Auto-enrolment may be challenging for smaller companies – but it can be done

Auto-enrolment has been a buzzword in the pensions sector for several years now, but with the announced start date of 1 January 2025 getting ever closer, talk instead has turned to the practical implementation of the plan.

While it’s a positive move for employees, there are concerns about how it may impact some employers – as well as whether it goes far enough in supporting our ageing population.

“There is a general feeling within the business community that auto-enrolment is a positive development from an employee perspective, particularly for lower income earners who are not already in a pension scheme or cannot currently afford one,” commented Hilary Larkin, Lead Outsourcing Partner, Mazars.

“However, auto-enrolment will bring significant additional cost and administrative burden to employers in an already challenging environment where other recent legislative changes have added substantial costs to businesses, such as increases in the minimum wage and extended statutory sick pay.”

For small companies, the administrative burden of the programme may also be problematic.

Administrative burden

“Auto-enrolment will undoubtedly bring an administrative burden for small companies, particularly at the outset when a structure needs to be put in place to meet the scheme’s requirements,” said Larkin.

“On an ongoing basis, employers will need to ensure that all eligible employees are enrolled on a retirement saving scheme as part of their payroll process. After six months of participation, employees will have the choice to opt out or suspend participation.

“When a person chooses to opt-out, they can receive a refund of their contributions. Once opted out, the employee will need to be re-enrolled after two years. This will be monitored by the payroll operator.”

Larkin advises that small businesses should work with their advisors to familiarise themselves with the principles of this new legislation, consider what it will mean for their business, and plan and budget accordingly.

Auto-enrolment will require eligible employees to be auto-enrolled as soon as possible when they join a company

“They will need to determine which employees are eligible and the financial impact on the business. If they already have a pension scheme in place, they will need to assess the costs of extending it to include all employees on a compulsory basis versus operating a dual-scheme approach.

“They may need to update their employment contracts to reflect changes. Once an approach is agreed, a communication strategy will need to be rolled out to employees, explaining how the scheme will work, the benefits for them and offering them support and guidance around their options.”

Auto-enrolment will require eligible employees to be auto-enrolled as soon as possible when they join a company, and so businesses that already offer pension plans may need to adjust their current arrangements.

“For existing pensions that operate on a voluntary basis, or ones that impose a waiting period before employees become eligible to join, these schemes will need to modify their structure to ensure eligible employees are auto-enrolled upon starting employment,” said Larkin.

Not eligible

“Non-contributory pension arrangements will also need to be amended, as both employers and employees will be required to make matching contributions into the pension to comply with the provisions of auto-enrolment.

“Businesses will have the option to offer a dual scheme approach, where the existing pension structure continues and those who are not eligible or who have chosen not to participate are enrolled into the auto-enrolment scheme.”

At present, the 1 January 2025 implementation date is looking ambitious, as much needs to be done in terms of infrastructure.

“Once the bill is written into legislation, the Government will have to commence the tender process with investment companies,” said Larkin.

“It is proposed there will be a panel of four companies that will offer four different pension schemes to employees (conservative, moderate risk, higher risk and default).

“Alongside this, the National Automatic Enrolment Retirement Savings Authority will also need to be established to administer the scheme.

“Once both are in place, a clear employer communication strategy will need to be rolled out by the Government. The success of the scheme will depend on careful planning and a willingness to adapt based on feedback and evolving needs.”

Finally, Larkin warns that while auto-enrolment is positive, the Government does need to look at the impact on businesses, especially smaller ones.

“The Government has cited Australia as an example of where auto-enrolment has been a success but has yet to consider the much lower rate of employers PRSI that prevails in Australia. Irish businesses are being levied with a much higher charge for auto-enrolment and Employers PRSI when combined.”

This impacts smaller businesses in terms of competing for talent too, with big companies able to offer lucrative company pension packages as alternatives.

“It is very difficult for smaller businesses to compete with benefits packages offered by large established enterprises.

“The Government needs to take a balanced approach in this regard when introducing business supports later this year and consider introducing an exemption from employers’ PRSI for smaller businesses to allow them to compete for talent.”