Munro O’Dwyer outlines the potential changes to the state pension from 1 January 2024, including emerging details concerning auto-enrolment and media coverage of the Standard Fund Threshold
There are several changes coming down the pike regarding pensions, and it’s important employers know the impending changes and prepare for them.
The Social Welfare (Amendment) Bill 2023
From 1 January 2024, changes are expected to the contributory state pension to facilitate greater flexibility, improved access and modifications to how it is calculated.
The Social Welfare (Amendment) Bill 2023 is currently in pre-legislative scrutiny. Here are the provisions contained within it.
Increased flexibility
There will be an ability to take the state pension at any age between 66 and 70, with an actuarially increased rate to reflect the later payment commencement date.
There will also be an ability to make additional PRSI contributions after age 66 to increase the level of the state pension. However, an overall cap of 40 years of PRSI contributions will remain.
This greater flexibility is in recognition of workforce, retirement and longevity trends. People are living longer, and there is increased demand to work longer and take phased retirement.
The recent Budget announced a 0.1 percent per annum increase in PRSI from October 2024, which is part of steps to manage the long-term sustainability challenges associated with state pension provision.
Change in state pension calculation
There is currently a ‘yearly average method’ approach to calculating the level of state pension, which is inherently complex.
From January 2025, there will be a ten-year phase-in of a ‘total contributions approach’ (TCA), with a target implementation date of 2034. This will recognise contributions (earned or credited) and home caring periods, up to 40 years, to be entitled to the full state pension.
Between 2025 and 2034, a hybrid of both approaches will be used.
The TCA aims to bring greater fairness to who receives a state pension and at what level, where contributions can be both earned and credited.
Long-term carers
Those who have spent more than 20 years providing full-time care for an incapacitated person may be entitled to an enhanced state pension from 2024. Credits will be given for periods greater than 20 years where there is a gap in the level of contributions due to caring.
Individuals can request a contribution statement from the Department of Social Welfare through a MyGovID account to help ascertain contributions made and any shortfall in those contributions.
For employers, these changes may mean further employee demand for both later and phased retirements.
Rather than treat each case on its merit, having a suitable retirement framework for employees (covering early, normal and late retirement and the benefits provided) will clarify your retirement policies and procedures. It will also support future workforce planning.
Auto-enrolment: the devil is in the detail
Auto-enrolment (AE) legislation is expected in the coming weeks, with an anticipated introduction in late 2024.
Stakeholders in the pensions industry have been liaising with the Department of Social Protection to understand the practical aspects employers must be aware of.
Waiting period
There is no waiting period in the AE system. The Central Processing Agency (CPA) intends to apply a 13-week rolling period for assessing eligibility without any backdating of contributions.
Careful consideration of eligibility conditions in existing pension arrangements and the implications in the context of the AE system will be needed.
Eligibility and exemption
For existing schemes where employee contributions are non-mandatory but the employer contributes, they will be exempt from AE.
There will be no other qualifying conditions at the outset of AE – these will only come into force in future years.
The CPA drives participation in the AE system for employees. Employers cannot influence this; only employees can opt out once in the AE system. For this reason, assessing who will be eligible for AE (both existing employees and future hires) will be essential.
There can be no dual participation in an occupational scheme and AE. It will only relate to employment where there is no pension provision. Should employers wish to move employees into their occupational scheme later, this will need to be triggered by the employee.
Automation
The intention will be for automated electronic payment notifications (AEPNs), similar to Revenue payroll notifications (RPNs), to be issued with effective dates from which payroll must apply. Payroll procedures will need to be updated to reflect this.
The Standard Fund Threshold and its implications
The impact of the Standard Fund Threshold’s €2 million cap on retirement savings has gained publicity recently. It causes a barrier for senior gardaí promotions where they would face a significant tax bill for excess pension savings above the €2 million limit.
This €2 million limit has been in place since January 2014 and has not been indexed. As a result, more employees are currently, or are at risk of, breaching this limit and facing a significant tax bill.
In the context of AE, it is unlikely that employers will have the freedom to exclude members who may have ceased contributions due to reaching the Standard Fund Threshold.
It is good practice for employers to monitor those at risk of breaching the limit and identify a suitable strategy for dealing with impacted employees (more so in the context of AE).
Defined benefit pension scheme settlements
A recent move by central banks to pause the continued increase in interest rates has led to a change in the market expectation of future interest rate movements.
For employers sponsoring defined benefit pension schemes, this may present a window of opportunity to consider the full or partial settlement of its defined benefit pension scheme liabilities in the near-term.
Given the economic backdrop, many sponsoring employers are now exploring the feasibility of partial/full buyouts.
Insurers are also in the market, offering strong commercial terms to take on the liabilities. It would be sensible for employers to at least consider their long-term objective and potential readiness for settlement in 2024.
Munro O’Dwyer is Partner at PwC
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