News

Movement on automatic enrolment welcome but sustained momentum needed to meet ambitious timeline Close adherence to timeline required to ensure passage of legislation and establishment of Central Processing Authority (CPA) achieved without delay €1 for €3 model should be withdrawn and existing, well-established model of tax relief for contributions should apply  29 March 2022: Today’s launch by Minister for Social Protection, Heather Humphreys T.D. of Ireland’s long-awaited automatic enrolment pension scheme is positive news, but Chartered Accountants Ireland has noted the ambitious timeline and cautioned that legislative hurdles, the tendering process, and the establishment of the CPA must progress at pace.    The largest professional accountancy body on the island of Ireland made the comments in response to confirmation by Government today that an automatic enrolment pension scheme for workers will be introduced in January 2024.    Commenting, Cróna Clohisey, Tax and Public Policy Lead with Chartered Accountants Ireland said: “While today’s announcement is welcome given the pension crisis facing us, the timeline is ambitious to say the least. A significant amount of work needs to be done not just to develop the legislation underpinning the scheme, but also to finalise its design and to establish the various mechanisms that will be required for it to function.     “Employers will also need sufficient time to plan and budget for its introduction. Payroll service providers tell us that a lead-in time of at least 18 months would be required to properly develop, test, and deploy a fully operational system. As the legislation progresses, the Government must work closely with businesses to advise and help them prepare for the introduction of automatic enrolment.”   Over 90 percent of respondents to a 2021 survey by the Institute supported the introduction of automatic enrolment, a scheme by which workers would automatically be enrolled in a pension scheme by their employers, and both employers and employees as well as the State would contribute to the pension fund. Chartered Accountants Ireland has also called for the existing model for tax relief at both standard and marginal rates for pension contributions to apply to automatic enrolment. It calls for the proposal to introduce a second model, whereby the State contributes €1 for every €3 paid in by an employee, to be withdrawn.  Ms Clohisey continued: “One of the issues that remains unclear is how the existing and well-established model for tax relief at both standard and marginal rates for pension contributions will sit alongside the €1 for €3 State model that is planned for automatic enrolment. The operation of essentially two tax systems between auto-enrolment and private pension schemes will cause needless tax arbitrage and confusion within the market. We are therefore calling for the existing model of tax relief to apply to automatic enrolment and for the proposed State model to be abolished.”   ENDS For more information Jill Farrelly PR & Communications Manager Chartered Accountants Ireland     

Persistently low coverage a major challenge for state Receding pandemic is opportunity to progress recommendations of Commission on Pensions  Increasing private coverage via auto enrolment is only way to safeguard state pension     27 January 2022 – CSO statistics published this morning showing that a third of workers do not have pension coverage outside of the state pension must prompt renewed momentum towards auto enrolment, according to Chartered Accountants Ireland. The largest professional accountancy body on the island of Ireland highlighted again the pressure on the viability of the state pension, amid continued delays to pension reform.  The Institute, which represents over 30,000 members noted the window of opportunity, as the pandemic recedes in Ireland, to lay the groundwork for the introduction of auto enrolment, which would see employees automatically enrolled in a pension scheme by their employers.  Commenting, Tax and Public Policy Lead with Chartered Accountants Ireland, Cróna Clohisey said: “One third of workers remain without private pension provision and will be reliant on the state pension. Of employees with no supplementary pension cover, 45% stated that they have never gotten around to organising it or will organise it at a future date, which highlights that the issue isn’t going to be resolved without significant action by the government.    “We have long argued that the sustainability of the State Pension cannot be addressed without parallel reforms to increase private pension coverage. We welcomed last year’s recommendations by the Commission on Pensions including the need for a long-term strategy on state pension reform, delaying any increases to the State Pension Age until 2028, abolishing mandatory retirement ages and introducing automatic enrolment.”     The government is due to make further decisions on the Commission’s proposals this March, with auto enrolment potentially being introduced in late 2023. The Institute notes the time that is required to build such a system and the need for employers to have sufficient time to prepare for such changes.  Clohisey noted: “A clear road map from government will allow the necessary consultation with employers and business groups to progress. One of the many issues that remains unclear is whether the existing and well-established model for tax relief at both standard and marginal rates for pension contributions should apply to auto-enrolment. In its absence, the operation of two tax systems between auto enrolment and private pension schemes will cause needless tax arbitrage and confusion within the market.”   Further detail on pension reform can be found in Chartered Accountants Ireland’s (under the auspices of the CCAB-I) recent submission to the Commission on Taxation and Welfare.  ENDS       

