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Future proofing Ireland’s pensions system    
The aim of increasing pensions coverage in Ireland has been importantly impacted by two major developments, one at EU level and one at national level. The significance of both are assessed by Jerry Moriarty, the CEO of the Irish Association of Pension Funds.
There have been two recent developments, one at European level and one locally, aimed at increasing pensions coverage. On March 22nd the Pan European Pension Product (PEPP) came into force and on March 29th the Minister for Social Protection, Heather Humphreys, launched the final design of the new auto-enrolment pension scheme for Ireland.

Both are designed to complement existing State and occupational pensions and are aimed at those not currently in pension arrangements.

The PEPP is based on European regulations so has common features and regulation in all EU countries. It is intended to be particularly attractive to people who work in different countries as they would be able to maintain the PEPP.

However, at this point in time it is not clear how successful the PEPP will be. Most potential providers argue that the 1% cap on charges will not cover the costs involved, particularly as there is a lot of focus on individual advice. While an individual can use the same PEPP for different jobs in different EU countries, they will still be subject to the very different rules that apply to tax treatment and payment of benefits in each. To date, no PEPP providers have registered products and there has been no legislation to enable PEPPs in Ireland.
Jerry Moriarty

The purpose of Auto-enrolment is to improve retirement savings, as currently only about half the work force are in a pension scheme and would therefore only have the State pension to rely on in retirement. Auto-enrolment has been long touted as the best means of dealing with this issue and has been very successful in the UK.

Starting in 2024, all employees not in an employer’s pension scheme will be enrolled into a new scheme and will have the ability to opt-out after 6 months.
The main features of the system will be:
• Employees, aged between 23 and 60, earning over €20,000 per annum (across all employments) and not already contributing to occupational pensions will be automatically enrolled.
• Employees will be free to opt-out of the system at the end of a minimum membership period (during the 7th and 8th month of membership) and on each occasion during the first ten-year period that contribution rates increase.
• Employees will also be free to suspend making contributions at any time.
• Employees/members will be free to choose from a range of four retirement savings funds:
• A conservative fund (e.g. mainly Government bonds, cash, or cash equivalents)
• A moderate risk fund (e.g. Government bonds, plus blue-chip equities, stock exchange indices etc.)
• A higher risk fund (e.g. equities and properties)
• A ‘default fund’ which will operate on a lifestyle/lifecycle basis.
• The funds will be provided by four commercial investment managers contracted through an open tender, each of whom will be required to provide each of the four fund types.
• All contributions nominated for a particular fund type will be pooled and distributed between the commercial providers. Similarly, all returns will also be pooled, meaning all employees opting for the same fund type will receive the same return, in accordance with the amount of contributions they have made.
• Where employees do not select a preferred fund, their contributions (together with those of the employer and the State) will be invested in the ‘default fund’.
• Employees will initially contribute 1.5% of gross earnings.
• Employees’ minimum contributions will be increased on three separate occasions by 1.5% over a 10-year timeframe until they reach a maximum of 6%.
• Employers will be required to match the employee contribution up to an income threshold of €80,000.
• The State will also provide a top-up equivalent to 33% of the employee contribution.
• Benefit draw-down will be linked to the State Pension age. Members will be able to draw-down their funds as a lump sum, annuity, or approved retirement product in line with pension and taxation law prevailing at the time of retirement.
• Administrative fees for all provider/ fund options will be minimised through leveraging the scale of a Central Processing Authority (CPA) with a maximum envisaged annual management charge of 0.5% of assets under management.
• Member account portability between employments will be facilitated by a ‘pot-follows-member’ approach. In other words, people keep their pension fund and stay in the scheme even as they change employments.
• Employees outside the age and earnings band thresholds designated for AE will be able to opt-in.
• All employees/members will be able to access account information, update account information, apply for payment suspension or exercise an opt-out via an online portal.
• Enrolment to commence in Q1 2024

Speaking at the launch the Minister said “This represents a significant milestone in implementing one of our key Programme for Government commitments. Every worker will have access to a workplace pension,” she said, saying it would change a system whereby workers were “often left to their own devices to navigate what is a complex world of pensions, to one in which choices and options are simplified on their behalf”.

There are still lots of details that are unclear, particularly around the tax incentives and the operation of the Central Processing Agency. A direct payment from the Government is more like the SSIA incentive and very different from the current system where employees get tax relief on their pension contributions at their marginal rate of relief. It will be better for those who are outside of the tax net or pay standard rate tax but worse than currently exists for higher rate taxpayers. This will further complicate a system that really needs to be simplified.

However, Auto-enrolment is an important step in ensuring that people in Ireland will be prepared for retirement and it is crucial that the Government continues with the work required to put this system in place.

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