Source document: https://docs-lawep.s3.us-east-2.amazonaws.com/1697803845962.pdf (Ireland)
welcome to brighter Response to Draft Heads and General Scheme of The Auto-Enrolment Retirement Savings System Bill 2022 Friday 25 November 2022 Submission Document A business of Marsh McLennan Mercer’s Response to Draft Heads And General Scheme of the Automatic Enrolment Retirement Savings System Bill 2022 Mercer Aspire Investment Monitoring Report Contents Introduction ..............................................................................................................................................................2 Observations and Recommendations for further Review .....................................................................................4 Head 8 Employers must not interfere in any way in the AE choices made by the individual employee .......................................................................................... 6 Head 9 Rates of contribution ............................................................................................................................................................................................................ 6 Head 33 - Design of the Default ....................................................................................................................................................................................................... 8 Head 34 – Design of the Alternative Funds ..................................................................................................................................................................................... 9 Head 35 - Auto-enrolled participants who wish to do can shift to an alternative fund offered under the AE ................................................................................... 9 Head 36 - The AE investment management function is outsourced to Registered Providers selected by tender .......................................................................... 10 Head 37 - The relationship between the CPA and Registered Providers
 ........................................................................................................................................ 10 Head 38 - The auto-enrolment pooled fund concept ....................................................................................................................................................................... 10 Head 39 – Investment Rules ............................................................................................................................................................................................................ 10 Head 42 – Digital first principal – electronic communications .......................................................................................................................................................... 11 Head 42 – MyAE .............................................................................................................................................................................................................................. 11 Head 57 – Access to funds aligned with the State Pension Age ..................................................................................................................................................... 12 Head 59 – Retirement Products ....................................................................................................................................................................................................... 12 Head 64 - The maximum direct cost charge to the participant to be capped .................................................................................................................................. 12 Head 66 – Transfer of existing pension funds into the AE system .................................................................................................................................................. 12 Head 67 – Amendments to the Taxes Consolidation Act
 ................................................................................................................................................................ 13 Summary Recommendations ..................................................................................................................................14 Mercer i Introduction Mercer welcomes the opportunity to contribute to the Joint Committee on Social Protection, Community and Rural Development and the Islands in relation to the General Scheme of the Automatic Enrolment Retirement Savings System.
Mercer is a global and local leader in employee engagement, retirement and investment strategies, offering a full spectrum of actuarial, administration, member communication and investment solutions and consulting services.

We are one of the largest providers of retirement services and solutions providing a wide range of strategic and compliance-related retirement services to defined benefit (DB) and defined contribution (DC) plans.
We are a leading global provider of investment services, and offer customised guidance at every stage of the investment decision, risk management and investment monitoring process.

We have $16.45 trillion in assets under advice and $318bn in delegated assets under management.

We are the trusted provider of choice for more than half of the Irish DB and DC occupational pensions markets.
With a significant market share in Global master trust market, our Irish master trust defined contribution pension scheme has been in operation since 2006, making it one of the longest established and largest master trusts in Ireland and has adopted a best in class approach to recent legislative changes, including IORP II.
In recognition of our excellence in DC, Mercer was the winner of the “Excellence in DC Award” and the “Pension Scheme Administrator of the Year” accolade at the 2022 Irish Pensions Awards and Pension Scheme of the Year for our Master Trust at the 2021 Awards.

Mercer has consistently and strongly supported the introduction of an automatic enrolment pensions system (“AE”) in Ireland on the basis of our belief that the improvement in pension’s coverage will be significant.
However, the way in which AE is introduced will be crucial and we believe getting right from the outset is critical to ensuring maximum engagement, participation and support from the general population, employers and unions.

Our position remains that the new system must be delivered in a simple and straightforward way that properly complements the benefits of Ireland’s existing well- functioning and well-governed occupational pension system.
Our position as market-leader in the private occupational pensions industry, as well as our global and local expertise in pension fund advice and investment management, provides us with an important perspective regarding the needs and concerns of employers when it comes to the implications of AE on their businesses, employees, and their current retirement benefit programmes.
Our observations in this submission focus primarily on the interaction of the existing pensions system with AE, as well as other commentary on the new AE system’s structural design principles.

Mercer 2 Executive Summary This document sets out Mercer’s key observations and recommendations arising from a review of the Draft Heads and General Scheme of the Automatic enrolment Retirements Savings System Bill 2022.
It includes observations on items explicit, implicit or absent from the Draft heads and refers to the corresponding Head for reference where available.

Following the introduction of auto-enrolment occupational pension schemes will operate under a parallel system which will continue to use the current tax reliefs.
As the minimum standards for occupational pension schemes have not yet been specifically addressed, it is not clear what occupational pension schemes will need to achieve in order to allow them to be exempt from the AE system.

Our submission aims outline areas where additional clarification is required in the short term.
Our interpretation of the Heads is that the CPA will perform the role of the Registered Administrator for AE, with some elements of administration to be outsourced to administration services providers.

It is unclear what elements of administration will be outsourced, and how the outsourcing will work in practice.

A particular area that requires clarification is how outsourcing will work in conjunction with access (or lack of access) to MyAE.
Furthermore the issue of how members will be identified in-house between the CPA and outsourced administration providers needs to be clarified.

This is particularly important as external providers will not be designated as Specified Bodies.

As a result out understanding is that any outsourced provider will not be permitted to reference members via their PPS number.

We welcome the majority of design characteristics of the investment profile of the AE system.
The design of the scheme has appropriately considered the risks to members and diversification in the funds and has considered offering some choice to members who want something different to the default.

