The recent approval of the pension auto-enrolment bill by the Government marks a pivotal moment in pension reform, with far-reaching implications for every worker and employer across the country.
For too long, a significant portion of the private sector workforce has lacked a proper pension plan, leaving them vulnerable in retirement. As a result, one in three workers today have no private pension.
Having been first mooted 18 years ago, the new scheme provides long-awaited clarity on how and when pension auto-enrolment will finally be brought to life.
From an industry point of view, that certainty will be crucial. As we all live longer and face greater levels of expense in our retirement, people will increasingly rely on private and occupational pensions.
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With the planned introduction of auto-enrolment from January, close to 800,000 people aged 23-60 years of age will now be brought firmly into the pension safety net. The new scheme as currently envisaged will see matching employer contributions and a top-up from the State at a rate of €1 for every €3 saved by the employee.
At Aon Ireland, we’ve been supportive of the merits of auto-enrolment and how it heralds a once-in-a-lifetime opportunity to create a fairer and more equitable pensions system.
However, the current scheme still misses the opportunity to further tackle the gender pensions gap that has emerged over time. While more than half of men receive a private pension, fewer than one in three women receive the same benefit.
It is vital that auto-enrolment is easy to understand, and is effectively communicated to every employee
This is compounded by the fact that women have in the past been more likely to take time out to raise children or care for a relative. This significantly reduces their opportunity to earn and convert some of that income into pension savings.
The auto-enrolment bill is expected to provide a pension for employees who do not currently have one and who earn more than €20,000 per year. The rationale for this income limit is clearly around lack of affordability for lower-paid workers. However, lowering the income threshold further would have ensured that more workers – and probably more women at lower income levels - were not excluded from the auto-enrolment safety net.
As the bill progresses, other measures should be considered to address the gender pensions gap once and for all.
For example, looking at more flexible contribution models to mitigate the impact on pension savings of those who have to take time out of employment. This could include catch-up contributions on return.
Another option would be to introduce enhanced Government contributions for savers who take maternity, paternity, parental or carer’s leave. This would ensure a more level playing field for those taking leave without employer supports.
Introducing pension auto-enrolment in only nine months is also, without doubt, a daunting challenge.
Once approved by the Oireachtas, an entirely new pensions system for one-third of the workforce will have to be built and the National Automatic Enrolment Retirement Savings Authority established to administer the new scheme. A panel of four investment firms are to be appointed to offer different options to employees based on varying levels of risk.
With January 2025 fast approaching, employers will face an uphill battle to put in place the complex changes that are required. This comes at a time when many sectors, including hospitality and retail, are facing a surge in operating costs.
Close to 800,000 people aged 23-60 years of age will now be brought firmly into the pension safety net
Despite its costs and other challenges, we must not lose sight of the fact that pension auto-enrolment will help build a more resilient workforce and, therefore, is good for business.
But what can employers do to prepare for the seismic change that lies ahead?
First, consider how the new scheme will impact payroll, finance and HR functions. From updating payroll systems and reviewing employment contracts to financial planning, auto-enrolment will have implications for every aspect of business.
Secondly, employers with existing pension plans must determine whether to extend access to all employees or instead allow employees to join the new auto-enrolment scheme and weigh up the costs.
As we move from design to implementation in a matter of months, supports need to be put in place for employers to navigate this challenge. To ensure successful implementation, Government needs to minimise the compliance burden and associated costs on businesses.
Amid the transformation of Ireland’s pension landscape, it is vital that auto-enrolment is easy to understand, and is effectively communicated to every employee.
The current scheme still misses the opportunity to further tackle the gender pensions gap that has emerged over time.
Employers have an important role to play in educating their workforce about the changes that lie ahead. By informing and advising employees early on, businesses can highlight the merits of their own scheme or the benefits of the new system, minimise opt-outs and establish healthy long-term saving habits and drive higher employee engagement.
But businesses cannot do this alone. With seven in 10 members of the public currently unaware of pension auto-enrolment, there is a pressing need for the Government, businesses and employee representative groups to work together to resolve this blind spot by the end of the year.
The long-term success of auto-enrolment will depend on employee buy-in. By coming together to close the gender pensions gap and actively support employers, we can harness the opportunity to create a fairer, more equitable and resilient pensions system in Ireland: one which ensures a dignified and secure retirement for people at the end of their working lives.
Mairead O’Mahony is head of human capital at Aon Ireland
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