Podcast Ep 223: Mark O’Connor and Bobby McDonnell from Bank of Ireland outline options for employers to get ready for auto-enrolment.
While auto-enrolment is due to become a reality in 2025, there are questions around when it will actually start.
One thing is for certain, Ireland is one of the last OECD countries to introduce an auto-enrolment system.
“For a lot of companies, their biggest outlay is their staff costs. So it is imperative it is looked after properly”
There are an estimated 800,000 workers in Ireland who don’t have a pension plan of any kind in place. This contrasts with Australia where it’s “super” as it is known has been growing wealth for citizens there for 32 years
Tech giant Tata Consultancy Services (TCS) has been named the preferred bidder to administer the Irish system. The company has been supporting the UK’s equivalent scheme since 2011.
Auto-enrolment will be mandatory for employees. From what we know so far about proportions, for every €3 contributed by employees, employers will match that and the State will add an additional €1. This will be for a minimum of 1.5% of gross pay in the first three years rising to 6% in year 10.
The idea behind auto-enrolment is to encourage those that aren’t currently saving for their retirement years to start now.
Only 46% of the Irish population are saving into a pension scheme currently, according to Bank of Ireland research, leaving 54% of the population unprepared for their retirement.
It’s decision time for employers: Auto-enrolment or private pensions?
Speaking on The ThinkBusiness Podcast Mark O’Connor, head of Corporate Pensions, and Bobby McDonnell, Corporate and Pensions risk manager at Bank of Ireland, said that even though we are awaiting a go-live date for the Irish auto-enrolment system, employers need to prepare now.
In the podcast they also talked about the virtues of auto-enrolment versus private pensions, the correct approach for employers, how various business types are set up to accommodate the new system and what employers are actually doing right now.
Fundamentally, it is a crunch decision time for employers in Ireland.
For example, they need to decide if they are going to march in step with the Irish Government’s auto-enrolment system or opt to offer their employees the opportunity to join an occupational pension scheme, or Master Trust as it is known in financial circles.
For example, employees who pay tax at 20% or do not pay any tax will benefit from the State contribution in Auto-Enrolment, which is effectively tax relief at a rate of 25%.
Equally, employees who are higher rate tax payers will be significantly better off in an Occupational Pension Scheme where they will get tax relief on contributions at the marginal rate rather than at 25% in Auto-Enrolment.
O’Connor said that employers who ensure that all their employees are members of their Occupational Pension Scheme will avoid the potential need to administer contributions to two or more schemes at the same time, whereby some employees are auto-enrolled and others are members of the Company Pension Scheme.
He said that the absence of Risk Benefits (Death in Service/Income Protection) for employees with Auto-Enrolment is another key consideration. There is also no ongoing advice available to either employers or employees. Both of these are key and highly valued features with occupational pension Schemes
McDonnell said that while many questions are still being raised about the proposed auto-enrolment scheme, any initiative that will boost the level of contributions Irish workers can make towards their financial future ought to be welcomed.
O’Connor said that logistically, it is likely that auto-enrolment in Ireland will begin on a phased basis. “In the UK it started with the larger businesses and was eventually phased to smaller businesses with lesser numbers of employees over a number of year.
“What we do know is an employee will be auto-enrolled into the scheme if they are aged between 23 and 60 and they are earning more than €20,000 per year. Earnings for contributions are capped at €80,000 per year.
“If you are already making a pension contribution through your payroll, then you won’t be enrolled. Employers with a pension scheme for some employees will find that the staff who aren’t on that scheme will be auto-enrolled.”
The bottom line is employers will need to make preparations to administer these contributions via their payroll system.
“For the first three years of the scheme the employee will contribute 1.5% of their earnings and the employer will match that. From the third year to the sixth year that will increase to 3% which the employer will have to match that. From the Government’ s perspective, every €3 that the employer contributes the State will add another €1 to that.”
According to McDonnell, employers are concerned about the technical aspects of auto-enrolment. “People really want to understand the rules so they can really grasp what is the right option for employees but also what is the right option for them as an employer to ensure they are abiding by the rules but also keeping their staff happy. For a lot of companies, their biggest outlay is their staff costs. So it is imperative it is looked after properly.”
He echoed O’Connor’s assertion that auto-enrolment doesn’t offer the same flexibility or benefits to workers as occupational pension schemes can and it is unlikely that they will cover the full cost of retirement.
“What we’re really looking at with auto-enrolment is that it is a Government-administered retirement savings scheme to ensure that anyone who is not saving starts to save.
“So ultimately, employers now face a decision. I think this is sometimes lost in the information that’s been out there: auto-enrolment is one option and a private pension is another option. And unfortunately a lot of employers who, if they don’t make that decision, could very easily be left with having to run two schemes side by side, which they don’t want to do.”
Part 1
Part 2
-
Bank of Ireland is welcoming new customers every day – funding investments, working capital and expansions across multiple sectors. To learn more, click here
-
Listen to the ThinkBusiness Podcast for business insights and inspiration. All episodes are here. You can also listen to the Podcast on:
-
Spotify
-
SoundCloud
-
Apple
