The Cabinet has agreed to draft legislation which will pave the way for a new pension scheme for private sector workers.
It is estimated that just 35% of private sector workers have a pension, something which makes Ireland an outlier internationally.
The new scheme will cost the Exchequer almost €3 billion every ten years and is due to come into effect from 2024.
When fully established, a worker earning €35,000 per year will accumulate a fund of €293,000 over their working life, excluding investment returns.
It is expected that three quarters of a million private sector employees, aged between 23 and 60 and who earn more than €20,000 a year, will be automatically signed-up.
Employers will be obliged to match the employee contributions.
Employees have six months to opt out or suspend participation. However, those that opt out will be automatically enrolled again after two years.
There will be four pension funds to choose from. They range from low risk to high-risk funds. Those that do not choose will be given a default option based on their age. People moving jobs will not have to change schemes.
Initially, those included in the auto-enrolment will contribute 1.5% of their gross earnings. It will be the same for employers. The State will contribute 0.5%.
Eventually, it will get to a point after ten years where employees and employers will contribute 6% and Government 2%.
There will not be an earlier draw-down option from the State pension age. Contributions from the State will stop after the State pension age.
Minister Heather Humphreys said the new scheme is targeted at the 750,000 people who do not have any pension provision made for their retirement, other than the State pension.
Speaking to RTÉ’s News at One, Ms Humphreys said two thirds of workers in the private sector currently do not have a pension plan.
“Sometimes, people find that the system is too complex and put it off until next year and the year after, and in actual fact they never got around to doing this,” she said.
“Automatic enrollment is about flipping the system on its head from one at the minute where you can opt in to one where you will be automatically enrolled and you’ll have to opt out.”
She said a scheme like this has been discussed for more than 25 years. She said the new system will be linked to the State retirement age, which is currently 66.
If this age changes, the new pension scheme will move in tandem with that.
We have consulted widely on this and we spoke to employers and we spoke to workers as well, and we felt that a gradual introduction would be attractive to everybody,” she said.
“It means then that the increases are gradual and you get more used to them and it’s easier for people to do things more gradually.”
Scheme welcomed by ISME
Chief Executive of the Irish Small and Medium Enterprises Neil McDonnell said the auto-enrolment scheme is welcomed by employers.
Speaking on RTÉ’s Morning Ireland, he said employers have been asking for such a scheme for many years.
He said that the numbers of private sector workers who have no pension at all other than the State, contributory pension “is very significant now”.
“People don’t realise the extent to which their standard of living is going to drop very precipitously after retirement if they don’t save for a pension, so this move is to be welcomed.”
It will take some time to set up, he said, as some lead-in time is required for employers to plan “because the contribution from employers previously been spoken of was 6% and we don’t think that can be done in one go because that that is going to add very considerably to the expense for employers”.
He said there is a lot of detail to be worked out but “the ultimate goal” is for workers to have a pension they can live on when they retire.
Mr McDonnell said a salary cap is not a good idea because there are no income caps within the public service for pension contributions and there should not be any in the private sector.
People can opt out, but they will be very strongly encouraged to stay in the schemes, he said.
Meanwhile, Social Policy Officer with ICTU Laura Bambrick said just half of workers are currently saving for their retirement and this is a particular problem in the private sector.
She said Ireland is unusual in that it does not compel employers to provide a pension or contribute to a worker’s pension.
Under the new scheme, each employee will save €6 for every hundred earned and this will be matched by the employer. Instead of tax relief, the Government will give one euro for every three euro saved by the employee.
“So, your six euro has suddenly grown to fourteen euro. That’s how good a return it is.”