Auto-enrolment retirement savings system for employees

A guide to the auto-enrolment retirement savings system for employees

Auto-enrolment is a new retirement savings scheme for employees who do not already have a workplace pension scheme or an additional pension arrangement.

Many workers in Ireland, particularly in the private sector, do not have additional pension coverage and, as a result, will depend on the State Pension when they retire . This may see a reduction in their income and living standards when they retire. Auto-enrolment will increase both pension coverage and overall pension adequacy by making it easier for employees to access a quality assured retirement savings scheme.

What is auto-enrolment?

The National Automatic Enrolment Retirement Savings Authority (NAERSA) will administer the auto-enrolment scheme. NAERSA will act as the caretaker of your interests and savings.

NAERSA will determine if you are eligible for auto-enrolment using Revenue payroll data, and if you are eligible, it will enrol you.

It will collect all employee, employer and State contributions, and invest the money on your behalf. A default investment strategy will be in place, but some alternative investment options will be available for those who may wish to make an active investment choice. NAERSA will then allocate any investment returns to your savings pot. You will keep one savings pot as you move from job to job – this is known as the ‘pot-follows-member’ approach.

NAERSA will operate an online portal for employees, to manage employee opt-outs, opt-ins, suspension of contributions and re-enrolment. It will also operate an online portal for employers, to record and facilitate payment of contributions.

NAERSA will pay you at State Pension age, which is currently 66.

How will auto-enrolment work?

The employee portal

You will be able to use your MyGovID credentials to log in to the employee portal. You can register for a verified MyGovID account on the website, www.mygovid.ie, or by downloading the MyGovID appfor free in app stores.

Through the portal, you will be able to view your savings, including the contributions from you, your employer and the State, and any investment returns. You will also be able to view administration fees deducted from your account. You will be able to manage your investment strategy and change from the default to the high, medium or low risk options. You will also be able to use the portal to exercise your right to opt out, suspend contributions, or opt in to the scheme.

If you meet these conditions, you will be automatically enrolled:

• aged between 23 and 60
• earning €20,000 or more per annum across all employments
• do not have existing supplementary pension coverage

If you are a member of an occupational pension scheme or trust Retirement Annuity Contract (RAC) or you have a Personal Retirement Savings Account (PRSA)or Pan-European Personal Pension Product (PEPP), where this is recorded in payroll, you will not be auto-enrolled.

NAERSA will use Revenue payroll data to identify eligible employees, using a lookback period of up to 13 weeks. If the lookback period indicates that your earnings would exceed €20,000 over a 12-month period, you will be auto-enrolled. You will stay enrolled even if your earnings later drop below €20,000.

Enrolment may take up to 13 weeks if you have just started work in an employment for the first time or you have a gap between your prior and current employment(s). Contributions will not be backdated for the time it takes to determine eligibility. For some employees, it will be clear from the outset that they are eligible and they will be enrolled without delay.

If you are under 23 or over 60 years of age, or earn less than €20,000 a year, you will be able to opt in if you wish. All auto-enrolment conditions – such as contributions from the employer, the employee and the State - will apply for employees who opt in.

If you are self-employed or not currently earning an income through an employer, you will not be enrolled and will not be able to opt in initially.

If you or your employer are already paying a pension contribution through payroll, that employment will be exempt from the auto-enrolment scheme. You will not be automatically enrolled for that employment and you will not be able to opt in based on that employment. However, if you have another employment for which pension contributions are not paid, you can be auto-enrolled or opt into the scheme in respect of that second employment.

For the first few years of auto-enrolment, any pension contribution greater than zero will be enough to exempt an employment. However, by the end of year six of the operation of the scheme, at the latest, standards for the exemption of existing pension schemes will be developed with the assistance of the Pensions Authority.

Who will be auto-enrolled?

Multiple employments

Your gross earnings across all employments will be used to determine if you reach the earnings threshold. This means that even if you are earning under €20,000 in each employment, you could be eligible for automatic enrolment if you earn €20,000 or more across all employments combined.

If you meet the earnings threshold across all employments, you will be auto-enrolled for any employment where there is no existing pension coverage. Your employer will pay contributions based on the portion of your salary that they pay to you. You will not be auto-enrolled for any employment where a pension contribution is paid through payroll, and you will not be able to opt in to the scheme based on that employment.

The contribution rates for auto-enrolment will be phased in over the first 10 years of the operation of the scheme:

• employee contributions will start at 1.5% of gross pay
• in year four they will increase to 3%
• in year seven they will increase to 4.5%
• in year 10 they will increase to the maximum rate of 6%

Your employer will match your contributions. Instead of tax relief on your contributions, the State will provide a top-up contribution at a rate of €1 for every €3 you pay in. As the employee and employer contributions are matched equally and then topped up by the State, the total amount of contributions will amount to 14% of an employee’s gross earnings from year 10 onwards.

Contributions will be fixed at a set rate, and it will not be possible for you or your employer to pay more or less than this rate.

Contributions will be calculated on your gross earnings, so anything included in the gross pay field of a payroll file will be assessable. Contributions will not, however, be levied on any gross pay over €80,000.

An example, for someone earning €20,000 per year, the actual amounts are:

Your employer will pay the contributions at the same time as they pay you, and the contributions will be visible on your payslip.

If you are on unpaid leave (for example sick leave or maternity leave), contributions will not be deductible for the period of unpaid leave.

What are the contribution rates?

Investment managers will be appointed to provide funds that will form the investment strategy options for the investment of contributions, including:

• a low-risk strategy
• a medium-risk strategy
• a high-risk strategy

You will be placed in a default strategy to begin with and will have the choice to move to one of the other strategies listed above.

