Bypass AE By Extending Pension Scheme Eligibility
With pension autoenrolment (AE) on the way in 2024, employers who currently operate a pension scheme should review the scheme in terms of eligibility, contribution levels and whether employees are entitled to immediate vested rights in the scheme rather than the statutory two-year vesting period.
That’s the view of Joe Creegan, Head of Corporate Life and Pensions, Ireland, at Zurich Life Assurance. “Employers should consider extending eligibility to include all employees and avoid the complication of administering two schemes in 2024,” Creegan adds. “Contribution levels could be increased over a period of years ensuring that they reach the minimum level of 12% in total by 2033, or indeed earlier to maximise members’ funds at retirement.
“Given AE will become mandatory, now is a good time for employers to get ahead of their obligation in 2024 and implement a pension scheme designed to meet the current needs of their employees and which supports their future financial wellness.”
Like other life companies, Zurich is busy facilitating DC schemes to move into their Master Trust. He stresses Zurich’s reputation for excellence in investment management, adding that the Master Trust structure future-proofs
employee pension provision by bringing expertise to scheme governance.
Creegan believes Zurich’s long-term investment performance and the financial security of a global insurance provider are key selling points for the company’s Master Trust. “A well-run Master Trust should have executives from the pension provider who bring insights into the business, along with a number of independent directors who can support the executives or challenge them on their performance,” he adds.
When selecting a trust provider, Creegan also recommends that employers look for strong administration capability with a focus on member engagement, as well as competitive pricing.
The recent report from the Commission on Taxation and Welfare recommended the removal of age-related contribution rates, to be replaced with a single annual contribution rate, and the removal of the annual earnings cap on contributions subject to lifetime limits. Creegan welcomes the proposed removal of the earnings cap, adding that any change to age-related limits should provide for unused relief at a younger age to be carried forward.
Not such a good idea from the Commission, in Creegan’s view, is its proposal to reduce the level of tax-free lump sum when a pension is drawn down. “The current level of tax-free lump sum is an appropriate incentive for pension savers and in particular for those who will pay the higher rate of income tax in retirement,” he explains.
“Those individuals would not have received a PRSI/USC relief on pension contributions, resulting in higher income earners potentially paying PRSI/USC twice on part of their income, once when employed and a second time in retirement. It should be noted that the current limit of retirement lump sum that can be taken tax free is a total of €200,000. This is a cumulative lifetime limit from all pension arrangements built up during a person’s working life.”