Mandatory Pension Vote Today

The proposed auto-enrolment pension scheme is aimed at increasing participation in pension funding within the private sector workforce. Its primary objective is to ensure that all workers have access to a workplace pension, complementing the basic state pension. Currently, only about 35% of the private sector workforce actively contributes to supplementary pension schemes, a figure the government aims to increase to 70% and beyond.

While boosting private pension funding is imperative, the terms of the impending auto-enrolment are not as favorable when compared to an employer-selected occupational pension scheme.

Set to launch by the end of 2024, the auto-enrolment scheme will target employees aged 23 to 60, earning €20,000 or more across all employments, and not already enrolled in an existing employer pension scheme. It is structured as an opt-out system, automatically enrolling eligible employees.

The proposed scheme, still pending specific draft legislation, entails matched contributions from both employers and employees. Initially, a total contribution of 3.5% of an employee’s salary is suggested, with 1.5% each from the employer and employee, along with an additional 0.5% from the state.

Notably, there are significant differences between the auto-enrolment scheme and an occupational pension scheme. Under auto-enrolment, the state contribution acts as a 33% uplift of the employee contribution instead of providing income tax relief, resulting in a considerable loss of tax benefits for higher-rate taxpayers compared to an occupational pension scheme.

The scheme will see contribution requirements increase every three years, with a projected total contribution of 14% over ten years, split equally between employers, employees, and the state, applicable to earnings up to €80,000. However, this proposed structure substantially reduces the tax advantages of pension funding for higher-rate taxpayers.

In addition to the variance in tax relief, several limitations are apparent:

• The proposed investment structure offers a limited selection of investment funds with minimal to no advice provided to employees.
• Establishing one’s scheme grants the flexibility to choose investment providers and brokerage firms, promoting market competition and potentially yielding better outcomes for employees.
• Auto enrolment restricts early access to pensions until normal retirement age, whereas occupational pension schemes may allow access as early as age 50 upon leaving service.

Our advice: Given these considerations, it is advisable for business owners to explore options for establishing their own occupational pension scheme ahead of auto enrolment. This approach avoids the necessity for both employers and employees to invest in the mandated arrangement.

For employers, the ability to tailor the pension offering, boost employee engagement, and demonstrate a commitment to employee well-being remains vital, especially considering the specific contribution requirements and limitations of the government-mandated scheme.

While auto enrolment presents a step forward in pension funding, it may not be optimal. Proactively establishing an independent pension scheme could offer strategic advantages in administration, investment choice, cost management, compliance, and talent attraction and retention.

As experienced advisors in the occupational pension scheme arena, we are available to provide further insights and assist business owners in understanding the implications of pending auto enrolment for their businesses.