How Pension Auto-Enrolment in 2025 Will Impact Irish SMEs
The impending introduction of pension auto-enrolment in 2025 is set to significantly impact Irish employers, particularly small and medium-sized enterprises (SMEs). This government initiative aims to increase the number of people saving for retirement by automatically enrolling eligible employees into pension schemes. While the goal is commendable, the practical implications for businesses, especially SMEs, could be far-reaching.
Under the scheme, employees aged between 23 and 60 earning more than €20,000 per year who do not have a private pension will be automatically enrolled. Employers will be required to contribute a percentage of their employees' salaries to the pension scheme, which will increase gradually over 10 years.
The direct financial impact on employers is substantial. Calculating the exact cost will involve careful consideration of many factors such as employee salaries, contribution rates, and tax reliefs. However, it is clear that payroll costs will increase, potentially putting a strain on cash flow, especially for SMEs operating on tight margins. But bear in mind that corporation tax relief can be claimed on the employer contribution.
Furthermore, you will need to take into account the increasing contribution rates over the next 10 years. In year 1, employers will only be required to contribute 1.5% of an employee’s gross salary.
However, this amount will be increased on a phased basis over 10 years, with 1.5% added every 3 years, and reaching 6% in the final year. Considering this, you should ensure your budget is set up as a rolling forecast, which looks at increased employer contributions, and allows you to re-evaluate plans regularly.
Lastly, you should consider creating a buffer in your budget to accommodate potential increases in contribution rates. This is a possibility, as by year 5 at the latest, the Pension Authority, which will supervise the scheme, will be required to carry out an official review.
Beyond the direct costs, employers will face administrative challenges. Auto-enrolment will need to be continuously managed. This includes monitoring the ages and earnings of your staff, re-enrolling lapsed employees after 2 years, and keeping up to date with any changes in legislation or requirements from the Pensions Authority. You will need to maintain detailed records of enrolled employees, their contributions, and any requests to join or leave the scheme.
Setting up the scheme, communicating with employees, and maintaining accurate records will consume time and resources. While the National Automatic Enrolment Retirement Savings Authority (NAERSA) will handle some aspects, employers will still have significant responsibilities.
For SMEs competing in a challenging market, the additional financial burden and administrative workload could create a competitive disadvantage. Larger companies with more substantial resources may be better equipped to absorb the costs and implement the necessary changes. This could lead to an uneven playing field, with SMEs potentially struggling to compete for talent and customers.
While pension auto-enrolment is intended to benefit employees in the long term, the short-term implications for employers, especially SMEs, are complex. Careful planning, budgeting, and potentially seeking professional advice will be essential to navigate the challenges ahead.
If you would like more information on how pension auto-enrolment may affect your businesses please get in touch.