Minister Doherty Announces Key Elements of Design for New Automatic Enrolment Retirement Savings System

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Minister Doherty Announces Key Elements of Design for New Automatic Enrolment Retirement Savings System
New system represents a ‘fundamental reform for the pensions system in Ireland’
Wednesday 30 October 2019
Today, the Government approved a large part of the design of a new Automatic Enrolment Retirement Savings System on foot of proposals from the Minister for Employment Affairs and Social Protection, Regina Doherty T.D. This follows on from the Government’s Roadmap for Pensions Reform which sets out the Government’s intention to develop and implement an Automatic Enrolment Retirement Savings System for the significant number of people working who do not have supplementary pension coverage.  
Minister Doherty said:
 “Most people, particularly when younger, don’t think about saving for their retirement. The figures are stark – two thirds of private sector workers don’t have any pension provisions made. While the State Pension will always be there for people, I want to ensure that the pensioners of tomorrow – all those in the workplace today – don’t just have enough to live but have a comfortable life in their retirement.
“That is why the introduction of an Automatic Enrolment system represents a fundamental reform for the pensions system in Ireland and is a crucial reform for Irish society overall. It is important that everyone is on-board for this journey and in designing the system I have carefully listened to all views. 
“My objective is to develop a system that first and foremost operates in the best interests of savers. This fundamental principle underlies the decisions that have been made today and will be made in finalising the design for automatic enrolment. 
“Today’s decisions have been informed by a wide-ranging consultation process that took place following the publication of the ‘Strawman’ proposal document last year. There was significant interest and engagement throughout the consultation process and this was reflected in the level of detail in the submissions received. I would like to thank all those who contributed to this process.”
Automatic Enrolment will supplement the State Pension, which remains the bedrock of the Irish pension system. It will also complement the existing supplementary pension system.  The aim of automatic enrolment is to improve supplementary pension coverage and adequacy among those who do not have a supplementary pension, and who are likely to experience an unwanted reduction in living standards when they reach retirement.
The level of supplementary pension coverage in Ireland is particularly low. It is estimated that only approximately 35% of private sector employees have supplementary pension cover. This low level of coverage can be attributed to the fact that Ireland is the only OECD country that does not have either a mandatory earnings related pension system or an automatic enrolment system.
Design Features Agreed Today
Significant elements of the design of the automatic enrolment system for Ireland were approved by Government in Cabinet today. These are key decisions in relation to the target membership, the contribution rates, the policies in relation to opting-out and re-enrolment, the administrative arrangements and organisational approach and the investment options. 
The majority of these decisions are based on the proposals that were set out in the Strawman document and withstood the scrutiny of the public consultation process, the ESRI’s economic analysis and my officials’ engagement with experts from around the world.  Further details on the consultation process and the ESRI research are set out below. 
The key features agreed today include:
  • Current and new employees aged between 23 and 60 years of age and earning €20,000 or above per annum across all employments will be automatically enrolled;
  • Employees earning below €20,000 per annum and employees aged under 23 and over 60 will be able to ‘opt-in’ to the system;
  • There will be no employee waiting period before enrolment;
  • Employees who are existing members of a pension scheme/contract which meets prescribed minimum standards and contribution levels will not be automatically enrolled;
  • Employers will be required to make a matching (tax deductible) contribution on behalf of the employee i.e. at a specified contribution rate;
  • Employer contributions will be limited to a qualifying earnings threshold of €75,000 – which will be reviewed over time;
  • Contributions during the first six months of membership will be compulsory;
  • Member opt-out of the system will be facilitated in a two month ‘opt-out window’ (between the start of the 7th month and the end of the 8th month);
  • Thereafter, a limited number of ‘Savings Suspension periods’ will be facilitated for members who wish to temporarily cease making contributions. Employer and State contributions will also cease in this scenario;
  • Members who opt-out will be automatically re-enrolled after three years but will have the ability to opt-out again under the same circumstances outlined above; and
  • Early access to accumulated retirement savings may be provided on the grounds of ill health and enforced workplace retirement.
  • A Central Processing Authority (CPA) will be established by the State and will be responsible for sourcing, on a competitive basis via an open tender, a limited number of Registered Providers to provide a defined suite of retirement savings options;
  • The CPA will establish minimum standards for service delivery and product features required of all providers, e.g., the number of investment fund options for members, service response times, etc.;
  • Employees will be automatically enrolled with the Central Processing Authority by their employer on commencement of employment;
  • Employees (rather than employers) will be responsible for selecting a provider and a savings fund option. In the absence of any savings decision, the enrolled employee will be automatically allocated to the default fund of one of the Registered Providers on a carousel basis;
  • The initial contract period for service delivery by Automatic Enrolment Registered Providers will operate for a period of ten years;
  • The CPA will seek to set annual administrative, management and investment charges of no more than 0.5% of assets under management. This charges cap will apply to all providers;
  • Each Registered Provider will be obliged to offer a similar range of ‘standard choice’ savings fund options including a default fund for those who elect not to exercise choice;
  • These funds will operate on a Defined Contribution basis;
  • These products may incorporate a ‘lifestyle’ or ‘target date fund’ investment approach and will be defined by reference to risk profile;
  • Members will be entitled to transfer funds accumulated in the automatic enrolment system (contributions plus investment returns minus investment and management fees) between the savings products;
  • Invested funds and scheme membership will follow the member when members change employments.
Following the comprehensive consultation process, the Government has decided to commence with an initial minimum contribution rate (for employees and employers) of 1.5% for three years, which will increase by 1.5 percentage points every 3 years thereafter to a maximum of 6% at the beginning of year 10. This addresses concerns expressed by both employees and employers about the Strawman proposal to escalate the contribution rates from 1% to 6% over a shorter time period with a rate of increase of 1 percentage point per year. This new approach allows more time for the contribution rate to bed in and earnings to adjust before the next increase.
