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What is the National Pensions Framework
This is a document that was published by the Irish Government in 2010. It sets out the Governments intentions for radical and wide-scale reform of the Irish pension system. It sets out a fair and equitable approach that encompasses all elements necessary for future pension provision. The State will continue to provide the bedrock for the pension system with the State Pension, while employers and individuals will be encouraged to share the responsibility with Government to save and provide for the future. The framework sets out key developments for the future of pension provision in Ireland in the areas of
- Social Welfare Pensions
- Current Occupational & Voluntary Provision
- Public Service Pensions
- Tracing Service for Dormant Pensions
What is the Auto-enrolment
The aim of Auto-enrolment is to deliver security, equity, choice and clarity to the Irish Pension System for each individual. It also aims to increase pension coverage, particularly among low to middle income groups and to ensure that State support for pensions is equitable and sustainable.
To increase adequacy of pensions in Ireland, coverage in funded pensions needs to be increased. This can be achieved through
- Automatic enrolment;
- Improving existing financial incentives to save for retirement
How Auto-enrolment will work
Employees will be automatically enrolled into a new pension scheme unless they are a member of their employers’ scheme and that scheme provides higher contribution levels or is a Defined Benefit Scheme.
Contributions to the new scheme will be made within a band of earnings, with earnings below and above certain thresholds exempt.
- Employees will be required to make a fixed percentage contribution.
- In line with the Government commitment, a State contribution equal to 33 per cent tax relief will be provided in respect of pension contributions made by the employee (within a band of earnings).
- Employers will be obliged to provide a contribution equivalent to the State contribution.
A simplified example of how this might work
A contribution of €4 to the scheme would comprise an employee contribution of €2, a State contribution equivalent to €1 and an employer contribution of €1.
Fund Choice under Auto-enrolment
A range of funds, including a low-risk default option, will be available so that people will have a choice about where their savings are invested as well as confidence in their security. If people decide that retirement saving is not feasible, they can opt-out but there will be a once-off bonus payment for people who contribute to the scheme for more than five years without a break in contributions.
The Government will introduce three principle changes in the Pension system
An auto-enrolment system for employees to ensure increased coverage and adequacy;
A requirement for employers not currently providing pension arrangements to take on a significant role in pension reform by enrolling employees and contributing on a mandatory basis.
Reform of the current system of tax incentives.
Once a person enters employment or changes employment, and is over 22 years of age, he or she will be automatically enrolled into the new pension scheme unless the employee is a member of their employers’ scheme which must be:
- a defined benefit scheme; or
- a defined contribution occupational pension scheme with a contribution rate equal to or greater than the minimum paid under the new scheme; and with an employer contribution equal to or greater than the minimum under the new scheme.
Three main reasons why people are not saving for their retirement
- Inertia. Automatically enrolling people into a pension scheme overcomes this problem.
- People are often unsure about the value of the incentives provided by the State to encourage pension provision. By providing a matching contribution equivalent to 33 per cent tax relief, the Government will introduce more transparency to the system. This allows people to see the exact value of the Exchequer support. By giving everyone the same matching contribution, the system is more equitable than the current system of marginal tax relief.
- As people need to use their money for other purposes at certain times, for example, to save for a deposit for a house, the opt-out mechanism allows people to take a break from saving for retirement when they need to do this.
The Renewed Programme for Government commits the Government to introducing tax relief of 33 per cent on pension contributions to replace the current rates of 20 per cent and 41 per cent. So the Auto-enrolment scheme is in line with that commitment.
Accessing the Funds
Employees will be permitted to opt out of the Auto-enrolment scheme after a period of three months. Employees can opt in again whenever they wish but, in any event, they will be automatically re-enrolled every two years. A once-off bonus payment will be paid to people who stay in the scheme for five years without a break in contributions. Once a person remains in the scheme for six months, their contributions will be held in a pension account and no withdrawals will be allowed.
The procedures for accessing funds from the Auto-enrolment scheme at retirement will be developed during the implementation phase. In as far as possible, these arrangements will mirror those which apply to access to PRSA funds at present.
The individual will be provided with a range of investment choices reflecting different levels of risk, accompanied by suitable, easily understood information about the level of that risk and the benefits expected. The range of funds will include very low risk options to provide members with a high level of security on their savings. The Government will not, however, provide any guarantees on investment returns.
The limited number and types of funds (which will be required to have life-styling built in) available under the scheme will be provided by the private sector through a competitive process run by the State. Members will have the option of choosing between these approved funds or providers, or else they will be enrolled in one of the low risk default options. Charges will be kept to a minimum as marketing expenses and investment advice are minimised.
The key features of the auto-enrolment system are as follows
- Employees (aged 22 or over) will be automatically enrolled unless they are a member of their employer’s scheme (which provides higher contribution levels or is a DB scheme).
- Contributions to the new scheme will be made within a band of earnings;
- Employees will be required to make a fixed percentage contribution.
- There will be a State contribution equal to 33 per cent tax relief and employer contributions to match the State contribution.
- Contributions will be collected through the PRSI system.
- A range of funds, including a low-risk default option, will be available.
- Employees can opt out but they will be re-enrolled every two years.
- There will be a once-off bonus payment for people who remain in the scheme for more than five years continuously.
- Small DC funds may be transferred into the scheme.
- It was intended that the scheme be introduced in 2014, but currently there is no set date for introduction.
In choosing the Auto-enrolment approach to pension provision, the Government has sought to overcome the inertia involved in the decision to take out a pension. In addition, it has provided the choice for people to opt out of the scheme if they wish. It has also ensured that employees, employers and the State all have to play their part in addressing the provision of future retirement incomes.