It also considers environmental, social and governance factors.

In the following response we conclude our observations, questions and recommendations on the default fund, alternative funds, member choices, the relationship with the CPA and the investment rules of the scheme.
Mercer 3 Observations and recommendations for further review As outlined in the invitation for submissions, all recommendations are again summarised in table format at the end of the document.
Head 2 (Interpretation) & Head 4 (Criteria for Auto Enrolment) Following the introduction of AE, we note that any employee who is an existing and actively contributing member of a pension scheme/contract which meets prescribed minimum standards and contribution levels will not be automatically enrolled for the employment to which that pension scheme relates.

In order for the scheme to be a “qualifying occupational pension scheme” it will need to meet certain minimum standards which are to be prescribed.
In addition to understanding the definition of these prescribed minimum standards, it is also important to understand how they should be evidenced, and who will be responsible for ongoing monitoring.
Our recommendations are as follow: • Details of the minimum standards should be published as soon as possible to allow employers and other relevant bodies to consider the potential implications of these standards on their schemes, their employees and their business and to undertake appropriate initial impact analysis and other relevant preparation.

• There should be clarity on which body will be responsible for the ongoing monitoring of whether schemes meet the minimum standards.
• Many occupational pension plans will need to introduce plan design changes over time covering areas such as changes to pensionable salary definition, removal of waiting periods, enrolment of existing life assurance only members, increase in contribution rates or overall salary definition.

Clear timelines within which stakeholders of occupational pension schemes can make any required changes should be confirmed.
• In particular, regarding the minimum standards: ─ There should be clarity on the definition of reckonable earnings / pensionable salary which will be used.

The definition of pensionable salary for occupational pension schemes can vary significantly depending on how the scheme has been designed.

Common definitions typically include an offset for the State pension, allowance for basic salary only, or inclusion of some (or all of) bonus, shift and performance related pay.
Clarity is needed on how reckonable earnings will be defined for the purposes of calculating the appropriate minimum contributions.

─ There should be clarity on if / how reckonable earnings definitions may vary and any corresponding impact on contribution scales.

─ There should be clarity on the manner in which schemes will be required to show at an overall level that their contribution rates meet the minimum standards for all members.
─ There should be clarity on what elements of current plan contributions will count towards the definition of the minimum standards, i.e.

will only employee and employer contributions be considered?

Mercer 4 ─ As an extension of the above, we recommend that clarity on the requirements for DB or hybrid schemes to show that they meet the minimum standards is provided.

─ Clarity should be provided around late retirement options where State Pension Age differs from Normal Retirement Age within a scheme.
While this matter is also being considered in wider context, there needs to be clarity on what occupational plans may be required to provide under the minimum standards.

This is especially important in the context of if/how risk cover is provided for members of occupational plans as they work later than their plans Normal Retirement Age.
In addition to increasing overall pension provision and increasing adequacy levels, the stated objective of AE is to complement rather than replace, existing private pension provision.

A scenario where an Employer has to participate both in the AE system and provide an occupational pension plan would not be in line with this objective.
The decision to restrict employees from making additional voluntary contributions through the AE system (at least in the initial phase) is disappointing as it would encourage certain members to want both types of plan.

In addition, risk benefits (e.g.

life cover) forms a significant protection benefit for many occupational pension schemes.

For many trust-based occupational pension schemes, risk benefits are currently provided under the same trust.
If a scheme cannot meet the minimum standards, requiring employees to join AE, employers may be faced with greater complexities as to how certain risk benefits are to be provided.

• • • We recommend that the minimum standards are drafted taking these scenarios into account and provide a clear and equitable selection methodology which will make it simple for individual members and employers to understand which approach may best suit their needs.
• Additional clarification is required relating to whether members can be enrolled in both the AE Plan and an occupational pension plan for either the payment of AVCs and or for risk benefits.

• Sub head 2 notes that employees shall be exempt from AE if they are in a qualifying occupational pension scheme into which the employer and employee are “actively making contributions”.
Some occupational pension schemes (either DB or DC) are non-contributory for active members, notwithstanding that those members may also be eligible to contribute if they wish.

In other instances, members who have or are projected to reach Standard Fund Threshold (SFT) limits will also opt out of their pension plan in order to appropriately manage their personal taxation impact.
We recommend that additional wording is added to the definition of a qualifying occupational pension scheme which allows for these (and other similar) nuances that arise in the current occupational pensions system.

• The minimum standards for occupational plans are not yet available, however we recommend that these standards also confirm what happens with occupational plans that do not meet the minimum standards in most, but not all requirements.
Clarity needs to be provided as to whether these plans can continue to accept contributions, whether the Employer must direct all future contributions towards AE, or whether for example a complex scenario must be adhered to where only a subset of members (i.e.

those earning over €80k and who would be significantly disadvantaged by contributing to AE) would be permitted to contribute to the occupational pension plan.
• Finally, as we will cover in additional detail later in this submission, the differences in taxation methodologies between occupational and AE Plans will lead to arbitrage opportunities.