Many trustees are planning to ensure that their occupational pension schemes will fully comply with IORP II regulations by the end of 2022. Munro O’Dywer explains how companies, as sponsors, should use the remainder of 2021 to strategically assess their existing pension value proposition and determine if they should consider a different approach. Pensions represent a significant component of the employee benefit value proposition. However, employees often do not see the actual value in their pension arrangements due to their inherent long-term nature. Those companies who can convey the value of their pension structures to their employees, both in the short- and longer-term, will drive increased loyalty. But what does value mean in the context of the pension scheme for the employee? This should not simply be viewed as the level of employer contributions being made. Adequate contributions are only a small part of the overall retirement planning jigsaw. Other aspects that should come into consideration include: scheme participation; investment options; investment performance; charges; member outcomes at retirement; member support to make optimal decisions; and the use of technology. The changing needs of employees Delivering a pension scheme that meets the needs of all five generations that exist in today’s workplace is by no means easy. Each generation has its own set of preferences. In addition, many will have different pension makeups (e.g. defined benefit only; a mix of defined benefit and defined contribution; and defined contribution only). Defined contribution pension schemes are becoming the norm. There is a greater focus on the adequacy of retirement savings and broader financial wellness. Employees can also have multiple pension sources, potentially across different countries. This creates added personal portability and taxation challenges. Furthermore, how employees expect to be supported on their retirement savings journey varies. There are different preferences around communication channels and the level of support (self-guided, group, or one-to-one). Achieving the right mix of pension components – structure, contributions, employee support and communications etc. – to maximise their effectiveness for all employees is more critical than ever. The market evolution In the same way generational needs and preferences differ, the pension providers, their propositions and the regulatory and taxation environment in which they operate continue to evolve. Operational changes, technology enhancements, investment thinking, and member engagement innovations are only some of the areas providers continue to adapt to, each of which has a knock-on impact on costs. For companies, it is essential to benchmark existing structures relative to the broader market. This will likely become a feature of the new regulatory regime, as outlined in the draft Code of Practice. The impact of the new regulatory regime The past ways of governing and managing trust-based pension schemes are expected to change under IORP II regulations. There will be a greater focus on risk management, value for members, and the ongoing monitoring of outsourced arrangements. As well as the culture and the ability of the trustees to look after member interests, risk, time and cost will increase when it comes to operating a single trust-based pension scheme. Many pension schemes can spend a disproportionate amount of time on regulatory compliance. This can come at the expense of those aspects that are likely to be valued higher by employees. This imbalance has the potential to be heightened by the new regulations. Areas include the adequacy of contributions, achieving strong investment returns, and making the right decisions at the right times before, at, and after retirement. What employers should consider before 2022 Companies have until the end of 2022 to be compliant with the new regulations. 2022 will be a year of pension changes. Companies need to ensure that their changes in 2022 are well considered in the context of the broader pension value proposition and look to enhance, rather than diminish, it. An effective way for companies to use the remainder of 2021 is as follows: Document your existing pension value proposition for employees (benefits/costs) Companies should document all benefits that employees receive from the pension scheme (e.g. employer contribution, tax relief, strong governance, investment options, help and support etc.) and the associated costs. Understand your employee needs and how these will evolve The next stage is to consider your employees and their particular needs. This will help companies understand if the employees’ views on what is valuable to them about their pension scheme are consistent with the benefits/costs documented and, if not, where the gaps lie. Consider the impact of the new regulatory regime IORP II regulations will mean more time and cost spent on regulatory compliance. This could affect the employee pension value proposition, where the elements most valued are neglected due to regulatory pressures. Consider how the existing proposition can be adapted or modified Companies should explore alternative pension structures (e.g. consolidation of pension schemes or master trusts), which will help mitigate the regulatory impact but where the employee pension value proposition remains intact or is indeed enhanced. Munro O’Dwyer is Pension Partner at PwC.

The following document provides a brief outline of retirement benefit measures contained in the Finance Bill that were not announced as part of Budget 2022.

