While pension auto-enrolment (‘AE’) is a common feature in many countries, Irish employers may be unfamiliar with the concept and will need pension, tax, and legal expertise to guide them through the new regime and ensure compliance with what may be a complicated administrative burden for some.
What is the auto-enrolment scheme (‘AE Scheme’)?
The Automatic Enrolment Retirement Savings Systems Act 2024 (‘AE Act’) which was initiated on 5th April 2024 was recently passed by both Houses of the Oireachtas and was signed into law by the President on 9th July. The AE Act seeks to establish a new retirement savings scheme to provide a financial retirement plan for employees who are not already part of a pension related regime.
The new regime will not apply to those in ‘exempt employment’ i.e., where contributions (either employee or employer contributions) are being made to a qualifying occupational pension scheme, qualifying Personal Retirement Savings Account (‘PRSA’), qualifying trust Retirement Annuity Contract (‘RAC’) or qualifying pan-European Pension Product (PEPP) and the employer is obliged under PAYE regulations to include details of those contributions on the monthly statutory payroll return.
Initially, there will be no minimum standards (including contribution rates) applicable to exempt employment related schemes, however, the AE Act provides for this within a 7–9-year period of the commencement of the new regime.
The government expects AE to be operational and the first contributions to be made into the system by early 2025. Once commenced, employees will be automatically enrolled if they are between the ages of 23 and 60; earn more than €20,000 per year; and are not in ‘exempt employment’. Employees aged 18-23, and 60-66 who are not in ‘exempt employment’, may voluntarily opt into the AE Scheme.
Employees will be able to opt-out of the AE Scheme during the opt-out window which is between 6 months and 8 months of the date they were automatically enrolled (or re-enrolled). In availing of the opt-out window, employees will be refunded their own contributions since enrolment but not the employer or state contributions which will remain for their benefit in the fund.
The opt-out window will also apply after a change in contribution levels; however, the refund of the participant contributions will be limited to the contributions they made since the rate change. Employees will be able to suspend their contributions for up to two years from 6 months after enrolment, re-enrolment, or a period of previous suspension.
Similarly, a period of suspension can be ended on any date before the end of the set two-year period by way of notification.
The operation of the AE Scheme
The AE Scheme will be run by a new government body called the National AE Retirement Savings Authority (the ‘Authority’). This authority’s functions are broad, ranging from establishing, maintaining, and controlling the AE Scheme, to arranging for the investment of contributions with investment management providers.
The AE Act provides for the composition of the Authority including the establishment of a board and related committees. By way of example of the focus of the Authority, one such committee, the investment committee, shall be tasked with monitoring the performance of the AE provider schemes. The Pensions Authority will be the oversight body and will provide supervisory reports on the operation and performance of the Authority.
One of the main tasks of the Authority will be to notify employers of the need for specified employees to be enrolled in the AE Scheme. Once notified, employers will have an obligation to facilitate the enrolment of eligible employees and commence contributions. AE contributions will be phased in over a decade, with both employer and participant contributions starting at 1.5% and increasing every three years by 1.5% to a maximum of 6% by year 10.
The state will contribute a corresponding one third (or €1 for every €3 contributed by the participant), with all contributions calculated to a maximum gross salary of €80,000. Employee contributions made under AE will not qualify for income tax relief however, the contribution made by the state indirectly compensates for this.
The AE Scheme aims to provide access to benefits at the state pension age (currently 66). The value of the benefits will depend on several factors including the risk level of the investment which will range from lower to higher risk as selected by the employee or by default will be apportioned depending on the employee’s age range.
For example, a higher risk level investment strategy will be applied to funds in respect of employees with 15 years before the state pension age i.e., based on the current state pension age, this is age 51.
The AE Act confirms that in the event of death of an AE employee, their personal representative can apply to the Authority to access the balance in the employee’s investment account for distribution as part of their estate. Early payment of the employee’s investment will also be possible in the event of incapacity or exceptional ill-health.
Tax matters awaiting clarification
The Act does not specifically address a number of tax matters associated with the AE pension arrangement although it is expected further clarifications and/or regulations will be made in this respect.
Some matters awaiting clarification include;
- Whether accrued AE benefits are deductible when calculating the SCSB or Increased Exemption for an employee on termination of an employment,
- The manner in which a lump sum payment taken on retirement from the AE scheme will be treated for tax purposes, and
- Non-resident individuals.
In addition, the impact for employees of a foreign company working in Ireland and liable to Irish payroll withholding needs to be considered. Currently, the definition of an exempt employment covers arrangements in which the employer must provide details of contributions paid through the monthly statutory payroll return.
