Work

Pension opt out may disappear as firms look to sidestep auto-enrolment

Companies examining rules of existing workplace pensions to minimise duplication under My Future Fund regime

Pensions: Companies are more likely to insist that new hires join existing occupational pensions schemes, WTW research found. Photograph: iStock
Pensions: Companies are more likely to insist that new hires join existing occupational pensions schemes, WTW research found. Photograph: iStock
Dominic Coyle
Fri Nov 15 2024 - 05:00

Workers may lose the right to opt out of their employer’s occupational pension scheme as companies look to avoid the administrative burden of operating auto-enrolment (AE), according to benefits consultants WTW.

WTW says companies and their employees face “significant challenges” ahead of the introduction of Ireland’s mandatory workplace pension scheme, My Future Fund, at the end of September next year.

A survey of 100 mostly large employers across the State found that 97 per cent currently offer a workplace pension scheme. Yet, just more than a third make it mandatory for staff to join the scheme when recruited.

More than half of the remainder say they now plan to make joining the in-house pension scheme mandatory for new hires, WTW said, “signifying a strategic shift on the part of employers in preparing for AE”.

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“Our experience is that companies would like to have everyone on the same platform as engaging with offering both an employer’s scheme and the Government AE scheme creates administration and communication complexities, particularly given the significant difference in how both systems operate,” says WTW head of corporate consulting, Brian Mulcair.

Employers will have to set up access to the State auto-enrolment programme from the end of September next year for all employees who are not members of any other pension scheme. That includes those who have opted out of an in-house occupational scheme, those working through a waiting period before accessing such schemes and temporary staff.

As of now, 38 per cent of responding companies impose waiting periods before new staff can join their pension scheme.

“Leaving those waiting periods in place will mean that employees will be automatically enrolled in the Government’s new AE scheme ... which will complicate pensions administration,” said WTW, adding that companies affected will need to review this aspect of their pension plan design.

The administrative burden of AE, juggling dual pension schemes and addressing the issue of temporary employees were employers’ biggest concerns, all ranking well ahead of cost issues.

[ Pensions: Uncertain times ahead of retiring workers ]

Temporary employees may well find themselves enrolled in AE, Mr Mulcair said as “there is a lot of administration involved in admitting short-term hires in an employer’s scheme and then administering the small retirement account that will have accumulated”.

Temporary staff would also lose any benefit of employer contributions to their pension under a company scheme unless they are working there for more than two years, while AE will lock in the benefit of contributions from the employer and the State.

Auto-enrolment will see everyone between the ages of 23 and 60 who earns more than €20,000 a year and is not already a pension scheme member, automatically enrolled in the My Future Fund.

They will initially pay 1.5 per cent of their gross salary into the scheme from their after-tax earnings, with that sum matched by their employer and the State contributing 0.5 per cent. That figure will rise by 1.5 percentage points for staff and employer, and half a point for the State every three years up to 2035, after which it will stay at 6 per cent, 6 per cent and 2 per cent respectively.

Average employer contributions to their own workplace schemes – at an average of 7 per cent across the State – are higher than the level that will be mandated under auto-enrolment.

Employees signed up to occupational schemes will also benefit from tax relief at their higher income tax rate, which is more beneficial financially than the €1 for €3 State top-up under auto-enrolment unless you only pay tax at the standard 20 per cent rate.

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Dominic Coyle

Dominic Coyle

Dominic Coyle is Deputy Business Editor of The Irish Times

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