If an Employer is currently providing an occupational plan which meets the minimum standards, will they also be obliged to offer AE at the request of any member?
We strongly recommend that clarity is provided on this matter and recommend that where choice is available, it does not outweigh the pragmatism of having a simple and integrated public and private pension system.
Mercer 5 Head 8 Employers must not interfere in any way in the AE choices made by the individual employee Sub Head 3 notes that an employee’s right to participate in the retirement savings system shall be protected by prohibiting an employer from inducing an employee to opt out or to suspend their membership of the retirement savings scheme.
While we acknowledge the intention in and objective of this Head, we propose that the wording be revised to clarify that employers who want to provide an occupational pension scheme that meets the minimum standards, and who wish to promote the benefits of their scheme with current and prospective employees, will not be penalised for doing so (while acknowledging that employees would retain the right to join AE in any event).
Many employers will have made significant investment in the design and development of their occupational pension plan and for clear operational reasons will prefer to undertake automatic enrolment of employees into their existing scheme rather than the AE system.

This scenario is in line with the objective of AE is to complement rather than replace, existing private pension provision.
Head 9 Rates of contribution Sub Head 1 of Head 9 does not confirm that contributions will be calculated on the earnings of the employee up to €80,000.

This is however, confirmed in sub Head 2 and 3 relating to the employer and State contributions.

Our interpretation is that this implies that there is no earnings limit over which employees will cease to contribute to AE.

It is unclear whether this is an omission or whether employee contributions would continue on earnings over €80,000.
If this is not an omission, this would result in a member with a salary above this level ultimately contributing more than their employer.

As tax relief does not apply to employee contributions under AE, these members would be further disadvantaged given the employer and State top ups would not be made on this portion of their earnings.

It would also introduce a further layer of complexity for both employers, who have to remit the contributions to the CPA (i.e.
excluding the employer portion), and for the CPAs own calculations of the State’s top up contributions.

Given the clear disadvantages to members, this scenario would mean that the sensible option for members earning above the threshold would always be to participate in an occupational pension scheme or PRSA, where one exists.

Clarity is required as to whether the salary based contributions cap also applies to employees on the portion of their benefits that is over €80,000.
Total contributions under AE will be 14% into a member’s retirement account as outlined under Head 9.

Broad conversations within the pensions industry have historically incorrectly referred to occupational scheme equivalent contribution rate versus AE of 12% (i.e.

6% employee plus 6% employer = 12%).

Our understanding is that the total contribution rate required into a member’s retirement account to meet minimum standards will ultimately be 14%.
We propose that clarity on the total contributions to be paid into an occupational pension scheme (i.e.

14%) is clearly outlined in the minimum standards.

We anticipate further complications will arise when designing, calculating and prescribing rules in relation to minimum standards for contributions in occupational pension schemes given the different tax treatment of the two types of plans.
If it holds that the total contribution rate into a member’s retirement account will be 14%, the outstanding question is whether it is the employee, the employer, or both that will share in the responsibility for the “additional” 2% contribution.

The answer to this is not straightforward and may ultimately be prescribed based on a member’s salary.

Employee contributions into an occupational pension plan are exempt from income tax at a marginal rate of tax as defined under the Taxes Consolidation Act 1997.
From 2023 a single person without qualifying children pays income tax at 20% on earnings up to €40,000 and pays 40% income tax on the balance of earnings.

The application of tax credits will also further complicate the minimum contribution standards set for occupational plans.

Mercer 6 We recommend that the minimum standards outline the minimum rates paid by the employer and or employee in order to ensure that the ultimate contributions total of 14% is achieved.
On review of the proposed approach, we believe that one potential approach in drafting the minimum standards will be based on a member’s salary level and income tax bands.

If this is the case, then we strongly recommend that these standards are robust enough that they allow for any future changes to income tax bands.

Head 10 – Opt Out This head provides that employees may opt-out following enrolment or re-enrolment subject to a number of conditions.
Clarity should be provided relating to how this will work operationally, especially in the case where outsourced administration services providers are used.

- Would a member liaise with the CPA via My AE or directly with the administration services provider?

- If outsourced, will there be requirements on the administration services provider to issue communications when they do or is it expected that this will all take place via MyAE?

- How will automatic re-enrolment after 2 years take place?
Will that be up to the administration services provider to find the member or will it be the responsibility of a member’s employer at the time?

What happens if multiple administration services providers are appointed (similar to the Registered Providers for investments), if an administration services provider is replaced over time, or if a member changes job and moves to a company that is serviced (albeit under the bonnet) by an alternative administration services provider?
- Once a member who has opted out is located, what proof of needing/not needing to be re-enrolled is required (i.e.

member may now be working for an ER with an occupational plan)?

How is this expected to be managed and what body is expected to manage it?

Our understanding of the proposal is that this administrative burden will predominantly fall to the CPA, but clarity is required as to how this will take place.
Head 12 – Effect of opt-out and suspension on contributions This head outlines that where an employee opts-out following enrolment or re-enrolment, they shall be refunded their own contributions since enrolment.

It further outlines that where an employee opts-out following a contribution increase, they shall be refunded the additional contribution thy have made since the rate change.

We recommend that an outline be provided on the operation of the refund process and responsibilities for same (i.e.
CPA or administration services provider) be clearly articulated.

In particular, details should be provided as to the process where a member opts out after a rate change.

Who is responsible for calculating this partial refund?

Will this payment be taxable and if so, what body will be responsible for remitting this payment to the State?
This Head refers to a refund of contributions, confirmation should be made as to whether this is correct or whether the refund should be based on the value of the appropriate portion of employee contributions at the date of disinvestment.

Head 15 – Responsibilities and functions of the Central Processing Agency Our understanding from this Head is that the role of the CPA in providing administration services may be similar to that of a Registered Administrator.
As referenced in other areas of this response, it is important that clarity is provided relating to what specific areas the CPA intends to outsource to administration services providers.

