Auto Enrolment - How it's Going & What You Need to Know

From the 1st of January, Pension Auto Enrolment has been launched for businesses across the country. This is something which has been in the pipeline for years, but in this week's instalment of The Bottom Line we will take a look at how it's actually working so far and answer some of the most common questions I have been hearing from employers over the first few weeks of the scheme.

What is it?

The Auto Enrolment scheme has been created to try take some pressure off the state pension. At the moment, only about 1 in 3 Irish employees have a private pension, and it's expected that in 25 years time we will have 3 times as many people retired as we have today. Therefore, the number of people on the state pension will essentially double in the next quarter of a century, and the state won't be able to afford this. As usual, the solution lies with small businesses.

The scheme essentially takes anyone who isn't already paying into a pension and puts them on a pension savings scheme with the state. I expect that in years to come this will completely replace the State Pension across the board. Operated through payroll, the scheme deducts 1.5% of employee's salary from their net pay, charges the employer a further 1.5%, and the state puts in 0.5%. All of this is goes into a pot for the employee's retirement, called My Future Fund.

How does it work?

The scheme is run with normal payroll. NEARSA automatically calculate the contributions, and they are taken from the employer's bank account directly each week. While that was the plan, I am noticing these payments are very slow to hit some employers bank accounts; however, I'm sure by the end of January this will be sorted out. The employer essentially now has three separate payroll bills; the net wage to employees, the PAYE to Revenue, and the Pension Contributions to NEARSA. It's very important to keep on top of this as there are to be strict penalties for non-compliance here.

How much will it cost me?

The contribution for the employer is 1.5% of gross pay, so for a minimum wage worker on a 40-hour week, this comes to €8.49. We need to drill into this further though. The same amount is to be deducted from employee's net pay. In theory, this sounds fine, but what about the many cases which we see each week where the employee is on, for example, '€550 take home'. These people usually aren't one bit impressed that their pay is now suddenly only €540; that's not their salary and they don't care about a pension or not. In many cases I've seen, the employer ends up having to stomach both their contribution, and the employees. To avoid this it's essential to be upfront with your staff that the contribution is taken from their net pay, and there's nothing you can do about it. There are enough things to pay for as an employer without doubling your pension contribution.

Does it come out of my pay?

No, directors are not enrolled in the scheme and self-employed sole traders cannot process payroll for themselves anyway. The only people auto enrolled are those between 23 and 60 years old who don't have a pension already deducted through employment and earn over €20,000 per year.

Is it worthwhile or would it be better having them on a private pension?

It's probably much better all round to have a private pension, but ultimately, it's the employee's choice. Firstly, you would need to contribute to the private pension as well, because otherwise they'd be worse off that the auto enrolment in terms of contributions. I still feel it's better though, because you would be operating the scheme on your own terms, and paying in when suited you, not every week as prescribed by NEARSA. It would also allow employees to decide their own contributions, if they wanted to put something in they could, but it would be their choice and whatever deduction appears on their payslip for pension couldn't cause any arguments with the employer. In addition, there is no tax relief available on auto enrolment, it is taken from net pay. Supposedly, this is offset by the State's 0.5% contribution, however, that is only beneficial if you trust the system which the money is being paid into to look after it for potentially the next 40 years on your behalf.

At this stage, if someone is enrolled, they have to wait until June to opt out of the scheme. The employee also must do this of their own accord and cannot be forced by the employer. If you'd like to do away with the scheme in your business, introducing a company pension plan and presenting it to the employees as a better alternative to Auto Enrolment would be the best option. If you start a pension through payroll, AR contributions stop automatically. Many employers have done this already, but the great thing about leaving it until now is the clarity to the employee that there is really no choice here, pension will be deducted anyway. For those who implemented pensions early, especially when the scheme ended up being delayed over a year, employees may not fully understand that they're genuinely better off. At least with some experience of the AR deductions, the employee can fully appreciate that your pension scheme is in their best interests as well as yours.

Thank you for taking the time to read, and I hope it has been of value. Watch out for next week's post, where we dive into why making money doesn't always mean you can pay your tax bill. If you'd like to get in touch with any questions, or to learn more about payroll and Auto Enrolment, please do not hesitate to leave a comment, or reach out to us at info@jesinnott.ie.

Be advised that the information provided in this blog post is for general informational purposes only and does not constitute legal or tax advice. While we strive to ensure the accuracy and completeness of the content, it should not be relied upon as a substitute for advice tailored to your specific situation. We are happy to provide this should you require assistance on any of the matters outlined above