It may have taken more than two decades to come to fruition but efforts to finally introduce compulsory pensions, via auto enrolment, for all workers looks to have run into some rocky waters, amid reports that some companies have been deliberately trying to avoid the scheme.
Now the Government is set to clamp down on such behaviour, by the introduction of minimum contributions from January 1st, 2026, across the broader pension sector.
But what are the differences between occupational schemes and the auto-enrolment My Future Fund, which will finally come into play on January 1st?
And will workers ultimately be the winners of the Government’s actions?
Auto-enrolment
My Future Fund is aimed at some 800,000 employees who have no private pension provision.
Under current legislation, companies have to give an employee the option of establishing a pension – but crucially they don’t have to contribute to it.
In practice, Stephen Gillick, head of pensions with Mason Hayes & Curran, says this typically means setting up a meeting for an employee with a pension provider.
My Future Fund will change this. According to a report from pension platform Kota, “it’s the first time employers will be legally obliged to contribute to a pension on behalf of their employees, placing it among the most significant changes to the Irish pension landscape in the history of the State”.
Employees are automatically opted in to the new scheme, but can later opt out. To join you must be aged 23-60 and earn more than €20,000 annually.
The big advantage of the new scheme is that both the Government, and your employer, will also contribute to your pension.
The starting rate is 1.5 per cent per employee/1.5 per cent per employer, and 0.5 per cent from the Government, although this is due to increase to 6 per cent per employee and employer and to 2 per cent from the State after 10 years.
“My Future Fund will certainly benefit a large cohort of employees,” says Gillick, although he adds that it will take a few years for contribution rates to build to anything substantial.
“The sooner we hit the decent contribution rates, the sooner people will really start to notice,” he says.
Occupational schemes
With an occupational scheme, there may be some advantages over auto-enrolment, such as employees may be able to access the funds in occupational schemes from as young as 50, while they will have to wait until 66 through My Future Fund.
Occupational schemes also frequently offer more flexibility when it comes to investment choices; investments are limited to three State-run funds with auto enrolment, with three managers, Irish Life Investment Managers, Amundi, and BlackRock.
Employees can also make additional voluntary pension contributions, known as AVCs, to the scheme. At present, it’s not clear how additional contributions can be made in My Future Fund.
When it comes to tax relief, employees benefit from their marginal rate on contributions – so then, a standard rate payer will get 20 per cent relief, and a higher rate taxpayer 40 per cent. This means a €100 contribution will cost the former €80 and the latter €60.
Employees in auto-enrolment won’t get tax relief as such. Rather, the 1:3 State/employee contribution ratio is equivalent to a 25 per cent tax relief.
Depending on your earnings, an occupational scheme might be more attractive. As our table shows, occupational schemes can be more beneficial for this reason for those paying the higher rate of tax.
With an occupational scheme, employees do not need to contribute, but employers do. Crucially, however, there is no minimum contribution required from an employer. This is what has given rise to the current issues.
For example, under auto-enrolment, an employee earning €45,000 would be entitled to a contribution from their employer of 1.5 per cent, or €675 in this case, on an annual basis into their pension. Within 10 years, this employer contribution should grow to €2,700, based on employer contributions increasing to 6 per cent, and on the salary staying the same.
But contributions under an occupational scheme could have stayed at the €675 level – a significantly lower level of contribution.
[ Employer still in the dark on how to sign staff up for auto-enrolmentOpens in new window ]
Avoiding auto-enrolment?
Have companies been setting up occupational schemes as a way of avoiding being tied to contribution increases under the State fund?
Earlier this month, Minister for Social Protection Dara Calleary said he was concerned about employers trying to subvert auto-enrolment by getting their employees to sign up for inferior schemes. Employers were warned it was an offence to “hinder or attempt to hinder an employee from participating in the My Future Fund scheme”.
Minister for Social Protection Dara Calleary. Photograph: Sam Boal/Collins Photos
As it stands, there have been reports of employer contributions of as little as 0.5 per cent – with no obligation to increase these.
Whether this is the case or not, employers have certainly been encouraged to consider their options.
Earlier this month, ISME, the small business association, sent around an email to members entitled “Auto Enrolment Alternative!”
This noted that ISME had partnered with Kota to offer an “easier” alternative to members, setting out some of the advantages of an occupational scheme versus My Future Fund.
In one of its publications, Kota noted that “contributions are mandatory at 1.5 per cent of salary, gradually rising to 6 per cent by 2035, regardless of business circumstances. This one-size-fits-all model leaves little scope to control costs, enhance the employee experience or align processes with company needs.”
Pension experts argue that if avoidance tactics were in place, it was in the minority.
“No scheme I’ve ever seen has a contribution rate of 1.5 or 2 per cent going into it,” says Gillick. “All the schemes that I’m involved in, the rates are far in excess of any minimum for auto-enrolment.”
Following the Minister’s announcement, ISME has stated that it sees that “the overwhelming majority of SMEs are acting in good faith and complying fully with the rules as auto-enrolment is introduced”.
Keith Dundon, head of financial services at SYS Financial, says businesses are doing what they can do to remain sustainable, but that he hasn’t seen “widespread token gestures” by employers to make them exempt from auto-enrolment.
ISME said “employees retain the freedom to choose whether they prefer to contribute to a PRSA or to the My Future Fund”.
However, this hasn’t always been the case. It’s understood that companies have been automatically enrolling employees into occupational pension schemes in the run-up to January – this can be done when employees sign up without making a contribution – which has led to Government concerns.
While there might be data protection concerns with such an approach, the view is that it has been used as a vehicle to get employees into occupational schemes on lower contribution rates ahead of January. Once the schemes are established, minimum employer contribution rates – which have been cited as being as low as 0.5 per cent in some reports – will be brought up to typical levels.
“In no way can I see companies getting employees to join a scheme with a low contribution rate to get around the auto-enrolment obligations,” says Gillick.
[ Auto-enrolment looms for workforce that has little understanding of pensionsOpens in new window ]
What next?
Now the State is set to clamp down on companies trying to limit employee contributions by opting for occupational schemes.
According to Gillick, the Department of Social Protection intends to introduce minimum pension contribution regulations within weeks, taking effect from January 1st.
From this date a new minimum total contribution rate of 3.5 per cent will apply. At least 1.5 per cent of this must come from the employer, with the remaining 2 per cent from the employer or employee.
Another change is that employee consent will be required for enrolment into a pension scheme, given previous concerns.
“The changes will have significant implications for certain arrangements, particularly noncontributory schemes and structures where employees receive reduced pension contributions,” says Gillick, adding that employers need to take “urgent action” now to ensure compliance ahead of the new year.
Indeed, employers were previously told there would be no minimum level of contribution required for occupational schemes at least until 2031.
And this “last-minute change” is coming at a time when companies are still trying to find out more about the auto-enrolment scheme.
“There is a lot to be found out underneath the bonnet as to how it will fully work,” says Dundon, adding that the minimum contribution regime will complicate this.
“On top of auto-enrolment being a challenge in terms of the information we’ve got, this will only cause another layer to it.”