Mercer 7 We also request confirmation of whether companies can be appointed as both an administration services provider and also as a Registered Provider of investment services.

Unless clarity is provided on this point, it will be very difficult to provide responses to tender as and when they arise.
Head 24 – Outsourcing of Pension Administration Services If pension administration services are outsourced, clarity will be required as to which parties (i.e.

the CPA or the administration services provider) will be responsible for which elements of ongoing administration before administrators can provide a response to tender.

AE could ultimately end up operating using a number of different potential approaches which will either increase or decrease the workload intensity of the outsourced administrator.
Our understanding is that the CPA controls receipt of contributions from the various employers, we recommend that additional clarity is provided on what happens next: - Will contributions then be remitted to an administrator for further transition to a Registered Provider?

Is so, how will this take place?

- Will the CPA wait until all contributions have been received and then remit as one payment or will the CPA remit contributions to the administrator on receipt?
- Or will the CPA remit contributions directly to the Registered Provider?

If so, how will the CPA and the Registered Providers then ensure that the correct contributions are allocated to the correct members on the correct dates?

- How will the CPA control complexities like weekly payments, fortnightly payments, manual payments and delays by multiple employers in remitting contributions?
Head 26 – Collection of State contributions This head provides that the CPA shall requisition the State contributions from the Department of Social and Protection and the Department of Social Protection shall pay the State contribution to the CPA in the time limit specified by regulation.

Clarity should be provided as to whether the payment of the States element of the contribution will be subject to the 21 day rule.
Head 30 – Provision for the facility to pay contributions manually This head outlines that a manual/semi-manual process for the payment and documentation of employee and employer contributions shall be prescribed by regulation where an employer administers their payroll manually.

If collection of these contributions is to be outsourced to an administration services provider, additional clarity will be required as to how exactly it is intended this will operate – i.e.
will it be via Excel or some other prescribed format?

Head 33 - Design of the Default We strongly agree with the importance of diversification in the design of the default investment option, particularly where the AE system may be introduced in a period of significant market volatility.

This is in the best interests of members.

An appropriate default should have diversification across all asset classes such as equities, fixed income, cash, alternatives and real estate.
We also believe that investment manager diversification is in the best interests of members to maximize their return and mitigate the risk in the investment journey.

The default option should involve, in the growth stage, a medium-high risk investment strategy – with an expected ESMA rating of 5.

It should be up to each provider to determine the exact constitution of this.
Mercer 8 It may be observed that in New Zealand, the decision taken was to opt for low risk default funds for Kiwi Saver at inception.

However, the decision was subsequently made to change this to a balanced growth option to improve the potential size of member’s pension pots at retirement.

We recommend that: • The CPA provides clarity on what they believe to be “reasonable expectations” for the investment profile of the default fund in terms of risk and return targets.
For example, a moderate return target profile of approximately cash + 4% or a targeted level of risk such as less than 15% volatility?

• Specific targets are set for investment providers to achieve in terms of risk and return.

The CPA can then measure and compare investment providers against their ability to achieve these targets.

• A medium-high level of risk in the default fund is in the best interests of members.
Human inclination is risk averse, but low risk investment options will, over a 40 year or even far shorter span, almost certainly result in far worse outcomes for savers than a medium or medium-high risk option, as is the norm for DC pension plans in Ireland currently.

We strongly recommend that the default should be, during the growth phase, a medium risk option exhibiting annual volatility less than 15% (consistent with a rating of 5 on the 1-7 ESMA scale).
Using this approach members will be able to achieve long term growth of their pension pots, while mitigating too much anxiety inducing volatility which they might get using a high risk approach (ESMA 6/7).

Applying the lifestyle de-risking strategy closer to retirement will also protect their pots leading up to the point of retirement when their asset levels are at their highest.

• It appears that at least initially the design of the default will tend towards 100% in cash during the de-risking phase.
Additional clarity on this point in terms of the length and design of the glide path would be welcomed.

Head 34 – Design of the Alternative Funds We agree that initially using limited “Alternative Funds” at differing risk levels is a prudent approach.

While you can offer too many options to members, we do feel that offering more choice than three investment options would be preferable to ensure all member’s investment needs are met.
We believe a range of non-lifestyled, risk rated, diversified options should be made available, with simplicity retained by describing the options in terms of their risk/reward profile (e.g.

Cash, Stability, Low Growth, Cautious Growth, Moderate Growth, and High Growth, each tallying with an expected ESMA risk rating from 1 to 6.

Another example of an option that could be included is a fund with sustainable characteristics.
We are seeing an increase in demand for these kinds of funds especially with younger generations.

Further clarity should be provided over what the exact investment restrictions are (if any) for the investment providers.

We would also recommend for the CPA to consider offering more investment options to keep up with market trends such as sustainable investing funds.
Head 35 - Auto-enrolled participants who wish to do can shift to an alternative fund offered under the AE We strongly agree that employees should be able to opt out of the default and choose another alternative investment strategy.

In the longer term, we believe that members should have the option to switch out of the default and into other strategies during their investment journey.

This includes the option to split their investment strategy between different funds if they choose to do so.
Mercer 9 Head 36 - The AE investment management function is outsourced to registered providers selected by tender We support the approach to outsource the investment management function to up to four registered providers for the initial fund range.

We understand the challenge of blending managers and investment strategies in a fiduciary arrangement for pension members.
We would recommend that the CPA choose to use an “Undertakings for the Collective Investment in Transferable Securities” (UCITS) investment vehicle for the AE system.

