Horse-trading between Fianna Fáil and Fine Gael over cabinet positions in the next government is some way off, as negotiating teams from both sides only started official talks this week on policy priorities – while weighing who to join forces with to secure a Dáil majority.
Some senior Government figures warned this week that it could be January – more than a month after the general election – before a new administration is formed.
But as with every new government, some incoming ministers will have more time than others to get their feet under the table. The next minister for social protection – replacing incumbent Heather Humphreys, who did not run in the election – won’t be among the lucky ones.
The Department of Social Protection faces the mammoth task of preparing for the launch of the long-awaited automatic enrolment (AE) pension scheme – which, after years of stops and starts, is due to go live in September, capturing about 800,000 workers in the State who do not currently have a workplace or private pension.
But while the AE system – which will be known as My Future Fund and will be run by a new State agency called the National Automatic Enrolment Retirement Savings Authority (Naersa) – is set to become one of the biggest immediate projects facing the next government, it took up noticeably little space in the manifestos of the main political parties.
Fianna Fáil, which won the most seats, didn’t even mention it in its 195-page tome, even if it is a strong supporter of the State ending its days as the only member of the Organisation for Economic Co-operation and Development (OECD) that does not operate an auto-enrolment or similar system.
“Auto-enrolment is a really important project, but unfortunately long-term issues don’t get debated in elections,” said Fergal O’Brien, director of lobbying at Ibec, the business representative group.
“I’m a little surprised that it didn’t come on the radar during the campaign when you think about the cost-of-living crisis, as it will result in money being taken from people’s pay cheques for AE contributions. But I suspect it is an issue that is going to return next year as employers face the challenge of explaining this to employees.”
Business costs
AE will apply to workers aged between 23 and 60 who earn at least €20,000 a year across one or more jobs and who are not already members of an occupational pension scheme. Employers and employees will each initially contribute 1.5 per cent of gross earnings to their pension pot, with the Government adding a further 0.5 per cent. The contributions are due to increase in stages, reaching 6 per cent and 2 per cent respectively in 2034.
It is not the only new expense facing employers. Next year is set to see the national minimum wage increase by 80 cent to €13.50, leaving it a third higher than before the pandemic. Sick pay entitlement is rising again from five days to seven, before reaching 10 days in 2026.
“Businesses are definitely concerned about cost competitiveness,” says O’Brien. “If we’re saying AE is really important, then other things shouldn’t be happening at the same time. It’s the accumulative and aggregate effect that really hurts.”
Shane McLave, managing director of Excel Recruitment, which works with more than 1,000 small to medium-sized businesses (SMEs) throughout the State, reckons mounting expenses for companies, coming hot on the heels of the pandemic and inflation crisis, will inevitably increase the size of the black economy.
“Businesses have seen a lot of big increases in running costs in recent years – and with the minimum wage set to be replaced by a living wage in 2026 (set at 60 per cent of the median wage in any given year), it’s going to be increasingly difficult to plan what your staff bill is going to be,” said McLave. “This is all contributing to growth of the cash-in-hand black economy. Auto-enrolment will only increase this part of the economy further.”
Some 68 per cent of workers aged between 20 and 69 had pension coverage of some form outside of the State contributory pension as of last year, according to Central Statistics Office data. But that figure is heavily skewed by employees in the public sector. And as the State pension is paid at a flat rate, workers without a supplementary pension are exposed to a significant drop in their living standards in retirement.
Life expectancy is also increasing and the State’s population is ageing. There are currently about four workers for every person aged over 65, according to Department of Finance figures. It forecasts that this number will drop to about two workers for every individual over 65 by the middle of the century.
“AE is an important part of addressing demographic ageing. However, politically, reducing take-home pay and adding to business costs will be difficult,” said Jerry Moriarty, chief executive of the Irish Association of Pension Funds (IAPF).
More than half of Irish business are not prepared for the impending AE regime, according to a survey carried out by corporate law firm Mason Hayes & Curran last month. Almost six in 10 respondents said that systems integration was the biggest challenge, as co-ordinating payroll systems with Naersa and managing the enrolment processes have emerged as a complex undertaking for many companies.
A similar number said they are most concerned about the administrative burden. The sheer volume of data transfers between employers and Naersa will increase the risk of a data breach or other errors occurring, according to Stephen Gillick, head of the law firm’s pensions team. This means that employers will need to stress-test systems well in advance of AE going live on September 30th next year.
False dawns
First proposed in 2006 by then minister for social and family affairs, the late Seamus Brennan, AE has been through years of false dawns.
Enabling draft legislation, originally scheduled to be published before the Dáil’s summer recess last year, was finally unveiled in April and finally signed into law in early July – just after Humphreys signed up Indian information technology company Tata Consultancy Services (TSC) to build and run the system.
Fortunately, TCS has background in this space, having been the administration provider to the UK auto-enrolment system which was established 13 years ago, and which currently services about 13 million participants.
However, the Department of Social Protection has yet to formally launch the search for four investment managers that will manage the assets of participants in the scheme. Officials had signalled to the pensions industry last autumn that they would start the tendering process for those crucial roles in late 2023, before signing up four successful bidders in the second quarter of 2024.
A department spokeswoman said a request for tender document “is expected to issue in the coming weeks”.
“We have been hearing for some time that this will be coming ‘in the coming weeks’. This doesn’t inspire confidence in the overall deadlines,” said Moriarty of the IAPF.
