New Pension Scheme Development in Ireland: Auto-Enrolment 2025

The Irish government is set to launch a new pension savings scheme known as Auto-enrolment (automatic enrolment), starting in January 2025. This initiative aims to enhance retirement savings for employees who are not currently participating in any pension plans. Once implemented, Auto-enrolment will automatically include eligible employees in a pension scheme, although they have the option to opt-out after six months.

Key Features of Auto-Enrolment

Auto-enrolment mandates contributions from employees, employers, and the government to build a robust pension fund. The administration of this scheme will be handled by the newly established National Automatic Enrolment Retirement Savings Authority (NAERSA), under the supervision of the Pensions Authority. The legislative foundation for this scheme is the Automatic Enrolment Retirement Savings System Bill 2024, which, upon enactment, will activate the auto-enrolment system.

Addressing Pension Gaps

The primary motivation behind this scheme is to address the gap in pension coverage among employees. Many workers currently rely solely on the state pension, which, while sufficient to keep retirees above the poverty line, may not provide the financial comfort that individuals are accustomed to during their working years. By automatically enrolling employees who earn more than €20,000 annually and are aged between 23 and 60, the scheme ensures that a broader segment of the workforce will have additional savings to supplement their retirement income.

Contribution Structure and Benefits

One of the significant features of Auto-enrolment is the contribution-matching mechanism. For every €3 that an employee contributes, the employer will also contribute €3, and the government will add €1. This results in a total contribution of €7 for every €3 the employee puts into their pension fund. This substantial employer and government contribution aims to significantly boost the retirement savings of enrolled employees.

Employer Participation and Penalties

Employers are required to comply with auto-enrolment obligations, including making contributions to their employees' pension funds. Failure to do so can result in penalties and potential prosecution. However, there are no compulsory contributions mandated for personal pensions. The benefit for employers is the reduced administrative burden and cost associated with setting up and managing individual pension schemes.

Portability and Flexibility

The auto-enrolment scheme is designed with portability in mind. If an employee changes jobs after being enrolled, their pension plan moves with them, managed by NAERSA. This "pot-follows-the-member" approach ensures continuity and simplicity for employees. Additionally, employees can opt out after six months, with a refund of their contributions, or suspend contributions at any time without a refund. If they leave the scheme, they will be automatically re-enrolled after two years if still eligible.

Phased Contribution Rates

The contribution rates under auto-enrolment are predefined and will increase gradually over the first ten years:

• Years 1-3: Employees and employers each contribute 1.5% of the employee's annual salary, with the government adding 0.5%,
• Years 4-6: Contributions rise to 3% from both employees and employers, with the government contributing 1%.
• Years 7-9: Contributions further increase to 4.5% from both parties, with the government adding 1.5%.
• Year 10 onwards: Employees and employers each contribute 6%, and the government adds 2%.

For example, an employee earning €20,000 annually will see total contributions of €700 in the first three years, increasing to €2,800 by year ten.

Contribution Caps

Employer and government contributions are capped at a gross annual salary of €80,000. Therefore, the maximum employer contribution is €1,200 annually in the initial three years, increasing proportionately with the employee's salary and the predefined contribution rates.

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