UCITS is a regulatory framework developed by the European Commission that creates a harmonized structure in Europe for the management and sale of mutual funds.

UCITS funds are perceived as safe, secure, diversified and well-regulated investments.

They are popular among many investors looking to invest for these reasons.
According to the European Commission, they account for the majority of all collective investments by small investors in Europe.

We recommend that additional clarity is provided on: - How does the CPA plan to blend the 4 registered providers into one fund for members?

Will there be another administration entity hired to do this?

- Whether the CPA plans to equally weight the assets across all providers / will they give more assets to some and less to others?
- Will the CPA be looking for exclusivity on the funds or will providers be able to open up to third party investors?

Head 37 - The relationship between the CPA and registered providers We request additional clarification on the governance relationship between the CPA and the investment providers and a timeline for when this might become available.

How long will the CPA keep each of registered investment providers within the scheme?
At what point will they consider changing investment providers / adding / removing providers?

The Design Principles document mentioned that contracts would cover 5 – 7 years is that still the case?

Head 38 - The auto-enrolment pooled fund concept We request clarification on what the reporting requirements will be for the investment providers at this point for the composite investment funds, and also on whether it is intended that the CPA will allow members to invest in more than one fund at once.
Head 39 – Investment rules We support the intention to offer members of the AE system manager diversification and recommend that the CPA endeavour to maximise same.

It is in members’ best interests to have manager diversification as well as asset class diversification to enhance the return generated in pension pots and to do so with the lowest level of risk.
We believe that the investment solution offered to the CPA for members should be impartial and independent in the selection of investment strategies used in the funds.

We support the CPA’s consideration for registered providers to take into account environmental, social and governance factors (ESG).

We believe that integrating ESG factors is in the best interest of achieving the best long-term investment outcomes for members.
ESG factors can have a material impact on long-term risk and return outcomes and should be integrated into the investment process.

By taking a broader and longer-term perspective on risk, including identifying sustainability themes and trends, it is likely to lead to improved risk management and new investment opportunities.
Climate change poses a systemic risk, and investors should consider the potential financial impacts of both the associated transition to a low-carbon economy and the physical impacts of different climate outcomes.

Stewardship helps the realization of long-term shareholder value by providing investors with an opportunity to enhance the value of companies and markets.
Mercer 10 In terms of best practices integrating ESG into pensions we recommend the CPA favour managers who can evidence that they are improving their ESG processes and approaches.

We recommend on an on-going basis that the CPA replace existing managers with managers who show better ESG ratings.

The CPA could also actively engage with managers on improving their ESG integration processes, from carbon emission reductions to improved diversity representation on portfolio management teams.
The CPA could challenge registered providers to manage the default fund to commit to net-zero carbon emissions by 2050.

This would align the AE system to the Government’s own Climate Action Plan.

We recommend that the CPA considers applying strong investment manager diversification to the scheme in the best interest of members.

We also recommend that the CPA considers the ESG credentials of the investment providers as a factor in their overall selection criteria.
We request clarification on the definition of "regulated markets" as the use of this definition in the IORP legislation was not as expected and is currently being examined by the Pensions Authority.

Head 42 – Digital first principal – electronic communications We support the proposal to use a “digital first” principle in relation to employee communications.
We feel that this approach will best suit the needs of the majority of members over time, while also providing members with the option to receive their communications in a non-electronic format.

We recommend that this communications principle is extended to the existing occupational pensions system given the difficulties and expenses faced by pension plan sponsors and trustees.
Apart from standard information provision via electronic communications, proactive promotion and calls to action should be a feature of any system that has a desire to reduce opt out levels and maximise adequacy levels.

New and better approaches of increasing member engagement are evolving rapidly over time.

As a result we recommend that the CPA periodically reviews the market to seek out best thinking in this and other communications related areas.
Head 44 – MyAE While there are no references to specific member communications that will be available under MyAE, we would like to flag that we consider ongoing communications as a key part of supporting member engagement with their pension scheme and helping improve outcomes.

At a minimum, the AE portal should include projection tools and access to investment performance, including details of all investment options available.
Our understanding is that MyAE will be the main source of contact between the CPA and AE members.

It is unclear what services will be outsourced by the CPA to administration services providers.

However assuming that some core services are outsourced, it seems sensible that these administration providers would have access to MyAE to allow them to complete their roles.
Additional clarity is provided on this point and also the complexities arising from access to MyAE in terms of ensuring access is limited and restricted as appropriate.

Mercer 11 Head 57 – Access to funds aligned with the State Pension Age We understand the intent behind only providing access to funds in line with the State Pensions Age, other than in specific circumstances.
However, as further noted, members of occupational pension schemes can generally retire and access their benefits from age 60 without ceasing economic activity.

Some people may be able to take early retirement from age 50, depending on the specific provisions of their pension scheme.

While existing in parallel, the options and features of the two systems should be as consistent as possible.
We recommend that members of AE are provided with the same choice in terms of flexibility in timing of drawdown as members of occupational pension plans.

Head 59 – Retirement products We welcome the long term consideration of member needs as AE evolves, including the potential introduction of a retirement benefits scheme that provides for the drawdown of funds accumulated by an employee.
Where any level of drawdown is being allowed, it should automatically include a provision for regulated financial advice, either in person or virtual, to avoid the challenges faced in the UK and NZ relating to longevity risks and income running out.

In a “digital first” approach, robo-advice could potentially be used, following careful consideration as to its appropriateness and limitations.
We would suggest that a multi-faceted financial advice system should be used to balance cost and quality of appropriate advice and limit reputational risk.

