2022, at the earliest. This could potentially leave employers and employees in a quandary as to what to do now in the intervening period.
Our view is very strongly in favour of taking action immediately. To postpone making decisions about pension plans would be damaging to employees. It’s a case of be mindful of future developments, whilst working within the existing framework to deliver a future ready solution for employees. And the good news is that you don’t have to do it alone.