What is it and what will it cost?

After decades of discussion and debate, the prospect of workers being automatically added into a private pension scheme took a step closer this week.

On Wednesday the Cabinet approved a Bill that is designed to create an auto-enrolment pension system in Ireland.

Following the lead of Britain, New Zealand and Italy, amongst others, the scheme could see pension schemes set up for around 800,000 workers, practically overnight.

But while such a system is, in theory, just months away, public awareness remains low.

Why is this happening?

According to a 2023 survey by the Central Statistics Office, 32% of workers aged between 20 and 69 are not signed up to a private pension.

Unless that changes, that would represent hundreds of thousands of workers who could be solely dependent on their State pension when they retire.

This could be a problem for workers who would have to adjust to a sudden, sharp drop in their incomes.

But it represents a major challenge for the State, which experts have dubbed the ‘pensions timebomb’.

That’s because a significant number of pension-less workers, along with Ireland’s ageing population, and longer life expectancy, is likely to put a significant burden on the Exchequer of the future.

Successive governments have sought to manage this by incentivising people starting pensions, either privately or through their job.

That includes tax relief on pensions contributions, and on the lump sum that may be paid to workers when they retire.

Despite that, private pension coverage in Ireland has continued to lag. In fact, some data suggest that it is going in the wrong direction.

A survey by the Competition and Consumer Protection Commission last year indicated that nearly a quarter of 45-54 year-olds did not have a pension – up ten percentage points in a year.

The Government believes that the best way to reverse that trend is to make pensions payments the default for workers – rather than something they have to actively sign up to themselves.

The international experience is that auto-enrolment schemes do improve pensions up-take, too.

Will it impact everyone?

No.

If you already have a pension, nothing will change.

The Government’s auto-enrolment plan will also cover only workers aged between 23 and 60.

That means those in the early years of their working life – and those close to retirement – will not be affected.

Meanwhile auto-enrolment will only kick in when a worker is earning more than €20,000 a year – so many part time workers may not qualify.

A minimum wage, full-time worker would, though, as their annual earnings would pass the €20,000 threshold.

Ultimately it’s estimated that close to 800,000 people will fall under the remit of the auto-enrolment scheme.

How much will it cost me?

The actual cost to you will depend on how much you earn, but it should be a relatively small amount at first.

Under the scheme, employees will contribute 1.5% of their gross salary during their first three years of paying in.

That will rise to 3% from the third year on, 4.5% from year six on, topping out at 6% from the tenth year onwards.

That means a person earning €45,000 – roughly the national average wage –would contribute €675 in the first year (or around €13 a week).

By the time they’re in the 10th year, they would be contributing €2,700 a year (or around €52 a week).

But the real hit to their pocket would be less than that – as that money would have been taxed were it not diverted to a pension.

So, in reality, the same worker would see their weekly earnings fall by around €8 a week in the first year of auto-enrolment – not €13.

By year 10 their pensions contribution would reduce their actual income by around €31 a week – rather than €52.

And beyond that tax relief, there are other incentives built-in to make the scheme attractive to workers.

Like what?

Under the auto enrolment plan, employers will be obliged to pay the same amount into the pension pots as workers.

Employer contributions will follow the same levels as workers – starting at 1.5% of gross salary and rising to 6% from year ten onwards.

That effectively means that every euro a worker contributes will be matched by their employer – doubling the size of the pot.

And, as an added incentive, the State will also contribute €1 for every €3 put in by the employee.

That means that the €675 contributed by an average-waged worker in year one will end up as €1,575, due to the matching €675 contribution from the employer and the further €225 from the State.

The €2,700 paid in year 10 would end up as €6,300, thanks to the employer’s contribution and a €900 top-up from the State.

The hope would then be that that money is then shrewdly invested in order to grow the pot even more.

When will the scheme start?

The Government has targeted 1st January 2025 as the start date for auto-enrolment – but some pensions experts have cast doubt on that timeframe.

While Cabinet signing off on the Bill is an important step in making auto-enrolment a reality, it still has to be made law.

It is hoped the Bill will progress through the Oireachtas after Easter, with the Dáil set to resume on the 9th April.

But even if the Bill is initiated at that stage, it could takes weeks before the resulting legislation is enacted.

And it’s only at that point that the actual workings of the scheme can begin to be set-up.

Central to that will be a tender process to find investment companies that will handle the money on behalf of workers – while a National Automatic Enrolment Retirement Savings Authority will also need to be established to oversee the running of the scheme.

And before money is taken from workers’ wages, it is clear that the Government has a job of work to do in informing the public on the scheme.

Research from the Central Statistics Office last year showed that, of workers with no occupational pension, just one in five was aware of the planned auto-enrolment system.

Meanwhile employers will have to make changes to their payroll, finance and HR systems to facilitate the change – not to mention the additional cost burden they will face due to the contributions they will be obliged to make.

We need your consent to load this rte-player contentWe use rte-player to manage extra content that can set cookies on your device and collect data about your activity. Please review their details and accept them to load the content.Manage Preferences

Will I be able to decide where my money goes?

To an extent, yes.

The bill currently proposes that – after a tender process – four investment companies will be designated ‘registered providers’, meaning they will be able to offer different pensions options to members.

There will be a default pension scheme that contributions are paid into, but workers will be able to opt for different schemes if they wish to take a different approach.

This will likely mean that someone will be able to move their money into a riskier investment portfolio if they so wish – or a more conservative one if they want to limit their exposure.

Will I be able to opt out altogether?

Yes – though not immediately.

Affected workers will have to participate in the new pension scheme for six months before being given the option of opting-out, or suspending their contributions.

But, even if they do so, they will be automatically re-enrolled after two years.

They will then have to participate for another six months, at which point they will have the option of opting out once more.

However, the hope of the Government is that very few people will take up that option.

International experience suggests that the vast majority of people decide to continue pensions contributions once they are signed up to a scheme.

The big roadblock that auto-enrolment seeks to get around is people’s tendency to simply not bother in the first place.

According to the CSO study last year, of those with no pension, just over a third had simply never gotten around to organising one.

A further 9% said they would set one up at some point in the future.