We would welcome any additional clarity that could be provided in terms of the content and the timeline for drawdown options.

Head 64 - The maximum direct cost charge to the participant to be capped We would like clarification on what is the intended charges cap on the default and other funds.
Consideration should be given to the anticipated split of the charges cap between the various parties who will be contributing towards to provision of services, including administration and investments.

Head 66 – Transfer of existing pension funds into the AE system This Head proposes that an employee participating in AE shall not be permitted to transfer into their AE account any assets that they hold in any alternative pension arrangement.
However, the possibility of members being able to transfer benefits out of the AE system into an occupational DC pension plan has not been clarified.

It is highly likely that someone who is a member of AE early in their working lifetime will subsequently move to an employment that provides an occupational pension plan.
However, as is outlined in the explanatory note, the variation in the methodology for providing financial incentives between the two systems may prohibit transfers in either direction, at least initially.

We strongly recommend that members of AE have the ability to transfer their accumulated funds into any occupational pension scheme should they choose to join one in the future.
The principle of simplification of our entire supplementary retirement savings system should be encouraged where possible, including the option of consolidating multiple pension pots (including AE funds) in a single place.

Mercer 12 Head 67 – Amendments to the Taxes Consolidation Act Subhead 5 provides for the payments from AE to be taxed as under PAYE provisions.

It also provides for the application of the lifetime tax-free limit of €200,000 on all retirement lump sums paid to an individual through AE.
Amounts in excess of this tax-free limit (the “excess lump sum”) are subject to tax in two stages.

The portion between €200,000 and €500,000 is taxed at the standard rate of tax while any portion above that is taxed at the individual’s marginal rate of tax.

Our interpretation of this subhead is that it proposes a significant departure from the current calculation of Revenue Maximum Tax Free Cash which would apply to members of occupational pension schemes.
We appreciate the simplification this will bring to administering and communicating the retirement benefits of those who come to retirement during the early years of AE.

However, if a tax free lump sum of €200,000 is introduced within the AE system, this will clearly introduce arbitrage opportunities to be exploited.
At various salary levels and once contributions into AE have reached their maximum, members could theoretically increase their lump sum by transferring into AE for long enough to accumulate the projected €200,000.

Then, this member would transferring back into their employer’s occupational pension plan.

This would of course, introduce additional administrative complexities for all stakeholders in both AE and occupational pension plans.
Furthermore, it would likely result in the creation of a cottage industry around financial advice for members trying to exercise this arbitrage opportunity.

Take for example someone who has no pensionable service in Ireland (say they have lived overseas and are now returning to Ireland).

Assume this member has ten years to go until retirement, is earning €70k per annum and is contributing at the maximum AE rate of 14%.

The future value of their pot at retirement is estimated to be c. €122k.
Under AE, this member would be able to take 100% of this as cash on retirement.

If the member was in an occupational pension plan and took their Revenue Maximum Lump Sum plus an annuity at retirement, only c. €55k of this €122k would be available as a Tax Free Lump Sum.

We believe that a primary goal of employees is to optimise the amount of tax free cash available to them at retirement.
If the amount of tax free benefit at retirement is significantly higher under AE than under an occupational pension plan, then members may put pressure on an Employer to provide access to both AE and an occupational plan.

This is directly at odds with the stated objective of AE which is to complement, rather than replace, existing private pension provision.
While we have used an extreme example for illustrative purposes, similar dynamics will also apply to existing employees within an occupational pension plan who will may be able to exercise arbitrage opportunities in both systems to increase their tax free cash at retirement.

We strongly recommend - Clear communications outlining AE members’ entitlement to a Tax Free Lump Sum of up to €200,000 at retirement, up to a maximum of their AE retirement account.
- Careful consideration is given to how this will work alongside current Revenue Maximum Tax Free cash rules for members in all types of plans (DC occupational, DB, hybrid) and at various retirement account values - That the same effective tax reliefs on member’s retirement benefits be provided for AE and occupational pension plans.

- A similar level of drawdown flexibility is introduced to members of occupational pension schemes.
For example, this could be in the form of a further increase in the limits under which members can exercise their trivial commutation rights, alongside a removal of the tax that applies to this benefit.

Mercer 13 - Clarity be provided as to whether members could access both a €200,000 lump sum under AE while also availing of a revenue maximum tax free cash lump sum from an occupational pension.
- While we believe that arbitrage opportunities should be limited between the two systems, we believe that careful consideration should be given as to whether a €200k tax free lump sum is an appropriate benefit to provide AE members in the longer term or whether some other measure should be used.
Head 73 – The CPA to be listed as a specified body for the purposes of accessing and using a PPSN This head outlines that CPA shall be listed as a specified body as provided for in Schedule 5 of the Social Welfare Consolidation Act 2005 as amended for the purposes of accessing and using a person’s personal public service number in accordance with Social Welfare legislation.
(2) In this Head, “personal public service number” means a number allocated and issued in accordance with Section 262, subsection (2) of the Social Welfare Consolidation Act 2005 as amended.

If the CPA is appointed as the registered administrator for AE and sections of administration for AE are outsourced to administration services providers, our understanding is that PPS numbers cannot be shared as the outsourced administration providers are not specified bodies.
We recommend that clarity be provided as to how the CPA intends on outsourcing in line with their needs while simultaneously proving an appropriate mechanism for tracking members.

