First mooted in 2006, automatic enrolment into a new workplace private pension scheme (auto-enrolment) looks set to be finally introduced in Ireland for private sector workers following an announcement at the end of March 2022 by Minister Heather Humphreys of plans to enrol an estimated 750,000 people in 2024.

Auto-enrolment, hailed by the Minister as a “once in a generation policy”, has worked well in other countries such the UK, New Zealand and Australia.

Much of the focus in Ireland to date has been on reducing future spending on pensions rather incentives to increase private pension coverage. This is not surprising given that the State Pension is the single biggest cost to the State in terms of benefits. €6 billion was spent on the State Pension in 2020, far exceeding the €4.5 billion spent on the Covid-19 Employment Wage Subsidy Scheme in the same year.

It is widely recognised that Ireland urgently needs to change its culture around saving for retirement and, with changing demographics, pressure on the State to continue to fund the State Pension will only grow unless private pension coverage is increased.

In 2021, the Central Statistics Office (CSO) reported that 34% of Irish workers have no pension provision other than the State Pension. Life expectancy in Ireland is currently 90 years for men and 92.6 years for women, which means that workers, on average, will be retired for more than a quarter of their lives, with one third of the population depending solely on the State to fund their later years.

While the current annual State Pension of circa €13,000 might seem reasonable if you have paid off your mortgage, Ireland’s home ownership rate in 2021 was reported to be 68.7%, meaning that people many will still be paying high rents in retirement long after their peers own their own homes. With average annual rents in excess of €15,000, according to the Residential Tenancy Board’s 2021 rent index, sole reliance on the State Pension will not be sustainable.

As inflation drives household running costs to new highs, it is understandable that the option of saving for retirement is the easy one to overlook. Depending on contribution levels, auto-enrolment presents an opportunity to plan more adequately for retirement.

Before auto-enrolment starting a pension required a worker deciding to do so. After auto-enrolment, if the same worker does nothing, a portion of their pay will automatically go into the new workplace pension scheme, with an option to opt out. The system relies on behavioural inertia, trusting that many people will not opt out and will stay invested.

This has been the experience elsewhere. A study carried out for Department of Work and Pensions in the UK looked at 50 employers across the public and private sector and identified the opt out rate at just 9%. Applying this rate to the numbers targeted for new scheme in Ireland could result in 682,500 additional private pensions for Irish workers.

Expectations of final pension fund values will need to be carefully managed as starting contribution levels of 1.5% by both employer and worker are relatively low. A single person on the average industrial wage of €40,000 can expect to pay €600 into the pension scheme each year. The employer will pay the same and the State will pay €200.

While auto-enrolment will inevitably increase private pension coverage, it cannot be implemented overnight. January 2024 has been identified as the starting date, but there are a lot of hurdles to overcome in advance of this date, including legislation and the establishment of a Central Processing Authority to oversee the scheme.

Employers and payroll service providers will need sufficient time and guidance to ensure they can roll out the new pension system once the necessary legislation is in place. Payroll service providers have indicated that this project will take approximately 18 months once full guidance is received, meaning there will be a long lead time involved in building the system.

Given Ireland’s demographics, it is important these plans are not further delayed as the pension problem is only growing. Minister Humphreys has provided assurances that the State Pension will remain the bedrock for retirees, despite much debate in recent time as to how this will be funded and at what age received.

Nevertheless, to reduce the reliance on the State Pension, people need to be incentivised to start saving for their pensions while they are earning. The new auto-enrolment system, if rolled out without delay, might just be what is needed to ensure that people can enjoy their retirement.

Miriam Donald, Public Policy Manager, Chartered Accountants Ireland.