The much-heralded introduction of auto-enrolment is set to be the biggest development in pensions in a generation.
It aims to increase the proportion of private sector workers with pension savings. Ireland will be following in the footsteps of several other countries including Australia, New Zealand and the UK, where the auto-enrolment model is already well established. In fact, Ireland is the last OECD country to introduce auto-enrolment.
By adopting a proven blueprint, it is reasonable to anticipate that auto-enrolment will have a transformative effect on pensions coverage in Ireland. However, the Government has amended the blueprint in two key areas. Firstly, it is proposing two very different pension savings systems operating alongside one another – the existing retirement savings regime and the new central Government auto-enrolment scheme and, secondly, it is not facilitating employers auto-enrolling existing employees in their own occupational pension schemes.
The dual approach stems from the Government’s desire to express the auto-enrolment State incentive in an easy-to-understand manner (similar to SSIAs introduced in the early 2000s), while also leaving the existing retirement savings system unchanged.
However, it undoubtedly takes us into uncharted territory, raising a number of important questions for employees such as: what are the main differences between the two systems and which is better?
[ Employers may need to run two pensions under auto-enrolmentOpens in new window ]
For companies where pension provision does not form part of their benefits package, the response may simply be to enrol all employees in the auto-enrolment scheme, in which case, the existence of two systems will be largely academic. However, for companies already making pension benefits available to their employees, the issues around the dual system will be significant. It is also acknowledged that for many people, their employer’s pension scheme will represent a better option compared to the auto-enrolment scheme.
One of the key differences between the two systems centres on contribution levels. Under the auto-enrolment scheme, employee and employer contributions will both start at a rate of 1.5 per cent of gross earnings capped at €80,000, with the 1.5 per cent rate eventually rising to 6 per cent after nine years. There is no flexibility to pay contributions above these set rates. In comparison, for employer defined contribution schemes, industry surveys reveal average contributions rate of 5 per cent from employees and 7 per cent from employers and there is flexibility to pay additional contributions.
Another key area of difference involves State incentives. The €1 for every €3 State top-up under the auto-enrolment scheme needs to be compared with the income tax relief available under the current pensions system. The value of the incentive under the existing system is worth twice that proposed under the new auto-enrolment system for a higher rate (40 per cent) taxpayer.
Another key aspect relates to the uneven routing between the two systems. The draft legislation provides that if an eligible employee is found not to have a contribution being paid to an employer scheme then they will be auto-enrolled straight away into the auto-enrolment scheme.
Many employers will put in place active communication campaigns to encourage sign-up in their own schemes in advance of the auto-enrolment system going live
Many employers have high-quality voluntary pension schemes where employees have decided not to join either through a lack of engagement or perhaps affordability reasons. The Department of Social Protection has confirmed that employers will not have the ability to auto-enrol these employees into their company schemes. This will result in employees being defaulted into the auto-enrolment scheme even if that scheme is inferior to what is available to them from their employer. Many employers will put in place active communication campaigns to encourage sign-up in their own schemes in advance of the auto-enrolment system going live but it is a shame that employees can’t be auto-enrolled.
Whatever one thinks about the merits or otherwise of the dual approach, given there are such fundamental differences, it is essential that employees consider which is the better pension option for them. Otherwise, employees may regret in years to come that they missed an opportunity to join a high-quality employer scheme that could have given them a far better retirement outcome.
The advent of auto-enrolment is very welcome and should address the long-standing problem that not enough people are saving for their retirement. It is important, however, that employees don’t let themselves be defaulted into a scheme that is inferior to what might otherwise be available to them.
Brian Mulcair is head of corporate consulting at WTW Ireland
