The My Future Fund national auto-enrolment pension scheme is scheduled to commence operation in January. And not a moment too soon.
After decades of debate, promises, announcements and postponements the new scheme will be a game changer for the hundreds of thousands of workers in the Republic who are solely dependent on the State pension for their income in retirement.
The latest research from the Consumer and Competition Protection Commission (CCPC) revealed a worsening in the situation, with an increase in the number of adults in the State who do not have a retirement plan in place. The research found that more than a quarter remain unprepared for retirement, up from one-fifth last year.
Of those who do not have a pension in place, affordability and putting it on the long finger were cited as the top barriers. A quarter of the respondents to the survey said they could not afford a pension, down from 30 per cent last year. Among the 26 per cent of adults with no retirement plan in place, 61 per cent now expect to rely on the State pension to fund their retirement, a significant increase from 53 per cent in 2024 and 43 per cent in 2023.
RM Block
Other research is equally sobering. About 800,000 workers in the State have no supplementary pension coverage of any kind, according to the CSO, while a survey carried out by Ask Acorn during the summer found that 30 per cent of adults have no pension savings whatsoever. That same survey also found that the average pension pot of an adult in the Republic is just €80,570.
Under the new My Future Fund scheme, all employees not already in an occupational pension scheme, aged between 23 and 60 and earning more than €20,000 a year, will be automatically enrolled. It will be phased in over a decade, with employer and employee contributions each starting at 1.5 per cent and increasing every three years by 1.5 per cent until they reach 6 per cent by year 10. The State will top up contributions by €1 for every €3 saved by the employee. That State top-up is designed to compensate for the lack of tax relief on employee contributions.
The scheme is what is known as soft mandatory. Membership will be compulsory for the first six months, after which members can choose to opt out. Those who do opt out will be automatically re-enrolled after two years. That process will repeat every two years in the hope that employees will eventually choose to remain in membership.
The experience in other jurisdictions, including the UK, suggests that this will indeed be the case. Pension participation in the UK’s private sector increased from 42 per cent of employees in 2011, before the introduction of auto-enrolment, to 86 per cent in 2022. However, there is mounting evidence in the UK that recent cost-of-living increases are having a negative impact on auto-enrolment participation as well as on the overall level of pension contributions.
While the new scheme will undoubtedly represent a big improvement on the current situation, it will not necessarily deliver the retirement income outcomes that members need. In the first instance, people aged in their 40s and over will not be in the scheme long enough to build up a substantial pension pot, particularly with the low rate of contributions in the early years.
“The My Future Fund will bring thousands more people into pension saving, which is hugely positive,” says Niamh O’Connor, a financial planning specialist with AIB in Cork. “But in the early years, contributions will be modest, starting at just 3.5 per cent of salary, including the State top-up, and gradually rising over time. For many, this won’t be enough to secure the lifestyle they want in retirement.”
There is no option to make top-up payments to the My Future Fund scheme, but those who would like to save more still have options.
“You can keep your My Future Fund and set up a separate personal retirement savings account (PRSA) alongside it,” O’Connor advises. “Importantly, your PRSA needs to be something you pay into outside of payroll, as a payment through payroll into a PRSA would disqualify you for My Future Fund. But if your employer offers both My Future Fund and an occupational pension scheme, it might be worth talking to them about moving into the occupational pension scheme, which would allow you to make additional payments. For higher-tax-rate payers, the tax relief on a PRSA would also be higher than in the My Future Fund. The key is recognising that the My Future Fund is a great foundation, but not the whole answer.”
Fergus Moyles, head of private wealth strategy at Mercer Ireland, agrees and calls for greater clarity. “Unfortunately, there is no option to pay additional voluntary contributions via payroll into the central auto-enrolment system as it currently stands,” he says. “This is one of the main disadvantages of My Future Fund in comparison to a company pension scheme or PRSA as additional voluntary contributions (AVCs) are vital to enable people accumulate sufficient pension assets to live a comfortable retirement.
“There may be an opportunity for individuals enrolled in the auto-enrolment system to pay one-off lump-sum AVCs into a pension arrangement outside the auto-enrolment system provided it is not done via payroll. However, this is not yet confirmed, and further clarity will be needed from the Department of Social Protection.”
The prospect of employers having to take on the additional burden of effectively running two pension schemes side by side is another issue that has been raised. If all eligible employees are not already members of the existing occupational scheme, the employer will also have to offer the My Future Fund scheme. The only way to avoid this will be to enlist all employees in the occupational scheme before January 1st, 2026, and to make membership mandatory for employees after that date. This is no bad thing, as it will support the core objective of the My Future Fund scheme in expanding supplementary pension coverage.
Where two schemes are in operation, employees should pay close attention to their tax position. If they are paying tax at the higher 40 per cent rate, the occupational scheme will be the better choice, from a financial perspective at least. The State scheme offers a Government top-up of one-third of the employee contribution – effectively meaning that a €100 contribution costs €75. In an occupational pension scheme, on the other hand, a €100 contribution would cost a higher-rate taxpayer €60.
For this and other reasons, Ashling O’Neill, a certified financial planner with Clear Financial, considers occupational pension schemes to be the superior option. “I truly believe it’s better for employers and employees to have a private scheme in place,” she says. “Employers have control over the contributions and how the scheme is managed. Also, private schemes are generally more generous than the 1.5 per cent employer contribution that auto-enrolment will start with. There is no option for either the employer or the employee to go above the prescribed levels or to make additional voluntary contributions in the State scheme.”
There is also the impact on the employer brand to be considered. “Companies that have their own private scheme will be compared favourably with those that only offer auto-enrolment,” O’Neill adds. “It is likely that auto-enrolment will be seen as very basic and a private scheme will be perceived as being a premium offering.”
