Auto Enrolment Scheme Details Announced

The Minister for Employment Affairs and Social Protection, Regina Doherty, announced more details about the auto enrolment scheme that is going to be introduced to help people fund for their retirement. It is estimated that just 35% of private sector workers have their own private pension plan. This compares to 100% of public service workers where joining the pension scheme is mandatory.

The Nuts & Bolts of the Scheme

• Current and new employees between the ages 23 to 60 who earn at least €20,000 a year will be automatically enrolled.
• If you earn less than €20,000 or fall outside those ages, you have to opt in to the system.
• There is no waiting period to join, it is from day 1 of employment.
• There is an earnings threshold of €75,000 on which contributions have to be paid.
• You cannot opt out for the first 6 months.
• After that, you have the option of opting out in month 7 & 8. Thereafter, you have to wait for ‘Savings Suspension Periods’ to open.
• Those who opt out will be automatically re-enrolled after 3 years and will have to opt out again.
• If you are already a member of a pension scheme, you do not have to join the auto enrolment scheme as long as it meets the minimum funding requirements.

How much will it cost?

Both employees and employers will have to contribute to the scheme.

• Both employees and employers will have to contribute 1.5% of salary to the pension scheme.
• This amount will increase by 1.5% every 3 years until reaching 6% of salary each.

How will it work?

• A Central Processing Authority (CPA) will be established by the State. The CPA will source the life companies to run the pensions.
• An employer will enroll an employee with the CPA when employment commences.
• Employees will choose their investment funds. If they do not pick a fund, there will be a default fund. Which provider the contribution goes to will be decided on a carousel basis.
• The value of the fund is the employees from day 1, there is no vesting period.
• An employee will have one policy for life, it will follow them around different employments.
• Members can transfer their benefits to different providers.

Expected Problems

The Minister wants this up and running by 2022. This is an extremely ambitious ask. A sophisticated computer system has to be designed and implemented in a very short period of time. It will also have to sync with the chosen providers systems so they can amalgamate the values of employees pensions across different providers.

Will providers be keen to be a ‘Registered Provider’? The maximum charge allowed is 0.5%. While this is good for the scheme members, it will be difficult for the providers to make money. Their initial contract will be for 10 years. Given a lot of the contracts will be at the lower end, the providers will be making very little from each policyholder.

Who will advise these people on their pension choices? Investing is not straight forward and people need to know where their money is going, what are the risk involved, what the expected returns are. Who will pay the fees to give advice on the scheme or will it be provided by the CPA?

I welcome the introduction of auto enrolment but I feel the government aren’t pushing it hard enough. A 1.5% contribution for 3 years is a waste of time. Someone on €20,000, will have contributed €1,800 to a pension after 3 years. After another 37 years of working, that money will be worth just €11,500 if it grows by 5% per annum…or €5,500 if you take inflation into account. It is the contribution levels that make the big difference to the fund at the end.

If you have any questions, drop me an email at steven@bluewaterfp.ie