Further to a seminar held by the Irish Institute of Pensions Management, with Clare Dowling (Auto Enrolment Programme Manager, Dept. of Social Protection) and Brendan Kennedy (Pension Regulator) presenting.
Legislation is being drafted currently, which when enacted, would provide for the following;
- Early 2024 introduction of a Mandatory Pension Automatic Enrolment (AE) System that would compel all employers to automatically enrol and contribute to a pension for all staff. Currently offering a PRSA facility, with tax relief provided at source via payroll for employees to contribute to their own retirement is the statutory minimum. Employers must facilitate this, where they do not offer membership of an Occupational Pension Scheme to employees within 6 months of joining service. But are currently not required to make a contribution.
- Employers operating with their own occupational pension schemes prior to the introduction of AE would likely be exempt [criteria for exemption to be agreed].
- Differs from our current system, as no tax relief on contributions. There would be a top up from Government which in real world terms would equate to a 25% income tax relief.
- NB Currently single individuals earning up to 36.8K per year would do better under the new system as they only receive 20% income tax relief under the current one – where contributions levels are equivalent.
- NB 40% income tax payers would not do as well under an AE system.
- The system would not be run through a broker channel and there is no choice for employers who have no pension – no opt out of this for the employer.
- It is envisaged that there will be no choice for members in Investment Manager, with potentially 4 outsourced managers appointed, but with blind investment system. The 4 fund choices would entail (Conservative, Moderate and Higher Risk, with a default Lifestyle). From what was presented we understand there would be no mechanism for any advice, other than information posted online.
- Essentially the AE system aims to reach the 750K low to middle income earners whose employers do not operate a pension currently or make any pension contribution.
- An Employer would be required to match a contribution equivalent to 1.5% of base salary in year 1 of introduction and this will build to 6% match over 10 years, across all employers and employees. So new employers setting up a company in 2035 would require on day 1 to offer 6%+6% – not linked to tenure of employee for clarity.
A lot of scepticism abounds that this can possibly be achieved in such a short time frame, and the fact that this type of initiative has been discussed since as early as 1988 has fed into this. In our view, it could certainly happen and the fact that is has been trumpeted in a very loud and public manner would further suggest it may.
What could the potential impact of this mean? It could create another them and us pension system, currently we have the Private vs Public Sector pensions debate and comparatives, if AE proceeds, we may see an expansion of this to the ‘Good Private Sector DC Pension’ vs. ‘Yellow Pack Private Sector AE Pension’ – but ultimately anything that furthers the potential for a good retirement saving regime is good for employees with no pensions, which to remind ourselves is the aim of this exercise.
As an aside to AE, all of this at a time when the Pensions regulator is seeking to massively reduce the number of private sector pension schemes operating by forcing employers into Multi-employer Master Trusts where the Authority can regulate all of the eggs in approximately 10 Master Trust baskets, leaving only the largest employers and schemes operating under their own Single Employer Trusts. The Pensions Authority is actively working and seeking to reduce the thousands of pension schemes (Occupational Pensions, including Single Member Executive Pensions) operating to a more practical 2,000 pension schemes and then to further reduce this to 400 – in their ideal world over a period.
Currently, employers operating their own occupational pension schemes and who wish to maintain them in 2023 will have to pay an additional €10-50K+ per year in trustee and governance costs from Jan 1 2023, as the Risk Management, Audit and Actuarial (for DB) – key function holder requirements take hold. It was made clear that non-compliance is not an option and any employers and ultimately trustees who do not meet the requirements by the deadline will be viewed as breaking the law and subject to penalties.
We have very few employers who will likely remain under their own Single Employer Trust as a result of these additional punitive costs, and we are assisting the vast majority with regard to a move to Master Trust as a result.
The Author of this article is Davin Spollen who is Head of Life & Pensions at Glennon, Vice President of the Irish Institute of Pension Management and Executive Board Advisor to the Asinta Employee Benefits Network.
Glennon Employee Benefits and Financial Planning advise companies, their employees, and individuals with regard to their pension arrangements. If you need advice in this area please reach out to Davin and his team, employeebenefits@glennons.ie or call 017075880.
