In one of the most important financial moves they could ever make, 800,000 people in Ireland are about to start saving for retirement. Alternatively, 800,000 people are about to see an effective cut in their take-home pay.
It all depends on whether you give it a positive or negative spin, but the fact is that, come next year, a new occupational pensions regime will introduce mandatory retirement savings requirements for the first time in Ireland.
Gripes about cash in the pocket aside, auto enrolment is widely seen as not only a positive step that will ensure today’s workers are more comfortable in retirement, but a necessary one that will see off a potential fiscal time bomb.
Most workers who do not already pay into an occupational pension set up by their employer will contribute, with contributions coming directly from their salaries. In addition, there will be a requirement for employers to make a matching contribution, while the state will also contribute funds.
The government itself explains who auto-enrolment will apply to in clear terms, describing it as “a new retirement savings system for employees” to be introduced on 30 September 2025.
“People who do not already have a workplace pension scheme, earn more than €20,000 per year and are aged between 23 and 60 will be automatically enrolled into the new system”.
60 per cent of those working in the private sector are not in a supplementary pension scheme and they will therefore be entirely reliant on the state pension
Seán Murray, director of product services for Ireland at payroll and HR specialists, Zellis, said that the recognition that Ireland was facing a potential pension crisis and needed to do something about it was far from new.
“Actually, it all harks back as far as 2007 to when Séamus Brennan, who was then the Minister for Social Welfare, published a green paper on it,” he said.
Ultimately, the goal is twofold: firstly, to ensure future pensioners are not left living in poverty and, secondly, to reduce the burden on the state.
“The reason is the realisation is that 60 per cent of those working in the private sector are not in a supplementary pension scheme and they will therefore be entirely reliant on the state pension. At the moment, that is currently €277 per week [2024]. Longer term, the government is likely to review its retirement age strategy again, with a view to increasing the pension age from 66 years to relieve pressure on a depleted Social Insurance Fund,” Murray said.
Since the idea was first floated, progress has been slow, but the idea that workers would automatically pay into a pension is reasonably widespread with several other countries having successfully adopted similar schemes.
“Australia introduced the first one in 1992, quickly followed by New Zealand, and Britain did it in 2012,” he said.
Support for the plan is largely uniform, though some smaller businesses have expressed concern as they will be subject to a contribution from day one of employing an individual, set at an initial rate of 1.5 per cent, rising over time.
“For small employers, they already have issues around employment costs: an extra bank holiday, statutory sick leave of up to five days, the increasing cost of the national minimum wage, and so on,” Murray said.
The National Automatic Enrolment Retirement Savings Authority (NAERSA), will be established as an independent body ensuring the safe running of the scheme and safeguarding contributions. A contract has recently been awarded to Tata Consultancy Services (TCS) to provide the technology and services.
Employers who currently offer a workplace pension are exempt, providing that access to that scheme is mandatory and immediate, but those seeking to now offer one will have to consider the additional costs.
“Roughly speaking, the going rate for employer contributions is between 5-6 per cent, and on top of that you have to pay someone to administer it — and there are overheads in terms of oversight,” Murray said.
Auto enrolment will mean avoiding the cost of running the scheme, and the terms of the employer’s contribution are clear. “It starts at 1.5 per cent, in year four it goes up to 3 per cent, then from years seven to nine it’s 4.5 per cent, before it finally plateaus from year ten on at 6 per cent. In addition, employers can write this off against corporation tax,” he said.