Auto Enrolment (AE) is coming — and as an employer, you have a responsibility to ensure your business complies with the new system. While AE promises to make pensions more accessible for employees, it’s important to understand how it will affect you as an employer. From pension contributions to employee enrolment and early retirement limitations, AE introduces a range of changes.
Let’s break down what AE means for employers, and how it might impact your payroll processes and overall pension strategy.
Key Features of Auto Enrolment
Here are the most relevant features of the Auto Enrolment pension system:
1. Eligibility and Employee Enrolment
Auto Enrolment applies to all employees who are aged 23 or older but under 60, and it includes those who were previously in non-pensionable employment. If your employees fall into this category, AE will automatically enrol them in a pension plan unless they opt out.
Employees can opt out of the auto-enrolment scheme after six months of enrolment, during months seven and eight. They can also opt out during the seventh and eighth months after a contribution rate change. Employee contributions made before the opt-out are refunded, but employer and state contributions remain in the pension pot to continue growing. After two years, employees who opted out will be automatically re-enrolled if they still meet the eligibility criteria.
What does this mean for employers?
You’ll need to have a system in place to automatically enrol employees in the scheme. You’ll also need to manage opt-out requests, as employees have the right to opt-out of the pension scheme within a set timeframe, as described above.
2. Low Contribution Rates
The AE contribution rates are relatively low at 1.5% for both the employee and employer, with the government contributing an additional 0.05%. These rates are a start, but it may take up to 10 years for employees to accumulate a meaningful pension fund under this scheme.
As an employer, you’ll need to set aside these contributions for your employees, which will increase your payroll costs over time. While these contributions are lower than traditional company pension plans, they still represent an additional expense.
3. Pension Flexibility Limitations
One of the key issues with AE is its lack of flexibility. Employees can only access their pension at age 66, with no early retirement options — even if their circumstances change or if they want to retire early. This could be a challenge for employees who need to access their pension early, especially in case of health issues or business closure.
As an employer, you may need to address employee concerns about early retirement options. If your company currently offers more flexible pension schemes, AE may not meet your employees’ needs in terms of retirement planning.
4. Tax-Free Lump Sum Restrictions
Under AE, employees can only take 25% of the pension fund as a tax-free lump sum. However, with company pension plans, employees often have the option to take a larger tax-free lump sum, depending on the scheme.
As an employer, this may affect how you communicate pension benefits to your employees, especially those who are looking for greater control over how they access their pension.
5. Contribution Caps at €80,000 Gross Salary
Both the employer’s and government’s contributions are capped at €80,000 gross annual salary. This could be limiting for higher earners in your company, who may want to contribute more to their pension to reflect their salary. With AE, the contributions are capped, which might not align with higher-level employees’ expectations or retirement needs.
Contributions and the PRSI Comparison
One thing to note is that there has been no official guideline from Revenue yet on how the system will work in practice, but we expect the AE system to function similarly to PRSI. In other words, we anticipate it will be set up in a way where contributions are deducted automatically from salaries and will be relatively easy to manage.
How AE Will Affect Your Payroll Process
As an employer, you will need to:
- Enrol eligible employees automatically into the AE pension scheme.
- Monitor opt-out requests and ensure employees are aware of their rights to opt-out.
- Deduct pension contributions from employee salaries and remit them to the pension fund, ensuring both employee and employer contributions are accurate.
- Communicate the limited options within AE (no early retirement, low tax-free lump sum, etc.) to your employees.
- Ensure your payroll system can handle the AE contributions and update your systems accordingly.
Conclusion
While Auto Enrolment is a positive step towards increasing pension access for employees, it does bring several challenges for employers. From the automatic enrolment process to the low contribution rates, AE will require adjustments to your existing pension plans, payroll systems, and employee communications.
As an employer, it’s essential to stay ahead of these changes, plan for additional costs, and ensure that your employees understand the limitations of the AE system. If your company is used to offering more flexible pension options, AE may not be the perfect fit, and you may need to offer additional support or alternative pension schemes.
Need Help Navigating the Auto Enrolment Changes?
If you’re unsure about how Auto Enrolment will impact your business or need assistance in setting up your pension system, our team is here to guide you.