Following today’s announcement, Minister Doherty emphasised:
“A key feature of this automatic enrolment system is that it will be a ‘pot-follows-member’ design. This means that an employee’s pension contributions will be collected in the same pension ‘pot’ even when an employee changes employer, or if the employee has multiple employers. This is one of the critical lessons that we learned from examining similar systems internationally.
“The implementation of this system by 2022 will be one of the most ambitious and ground-breaking reforms for Irish workers. Proposals are being developed for Government to phase in the implementation process, which will enable automatic enrolment to commence by 2022 as planned.”
Next Steps
In continuing to develop the automatic enrolment retirement savings system, there are five main areas where work is continuing so as to produce design options for Government to consider. 
These areas are related to the design of:
  • the State financial incentive;
  • the scope and role of the Central Processing Authority;
  • the nature and functions of the Registered Providers;
  • the investment framework and funds to be offered by Registered Providers, including, the design of the default fund, and also the pay-out phase; and
  • the phasing of implementation.
Further details on these areas of work are available on the Department’s website.
As the various elements of the design of automatic enrolment are linked, the final design of the State financial incentive and the Central Processing Authority may result in changes to some of the design elements which are settled in principle. However, any such change will not fundamentally alter the direction in which Government intends to proceed with the design of automatic enrolment.
The Government will continue to engage and consult with all interested parties throughout the design and development process of automatic enrolment. This will be used to generate as much consensus as possible as to the best way forward as plans are developed and refined. A further consultation process will take place following the finalisation of the remaining elements of the design.
Notes for Editors
Consultation process
Last year, the Minister for Employment Affairs and Social Protection, Regina Doherty T.D., launched a Strawman proposal of how an automatic enrolment system could be designed and operate, and launched a major national public consultation process on it. The approach used for the consultation process was wide-ranging and consisted of a call for written submissions and the organising of regional seminars, an online survey and focus groups.
This approach resulted in significant engagement from a diverse range of stakeholders including employer and employee representatives, industry bodies, advocacy groups and interested individuals.
Over 100 written submissions were received from stakeholders and around 170 people participated in four consultation sessions held in Dublin, Galway and Cork.  As a follow-up to these meetings, an online survey was administered to all those who had registered to attend one of the consultation fora.
The consultation process concluded in March of this year with a series of six focus groups (arranged by the Pensions Authority) to obtain the views of those likely to be included in the target population, but who would be unlikely to respond to a call for submissions on the Strawman proposals.
Reports on each of the four formal elements of the consultation process have been prepared along with a summary report on the consultation process as a whole. These are available on the Department’s website. The full set of consultation submissions will be made available on the Department’s website in November.
Overall, the responses to the Strawman consultation process were positive and constructive. While stakeholders advanced a diverse and often conflicting range of views around the manner in which the system could operate, the principles and concepts underpinning the Strawman proposals were generally accepted.
In addition to the consultation process, Departmental officials have met with representatives of many of the stakeholder groups on a bilateral basis and have engaged with a broad range of experts in this area both nationally and internationally.
Economic analysis
In parallel to this work, the ESRI was commissioned to undertake a macro- and micro-economic impact assessment of introducing automatic enrolment.
In relation to the macro-economic impact, the ESRI found that although the introduction of contributions to an automatic enrolment retirement savings system would lead to some lower levels of economic activity in the short to medium-term, it is likely to have a positive effect on the economy over the longer term as consumption is smoothed over the life course.
The analysis found that, in the short to medium-term, there would be lower levels of economic activity because of lower household disposable income as a consequence of pension contributions being made to retirement saving funds.  The ESRI noted that as these contributions would be at lower levels during the introductory phases, the economic impacts would then be proportionately smaller. 
In the micro-economic impact analysis, the ESRI found that the maximum rate of the State Pension provides a relatively high gross replacement rate for many low earners and that setting too low an earnings threshold (below €20,000) may lead to those with lower earnings over-saving. On the basis of the age and earnings criteria set out in the Strawman, the ESRI estimates that the size of the target population for automatic enrolment would be 585,000 employees.
Overall, the ESRI concludes that in the longer term automatic enrolment is likely to have a positive effect on the economy, as the automatic enrolment system will allow individuals to smooth their consumption over the life course and that by deferring income people will have higher income in retirement than otherwise would have been the case if such a system had not been established.
The ESRI’s micro and macro-economic analysis is available on the Department’s website (link below).
The following documents are being published on the Department’s website this evening.
  1. Design of an Automatic Enrolment Retirement Savings System - Update and next steps
  2. ESRI Working Paper No. 640, October 2019 - A micro-macro economic analysis of pension auto-enrolment options
  3. Overview of findings from the Strawman Public Consultation Process for an Automatic Enrolment Retirement Savings System for Ireland - June 2019
  4. A Public Consultation on an Automatic Enrolment Retirement Savings System - Findings of the Written Submissions
  5. A Public Consultation on an Automatic Enrolment Retirement Savings System - Findings of the Consultation Seminars
  6. A Public Consultation on an Automatic Enrolment Retirement Savings System - Findings of the Automatic Enrolment On-line Survey
  7. A Public Consultation on an Automatic Enrolment Retirement Savings System - Findings of the Automatic Enrolment Focus Group Meetings
  8. Summary of progress in the design of an Automatic Enrolment Retirement Savings System for Ireland and next steps - October 2019
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Last modified:30/10/2019