The Irish Government has published the Report of the Commission on Pensions which puts forward a number of proposals to address the sustainability of the State Pension. Many of the recommendations put forward by the Institute to the Commission form part of the proposals including the need for a coherent long-term strategy on State Pension reform, delaying any increases to the State Pension Age until 2028 in order to give workers time to plan for their retirement, abolishing mandatory retirement ages and introducing automatic enrolment as soon as possible.   Overall, the Commission recommends that any of the proposals that are progressed by Government are subject to further gender, equality and poverty proofing. The Commission also emphasised the need for “enhanced transparency and recommends ongoing communication relating to State pension reform to secure public understanding of the importance of sustainability, certainty and poverty prevention.” A summary of the recommendations is provided below. State Pension Age 10 of the 11 members of the Pension Commission recommended a gradual incremental increase in the State Pension age by three months each year commencing in 2028, reaching 67 in 2031 (10 years from now), with further increases of three months every second year reaching 68 in 2039. Retirement Age Retirement ages in employment contracts should be aligned with the State Pension age, by introducing legislation that allows but does not compel an employee to stay in employment until State Pension age.  More generally, an employer would not be able to set a compulsory retirement age below the State Pension age. Flexible Access The Commission recommends that a person may choose to defer access to the State Pension up to age 70, and receive a cost neutral actuarial increase in their State Pension payment. The Commission also recommends that a person can continue to pay PRSI contributions past State Pension age at their existing PRSI contribution rate (employees, employers and the self-employed) to improve their social insurance record for State Pension Contributory purposes. The Commission also views it worthwhile in recognising long PRSI contribution histories by including a provision whereby those who choose to retire at 65, and have a long Total Contributions (TCA) record of 45 years, may receive a full pension. Financing the State Pension The Social Insurance Fund should continue to be financed on a pay as you go basis, and there should be a separate account in the SIF for State Pensions in order to provide transparency and the Fund’s ability to meet its commitments on an ongoing basis. Annual Exchequer contributions to the ‘State Pension’ account of the SIF should be made rather than relying on Exchequer subventions only when the SIF is in deficit. PRSI recommendations Maintaining the exemption from PRSI on all social welfare payments Removing the exemption from PRSI for those aged 66 years or over - the Commission recommends that all those over State Pension age should pay PRSI on a solidarity basis (Class K) on all income currently subject to PRSI Removing the exemption to pay PRSI on supplementary pension income (occupational and personal pensions, and public sector pensions). Increasing self-employed PRSI from 4 percent to 10 percent gradually and in the medium term, Class S PRSI rate should be set at the higher rate of Class A employer PRSI (currently 11.05 percent). Not increasing employers and employees PRSI until after 2030. After than the rate would increase by 1.35 percent by 2040.  Payment rate The Commission endorses the principle of benchmarking and indexation of State Pension payments and supports the establishment of an independent standing body to advise the Government on pension rates of payment Total Contributions Approach v Yearly Average The Commission recommends that the full transition to a Total Contributions Approach and the abolition of the Yearly Average approach to calculating entitlement to the State Pension Contributory rate of payment should be implemented as soon as possible, pending the passage of necessary legislation and IT system changes. Since 2019, both calculation methods have been in operation with the better rate from the two methods awarded. However, this has caused anomalies and unfairness in the system where people with fewer contributions can still qualify for further high levels of payment. Therefore, the Commission recommends that for those who are better off under the Yearly Average approach, a phased transition to the TCA approach should apply gradually over a 10-year period. Long-term carers Long-term carers are defined as carers who have been caring for more than 20 years. The Commission recommends that they should be given access to the State Pension Contributory by having retrospective contributions paid for them by the Exchequer when approaching pension age for any gaps in their contribution history from caring.   Increasing private pension coverage The Commission also endorses the early introduction of an auto enrolment pension savings system, to improve retirement income adequacy for future pensioners.  

This week’s call by the Commission on Pensions for the early introduction of an auto-enrolment pension savings scheme is an important reminder of the scale of the challenge of pension provision in the coming decades in Ireland, according to Chartered Accountants Ireland. The proposal was part of a series of recommendations set out by the Commission on Pensions following their examination of the sustainability of the State Pension. A survey this year of some of Chartered Accountants Ireland’s 30,000 members, recorded 93 percent support for the introduction of auto enrolment, a scheme under which workers would automatically be enrolled in a pension scheme, with contributions by employers, employees, and the state. In February 2021, the Government announced that its introduction would be delayed until at least 2023. Commenting, Cróna Clohisey, Public Policy Lead with Chartered Accountants Ireland said: “It has been our position for years now that reforms to enhance the sustainability of the State Pension cannot take place without parallel reforms to increase private pension coverage in Ireland, which at the moment is around 60 percent. The scale of the pension funding problem will only grow unless more workers start to save for a pension.  “Starting the lengthy process of introducing auto-enrolment as a matter of urgency is the obvious answer to what is already a huge problem. This scheme will incentivise people to save and that in turn will reduce the reliance on the State Pension and therefore enhance its sustainability.” When it comes to the State Pension age, the Commission recommends gradual incremental increases of three months each year starting in 2028, reaching 67 in 2031, with further increases of three months every second year reaching 68 in 2039.  Commenting Ms Clohisey said: “Minister Humphrey has stated that the Government will not make a decision on these proposals until March 2022, and while we understand the widespread impact that these proposals would have, the further delay is regrettable. Based on the State’s history of addressing pensions policy, by the time any changes are implemented, we fear that 2028 will not be very far away.   “Workers approaching State Pension age, many of whom will have already worked for in excess of 40 years, deserve clarity on what age they can become entitled to the State Pension so that they can plan for their retirement. Therefore, we are urging the Government to expediate decision making on the State Pension Age in particular.” The Commission on Pensions’ recommendations also contained proposals to abolish mandatory retirement and allow workers to continue in employment until they reach State Pension Age if that is what they wish to do, a proposal welcomed by Chartered Accountants Ireland.  Commenting Ms Clohisey said: “Increasing the State Pension age without also addressing the issue of contractual retirement ages will also put pressure on the State’s finances as many workers have to bridge the gap to the State Pension by availing of the Benefit Payment for 65-year-olds. The Commission’s recommendation to align retirement ages in employment contracts with the State Pension age will help bridge this gap but for those who wish to retire at 65 years however, the State Benefit Payment for these individuals should continue.”