A second unique reference number or employer ID would likely create confusion for a member calling in to check their benefits given they are receiving communications likely noting My GovID or PPS.

An employer based ID number may also lead to traceability issues with the pot follows member approach over time.
Additional Notes Having reviewed the Heads, we cannot see any reference as to how the accounts of members who go through a Pensions Adjustment order are processed.

We recommend that clarity relating to the treatment of non-member spouses is provided following the receipt of a PAO.

For example, will the portion of a non-member spouses benefits be transferred into an account relating to the non-member spouse?
Mercer 14 Summary recommendations A summary of our recommendations is as follows: Head Heads 2 and 4 Recommendations In addition to understanding the definition of these prescribed minimum standards, it is also important to understand how they should be evidenced, and who will be responsible for ongoing monitoring.
Heads 2 and 4 Details of the minimum standards should be published as soon as possible to allow employers and other relevant bodies to consider the potential implications of these standards on their schemes, their employees and their business and to undertake appropriate initial impact analysis and other relevant preparation.

Heads 2 and 4 There should be clarity on which body will be responsible for the ongoing monitoring of whether schemes meet the minimum standards.
Heads 2 and 4 Clear timelines within which stakeholders of occupational pension schemes can make any required changes should be confirmed.

Heads 2 and 4 There should be clarity on the definition of reckonable earnings / pensionable salary which will be used.

Heads 2 and 4 There should be clarity on if / how reckonable earnings definitions may vary and any corresponding impact on contribution scales.
Heads 2 and 4 There should be clarity on the manner in which schemes will be required to show at an overall level that their contribution rates meet the minimum standards for all members.

Heads 2 and 4 There should be clarity on what elements of current plan contributions will count towards the definition of the minimum standards, i.e.

will only employee and employer contributions be considered?
Heads 2 and 4 We recommend that clarity on the requirements for DB or hybrid schemes to show that they meet the minimum standards is provided.

Heads 2 and 4 Clarity should be provided around late retirement options where State Pension Age differs from Normal Retirement Age within a scheme.

This is especially important in the context of if/how risk cover is provided for members of occupational plans as they work later than their plans Normal Retirement Age.
Heads 2 and 4 We recommend that the minimum standards are drafted taking protection benefits and AVCs into account and provide a clear and equitable selection methodology which will make it simple for individual members and employers to understand which approach may best suit their needs.

Heads 2 and 4 Additional clarification is required relating to whether members can be enrolled in both the AE Plan and an occupational pension plan for either the payment of AVCs and or for risk benefits.
Heads 2 and 4 We recommend that additional wording is added to the definition of a qualifying occupational pension scheme which allows for nuances associated with various types of pension schemes, SFT limitations and various employer contribution approaches that arise in the current occupational pensions system.

Heads 2 and 4 We recommend that these standards also confirm what happens with occupational plans that do not meet the minimum standards in most, but not all requirements.
Heads 2 and 4 We strongly recommend that clarity is provided on treatment of members where arbitrage opportunities exist.

We recommend that where choice is available, it does not outweigh the pragmatism of having a simple and integrated public and private pension system.
Mercer 15 Head 8 Head 9 Head 9 Head 9 Head 9 Head 10 Head 12 Head 12 Head 12 Head 15 Head 24 Head 30 Head 33 Head 33 Head 33 Head 33 Head 34 Head 34 Head 35 Head 36 Mercer We propose that the wording be revised to clarify that employers who want to provide an occupational pension scheme that meets the minimum standards, and who wish to promote the benefits of their scheme with current and prospective employees, will not be penalised for doing so (while acknowledging that employees would retain the right to join AE in any event).
Clarity is required as to whether the contributions cap also applies to employees on the portion of their benefits that is over €80,000.

We propose that clarity on the total contributions to be paid into an occupational pension scheme (i.e.

14%) is clearly outlined in the minimum standards.

Further, we recommend that the minimum standards outline the minimum rates paid by the employer and or employee in order to ensure that the ultimate contributions total of 14% is achieved.
If these standards are based on a member’s salary level and income tax bands, then we strongly recommend that these standards are robust enough that they allow for any future changes to income tax bands.

Clarity should be provided relating to how Opt-outs will work operationally, especially in the case where outsourced administration services providers are used.

We recommend that an outline be provided on the operation of the refund process and responsibilities for same (i.e.
CPA or administration services provider) be clearly articulated.

In particular if an outsourced administration provider facilitates opt outs, details should be provided as to the process where a member opts out after a rate change.

In this circumstance a partial refund is due.

Will this payment be taxable and if so, what body will be responsible for remitting this payment to the State?
This Head refers to a refund of contributions, confirmation should be made as to whether this is correct or whether the refund should be based on the value of the appropriate portion of employee contributions at the date of disinvestment.

Clarity needs to be provided relating to what specific areas the CPA intends to outsource to administration services providers.

If pension administration services are outsourced, clarity will be required as to which parties (i.e.
the CPA or the administration services provider) will be responsible for which elements of ongoing administration before administrators can provide a response to tender.

If collection of these contributions is to be outsourced to an administration services provider, additional clarity will be required as to how exactly it is intended this will operate – i.e.

will it be via Excel or some other prescribed format?
The CPA provides clarity on what they believe to be “reasonable expectations” for the investment profile of the default fund in terms of risk and return targets.

Specific targets are set for investment providers to achieve in terms of risk and return.

The CPA can then measure and compare investment providers against their ability to achieve these targets.
We strongly recommend that the default should be, during the growth phase, a medium risk option exhibiting annual volatility less than 15% (consistent with a rating of 5 on the 1-7 ESMA scale).