Such requirements are generally limited to contributions made to an Irish approved occupational pension scheme, qualifying PRSA or qualifying PEPP. Short-term business visitors or expatriates working in Ireland temporarily may therefore be in scope of AE, notwithstanding contributions are paid to an overseas pension arrangement.
Additional cost considerations arise for the employee and employer as well as the potential Irish and home location tax impact of accrued AE benefits in such cases.
Sanctions & offences
The AE Act provides for a number of offences, some of which can attract a fixed penalty of up to €5,000. Compliance Notices can also be issued where an authorised officer is satisfied that there has been a contravention of a relevant provision. Offences such as failing to pay contributions or deducting contributions from an employee’s gross pay but failing to pay the corresponding contribution within the prescribed time, will lead to the employer having to pay to the Authority the amount they failed to pay with interest (calculated in accordance with the Act).
Certain other offences will attract, on summary conviction, a class A fine or term of imprisonment not exceeding 6 months (or both), and on conviction on indictment, a fine not exceeding €50,000 or term of imprisonment not exceeding 3 years (or both). The Authority may also take legal action on certain matters including applying to court for an order requiring an employer or an employee to pay arrears of contributions.
Employers will be prohibited from penalising or threatening penalisation against an employee for participating or proposing to participate in the AE Scheme. Penalisation includes suspension, lay-off or dismissal (including a dismissal within the meaning of the Unfair Dismissals Acts 1977 to 2015), or the threat of suspension, lay-off or dismissal, demotion, or loss of opportunity for promotion or withholding of promotion.
Claims in respect of penalisation (which will be heard by adjudication officers of the WRC and on appeal, the Labour Court) could result in a direction to an employer to: facilitate the employee’s participation in the AE Scheme; require the employer to pay any contributions due for that employee from the date they should have been enrolled: mandate the employer to rectify any contraventions of the legislation; award compensation in favour of the employee (up to 4 weeks’ remuneration); or, a combination of such directions.
What should employers do now?
While the AE Scheme is a significant change to pensions in Ireland, employers can continue to facilitate access to their occupational pension schemes and/or PRSAs, and in parallel to this, respond to the AE obligation on commencement. However, it may be prudent for employers to act in terms of performing business and workforce impact analysis i.e., assessing their workforce by age, salary and current retirement arrangements, including the costs associated with contributions, administration of existing schemes and any mobile employee aspects to be considered.
This analysis will help determine if it is possible to extend existing arrangements to all employees and whether employers should pro-actively encourage or entice employees with no financial retirement arrangements to avail of existing pension related benefits.
The AE legislation will not immediately affect membership requirements or benefits under existing schemes, nor will it create any obligation on employees to avail of existing schemes. However, employers need to consider which of the three broad possible options they favour below and what they need to do to action these options.
- Provide no employer-based pension arrangement and operate the AE Scheme once commenced. For employers who do not provide pension related benefits, the ‘single approach’ of the AE Scheme will become operational, and they will respond to notifications from the Authority to facilitate the scheme. Costs associated with this approach including the new employer contribution rates will need to be assessed, budgeted, and accounted for. Payroll providers will need to be in a position to deduct and facilitate the remittance of contributions to the Authority.
- Continue to provide occupational pension scheme or PRSA benefits and adopt the AE Scheme on commencement for those outside of the existing benefits. This would be considered as the ‘dual approach’ which may be the most common position employers find themselves in, noting that this approach will lead to different administration, costs, and levels of benefits between two (or more) schemes and two (or more) cohorts of employees.
- Attempt to have all employees as ‘exempt’ under the AE legislation by having it as a condition of employment that all employees must be active members of an occupational pension scheme or PRSA (or have their own trust RAC). This ‘single scheme’ approach may be open to new employers who can determine this as a term of employment from the outset and will not need to entice or encourage employees into an existing scheme or a new section of an existing scheme. For existing employers whose schemes may be limited in terms of access based on age or service requirements, this option may not be available to the employer or attractive to the employee whose consent will be required for the deduction of any participant contributions.
Administration costs, levels of contributions, rules of existing schemes, taxation differences between the systems and employee engagement matters are all going to feature in the analysis of the options above. In addition, as part of their planning employers will need to engage with a variety of stakeholders such as payroll providers, trustees of the existing pension plan, pension plan providers or administrators and possibly also insurers depending on whether any of their decisions have a bearing on risk benefits.
We recommend employers contact KPMG to get the most appropriate pension, tax, and legal advice on the best way to be prepared for AE and its impact on reward programmes, HR, and Finance functions.
Get in touch for more
Head of Employment & Immigration Law
KPMG Law LLP