The default strategy will operate on a typical lifecycle basis, which means that the investment risk is decreased as you get closer to retirement. This strategy will see you move from the higher to the medium to the lower risk strategy, based on your age and the number of years remaining until you reach the State Pension age of 66. This strategy takes advantage of high-risk growth in younger years, and the stability of low risk closer to typical retirement age. The default strategy will be structured in a way so that you will not need any financial knowledge or to make choices to get a good retirement income.

Measures will be in place to ensure that these savings, while not guaranteed by the government, will be managed carefully . This includes a rigorous tender process to select investment managers and oversight by the NAERSA Board, the Pensions Authority and the Financial Services and Pensions Ombudsman.

How are contributions invested?

Can employees opt out of auto-enrolment?

The auto-enrolment scheme will not be fully mandatory, and you will be able to opt out of the scheme at the following times:

• six months after enrolment, in months seven and eight.
• six months after a contribution rate change, in months seven and eight.

In the first scenario, your contributions will be refunded. In the second scenario, you will get a refund of the difference between the new and previous rate. The second option will only be available in the first ten years of auto-enrolment as contributions are phased in. In both of these scenarios, any previous employer matching contributions and State top-up contributions will remain in your savings pot as your personal property and will be made available to you at the age of 66.

After two years, any employee who opted out of auto-enrolment and who still meets the eligibility criteria will be automatically re-enrolled.

Can employees opt out of auto-enrolment?

Can employees suspend auto-enrolment?

You will be able to suspend auto-enrolment contributions at any time. You can choose to suspend contributions for a period of one to two years. You will not receive a refund of contributions, as you will just be taking a break from paying them. If you choose to suspend contributions, you will not be able to resume saving before a minimum of one year.

If you suspend contributions, any previous employer matching contributions and State top-up contributions will remain in your savings pot as your personal property.

After a maximum of two years, any employee who suspended contributions and who still meets the eligibility criteria will be automatically re-enrolled.

Can employees suspend auto-enrolment?

The retirement age for auto-enrolment is linked to the State Pension age (currently 66 years of age).

In the first years of the auto-enrolment scheme, retiring employees will receive a lump sum payment from their savings pot. In the future and as the scheme develops, it is envisioned that more retirement products such as annuities will be developed and available to retiring employees.

You will not be able to access your savings pot before retirement age. This is to ensure that your savings are ringfenced for retirement. Early drawdowns will only be possible in the case of an ill-health retirement. In the unfortunate event where an employee dies prior to retirement, the savings and investment returns in their pot will be calculated will form part of their estate.

What happens at retirement?

The benefits for employees include:

• more money in retirement years
• eligible employees will be automatically enrolled
• your savings pot will follow you from job to job
• from the tenth year of auto-enrolment, contributions to your savings will be equal to 14% of your gross earnings (when the employer and State contributions are included), however, you will only pay 6% directly from your gross earnings
• the money you receive from auto-enrolment at retirement will be in addition to the State Pension
• you do not need to make investment decisions to get a good retirement income
• contributions and investment returns will be your personal property, protected under the Constitution and therefore cannot be accessed by anybody else
• you will be able to view your account on an online portal
• the large number of participants and money that will accumulate in the system over time will ensure that shared costs and fees can be kept to a minimum

What does it mean for employees?

Employees should be aware that:

• if you are eligible for auto-enrolment, or you want to opt into the scheme, it is important to budget for your contributions when auto-enrolment starts, and into the future
• if you have multiple employments, you will be auto-enrolled if your total gross salary is €20,000 or more across all employments
• auto-enrolment will be one among multiple pension coverage options (for example occupational or private pensions), and you should consider which option is most suitable for your personal circumstances
• there are no waiting periods for auto-enrolment, so you will be enrolled as soon as you are deemed eligible. This means that if your employer’s occupational scheme has a waiting period, you could be automatically enrolled before you can join your employer’s scheme. If this happens, and you later want to join the occupational scheme, you will be able to do so. That employment will become exempt from auto-enrolment. You will get a refund of any overlapping contributions, but any other contributions will remain invested in your savings account and made available to you at the age of 66

What do employees need to consider?

How does auto-enrolment impact other pension coverage options?

The auto-enrolment scheme will be another retirement savings option for employees, but other options may include an occupational or private pension. You should consider which option is best for your personal circumstances.

Factors that may affect this include the contribution level, other benefits associated with a scheme, and the tax relief offered in other schemes compared to the State top-up offered in the auto-enrolment scheme, which is the equivalent of 25% in tax relief.

You can choose to join another pension scheme and when contributions to that scheme are paid through payroll, auto-enrolment contributions will be stopped by NAERSA. Any overlapping contributions will be refunded, and your auto-enrolment savings pot will continue to be managed by NAERSA.

How does auto-enrolment impact other pension entitlements?

The State Pension is the foundation of pensions in Ireland, and the auto-enrolment scheme will supplement any State Pension entitlements. Auto-enrolment contributions will also be in addition to social insurance (PRSI) contributions.

Auto-enrolment will have no effect on entitlement to the State Pension (Contributory), as the State Pension is calculated on PRSI calculations and does not take anything else into account.

The State Pension (Non-contributory) is means tested and any auto-enrolment pension payments will be assessable, the same as any other pension payment.

Can a pension from previous employment be combined with AE savings?

In the initial years of the scheme it won’t be possible to transfer in pension savings from another scheme to the auto-enrolment scheme. It also won’t be possible to transfer savings out from the auto-enrolment scheme to other pension schemes.