The plan is for each of the four asset managers to provide four different fund types – a conservative, moderate risk, higher risk, and default option. Investment groups such as Amundi, Irish Life’s investment management arm and State Street Global Advisors are expected to be among bidders for the investment management contracts. However, there are concerns in the industry that this will lead to “generals” in all asset classes, rather than top-notch managers in particular assets.
Officials in the department told The Irish Times last month they plan to tweak the fee structure envisaged under the plan to include a flat annual fee, which will be levied on each of the 800,000 workers expected to be captured by the scheme, in addition to a charge based on a percentage of assets under management.
They did not give further details on the fees, other than that the department “will ensure these are highly competitive”.
Officials had originally planned for annual management fees of 0.5 per cent of assets under management – with most of the money going to the investment managers but some also earmarked for the running costs of Naersa.
A flat-fee element would disproportionately affect lower-paid workers with smaller investment pots in the scheme. However, pension industry sources say it will help meet some of the running costs of the scheme when the pool of assets being managed is very low.
The flat fee “is the fairest and cheapest model for scheme participants in the medium to long term,” a department spokesman said after this report had been published. “Investment management services will be funded through a negotiated and competitively priced percentage model,” he added.
The flat fee model for administration will provide transparency for participants, a reduction in the relative cost of fee as savings grow and ensure total participant charges remain below 0.5 per cent of assets under management over the medium to long term, he claimed.
The department estimates the total amount of assets in the scheme will grow to about €21 billion after 10 years. Budget 2025 allocated €13 million to the cost of the State’s top-up My Future Fund payments from the end of next September. The department has estimated that the scheme will cost the Government €3 billion over the course of its first 10 years – less than 0.1 per cent of the size of the domestic economy this year (measured by modified gross national income, or GNI*).
The incoming minister will need to appoint a chief executive and board members to the Naersa by end of March, according to a timeline outlined by Humphreys two months ago.
Employer issues
The most pressing issue for employers who have not yet started preparing for AE will be to assess which of their employees aged between 23 and 60 are in scope to be included in the regime. Employees are widely defined under the legislation – capturing anyone where payroll taxes are being operated on pay. This includes new staff who may be on probation as well as casual and part-time staff, according to lawyers and pension experts.
Employees enrolled in AE will have to stay in the system for a minimum of six months, but have a two-month window after that to opt out if they choose.
Industry sources say many employers ahead of the game are making a concerted effort to encourage staff not already part of existing workplace pensions schemes to sign up. This is in order to minimise the administrative burden for companies dealing with two schemes – even if the average employer contributions to occupational schemes, at 5 per cent, is higher than the initial rate they face paying into the AE plan.
The plan has been “designed to keep employer administration to a minimum,” a department spokesman said. “A new body, the National Automatic Enrolment Retirement Savings Authority will handle the bulk of this work. This means that there will be very little in the way of administrative burden for employers,” he added.
“Employers need to carefully consider not just the initial costs of the new system, but also how it will evolve over time,” said Caitríona MacGuinness, head of the defined contributions (DC) team at Mercer Ireland, another big benefits consultancy. “They also need to work hard on communicating effectively with employees about the incoming regime.”
Occupational pension plans on offer are overwhelmingly dominated by DC schemes, where – like the planned AE system – retirement benefits are dependent on the performance of investments rather than promised as a proportion of a retired worker’s former salary under more traditional defined benefit schemes.
A recent survey by employee benefits consultants WTW found that 97 per cent of large employers in the Republic offer an occupational pension scheme. However, only a little over a third make it mandatory for staff to join such plans when recruited.
“A lot of companies are now planning to change the terms of contracts for new hires, to make them join their occupational schemes,” said McGuinness, noting that in many cases occupational schemes offer better benefits.
The Irish Congress of Trade Unions (Ictu) has warned it will take action against employers if they respond, conversely, to a cheaper AE option by closing off their existing workplace schemes to new hires – or “level down” contributions in private plans to match AE rates.
“An employee-centric approach should be considered by all organisations when deciding on the best strategy to be auto-enrolment ready,” said Shane O’Farrell, director of employer solutions at life and pensions group Irish Life, who also says that many companies are opening their occupational schemes to staff who stand to be captured by AE.
“Employers are telling us that they value the flexibility, control and ancillary benefits that are part of their company pension plans. From aspects such as advice support to early retirement options, and the overall quality of the employer and employee experience, [they say that] having one company pension plan that’s open to all their people is a more appealing option overall for their organisations.”
The recent Finance Act 2024 caused confusion by setting out a taxation approach for benefits in an auto-enrolment investment pot on the death of a scheme member that differs to the structure operating under standard DC schemes or personal retirement savings accounts (PRSAs).
In DC and PRSA schemes, funds in a member’s plan are subject to certain lump-sum limits and inheritance tax rules following their death. However, the recent Act has established that funds in an auto-enrolment plan will be subject to income tax for the beneficiary as they would be entitled to the full amount in the participant’s account in a lump sum.
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A spokeswoman for the Department of Finance has said its officials and the Revenue Commissioners are considering ways to more closely align the tax treatment on death of both regimes before it becomes an issue, starting with potential measures in Finance Bill 2025.
“The next government has an opportunity to see what tweaks can be made to make implementation of AE more seamless and less administratively burdensome,” said O’Brien of Ibec.
But with a little over nine months to AE-day, there isn’t much time.
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