Additional clarity on the length and design of the glide path would be welcome.

Further clarity should be provided over what the exact investment restrictions are (if any) for the investment providers.
We would also recommend for the CPA to consider offering more investment options to keep up with market trends such as sustainable investing funds.

We recommend that members should have the option to split their investment strategy between different funds if they choose to do so.

How does the CPA plan to blend the 4 registered providers into one fund for members?

Will there be another administration entity hired to do this?
16 Head 36 Head 36 Head 36 Head 36 Head 36 Head 36 Head 37 Head 37 Head 38 Head 39 Head 39 Head 39 Head 39 Head 39 Head 42 Head 42 Head 42 Head 44 Head 44 Head 57 Mercer What kind of investment vehicle will the CPA be using for the Automatic Enrolment Retirement Savings Scheme?

i.e.

UCITS / Unit Linked Life Wrapper etc.

How long investment providers will be given to complete the tender / RFP?

Whether the CPA is considering appointing less than four providers?
Whether the CPA plans to equally weight the assets across all providers / will they give more assets to some and less to others?

Will the CPA be looking for exclusivity on the funds or will providers be able to open up to third party investors?

Will the funds solely be available to Irish Investors?

We request additional clarification on the governance relationship between the CPA and the investment providers and a timeline for when this might become available.
How long will the CPA keep each of registered investment providers within the scheme?

At what point will they consider changing investment providers / adding / removing providers?

The Design Principles document mentioned that contracts would cover 5 – 7 years is that still the case?
We would ask for clarification on what the reporting requirements will be for the investment providers at this point for the composite investment funds, and also on whether it is intended that the CPA will allow members to invest in more than one fund at once.

We recommend that the CPA considers applying strong investment manager diversification to the scheme in the best interest of members.

We recommend on an on-going basis that the CPA replace existing managers with managers who show better ESG ratings.
The CPA could challenge registered providers to manage the default fund to commit to net-zero carbon emissions by 2050.

This would align the AE system to the Government’s own Climate Action Plan.

We recommend that the CPA considers applying strong investment manager diversification to the scheme in the best interest of members.

We also recommend that the CPA considers the ESG credentials of the investment providers as a factor in their overall selection criteria.
We request clarification on the definition of "regulated markets" as the use of this definition in the IORP legislation was not as expected and is currently being examined by the Pensions Authority.

We recommend that this communication principle is extended to the existing occupational pensions system given the difficulties and expenses faced by pension plan sponsors and trustees.
Apart from standard information provision, proactive promotion and calls to action should be a feature of any system that has a desire to reduce opt out levels and maximise adequacy levels.

New and better approaches of increasing member engagement are evolving rapidly over time.

As a result we recommend that the CPA periodically reviews the market to seek out best thinking in this and other communications related areas.
At a minimum, the AE portal should include projection tools and access to investment performance, including details of all investment options available.

Additional clarity is required relating to the access of administration services providers with MyAE, ensuring access is limited and restricted as appropriate.

While existing in parallel, the options and features of the two systems should be as consistent as possible.
We recommend that members of AE are provided with the same choice in terms of flexibility in timing of drawdown as members of occupational pension plans.

17 Head 59 Head 64 Head 66 Head 67 Head 67 Head 67 Head 67 Head 67 Head 67 Head 67 Head 67 Head 73 Additional notes We would welcome any additional clarity that could be provided in terms of the content and the timeline for drawdown options that might potentially be considered.
We would like clarification on what is the intended charges cap on the default and other funds.

We would strongly recommend that members of AE have the ability to transfer accumulated funds into an occupational pension scheme if they choose to join one in the future.

If all AE members will be eligible for a Tax Free Lump Sum of up to €200,000 at retirement, this point is clearly communicated.
We recommend that this option, or an alternative approach that provides a similar level of flexibility to members with regard to drawdown of benefits from occupational pension schemes is introduced.

For example, this could be in the form of a further increase in the limits under which members can exercise their trivial commutation rights, alongside a removal of the 20% tax that applies to this benefit.
Clear communications outlining AE members’ entitlement to a Tax Free Lump Sum of up to €200,000 at retirement, up to a maximum of their AE retirement account.

Careful consideration is given to how this will work alongside current Revenue Maximum Tax Free cash rules for members in all types of plans (DC occupational, DB, hybrid) and at various retirement account values.

That the same effective tax reliefs be provided to on members’ retirement benefits for AE and occupational pension plans.
A similar level of flexibility to members with regard to drawdown of benefits from occupational pension schemes is introduced.

For example, this could be in the form of a further increase in the limits under which members can exercise their trivial commutation rights, alongside a removal of the 20% tax that applies to this benefit.
Clarity be provided as to whether members could access both a €200,000 lump sum under AE while also availing of a Revenue Maximum Tax Free Cash lump sum from an occupational pension.

We believe that careful consideration should be given as to whether a €200k tax free lump sum is an appropriate benefit to provide AE members in the longer term or whether some other measure should be used.
We recommend that clarity be provided as to how the CPA intends on outsourcing in line with their needs while simultaneously proving an appropriate mechanism for tracking members.

We recommend that clarity relating to the treatment of non-member spouses is provided following the receipt of a PAO.

Mercer 18 welcome to brighter Mercer (Ireland) Ltd. Charlotte House Charlemont Street Dublin 2 www.mercer.ie Mercer (Ireland) Limited, trading as Mercer, is regulated by the Central Bank of Ireland.
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