corporate

Background

The Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) – IORP II was transposed into Irish law on 22 April 2021. This Directive imposes additional levels of governance and compliance for trustees of pension schemes (including the directors of companies acting as trustees) and additional costs for sponsoring employers.

The implementation of IORP II will strengthen consumer protection and will also have implications for how the Pensions Authority supervises in the future, with a greater emphasis on forward-looking risk-based supervision. The supervision will be more intrusive, more qualitative and more demanding. The Pensions Authority stated that compliance with the Directive is not an end in itself and that its purpose is to make pension schemes more efficient and accountable, and to ensure that there are trustees in place who are able and willing to address the significant responsibilities involved in overseeing and investing pension assets for up to 50 years.

Ireland is unique globally in terms of the number of pension schemes in existence. Based on the scheme registration data provided to the Pensions Authority by regulated entities, there were 86,000 Defined Contribution schemes in existence with active members as of 31 December 2021. The Pensions Authority has stated in the past that proper supervision and value for money will not be achieved unless there is a much smaller number of larger, more efficient schemes and that consolidation of the number of Defined Contribution schemes is fundamental to improving the Irish pension system. There is no doubt that the IORP II Directive will assist with the consolidation goal of The Pensions Authority and it is expected that the number of schemes will reduce to between 150 and 200 schemes by 2027.

Developments in the Irish Market since April 2021

Since the transposition of the Directive and the subsequent publication of the Pension Authority’s Code of Practice for trustees of occupational pension schemes and trust RACs, many employers have reassessed their pension scheme structure.

While some of these employers have considered the PRSA option, the proposed changes to PRSAs, including the removal of the certificate of benefit comparison and bringing contribution limits in line with Occupational Pension Schemes have not materialised. Consequently, the option of transitioning to a master trust has gained more traction in the market.

Employers that have still not reassessed their pension scheme structure

For those employers that have not already done so, they will need to decide urgently, what is the most appropriate solution for their pension scheme going forward. Essentially, they will either:

(a) continue their own scheme in its current format (i.e., maintaining the ‘own trust’ arrangement) and support the implementation of the IORP II requirements having regard for the enhanced levels of governance and compliance along with the additional cost for the sponsoring employer;

or

(b) consider whether an alternative pension arrangement, such as a master trust, would be a more appropriate and efficient solution. Such a decision will most likely result in the current pension scheme being wound-up with the Sponsoring Employer requesting the Trustees to transfer the members and their Pension Fund Assets to the master trust in accordance with the procedures set out in the Occupational Pension Schemes (Duties of Trustees in Connection with Bulk Transfer) Regulations 2009 (as amended).

It is imperative that Employers receive independent and impartial advice to assist them with their decision-making process as all ‘own trust’ pension schemes are required to be in full compliance with IORP II by 31 December 2022.

Master Trusts and Selecting a Master Trust Provider

A master trust can be used by several unrelated employers and their employees while ‘own trust’ schemes can only be used by related employers. The master trust is managed on behalf of its members by a trustee, that must be incorporated as a designated activity company (DAC), and ultimately has the fiduciary responsibility of running the master trust. One of the main advantages of master trusts is that all the compliance and governance requirements are dealt with centrally by the master trust’s trustee board. Importantly, each unrelated employer retains control of the strategic benefit design of its section including the eligibility conditions and the benefit structure.

Generally speaking, master trusts offer access to economies of scale that may not be the case for all ‘own trust’ pension schemes and they are future-proofed for further regulatory changes e.g., the governments long awaited Auto Enrolment Scheme which is scheduled to launch in early 2024 and the potential for in-scheme post-retirement drawdowns as highlighted in the 2020 Report of the Interdepartmental Pensions Reform and Taxation Group.

The Pensions Authority conducted 20 engagement meetings with trustee boards of master trusts as part of its 2021 engagement programme. This built on the work commenced in 2020 and forms part of the overall move to forward risk-based supervision as referred to above. The Pensions Authority has previously advised that it expects all master trusts to be compliant with IORP II and the published Code of Practice by 1 July 2022. It is expected that the Pensions Authority will publish its findings on master trust compliance as soon as practicable post-July and they may publish an up-to-date list on its website of compliant master trusts post July 2022.

The Pensions Authority published an employer guide to master trusts and it highlighted the importance of employers shopping around with a view to selecting a well-run master trust that offers value for money. Moving to a master trust is a significant decision. Seeking some expert advice from an independent third-party evaluator with experience of the master trust market is essential because there are very nuanced differences between the various master trust providers in the Irish market.

Additionally, the third-party evaluator can also assist with the following issues which may arise when transitioning from an ‘own trust’ arrangement to a master trust arrangement:

• Transition/Onboarding fees

• Mitigating out-of-market risk

• Treatment of Investment Options that attract certain investment guarantees

• Mapping of Investment Options from ‘own trust’ to master trust e.g.  Investment Options automatically mapped to the Default Investment Option or Investment Options mapped to comparable Investment Options from a risk/return profile perspective

• Treatment of any surplus/excess proceeds

• Documenting the Risk Benefits

• How Pension Adjustment Orders (Retirement & Contingent) served on the Trustees of the ‘own trust’ arrangement are treated

• Merits of establishing a Pensions Oversight Committee comprising of Employer, Member and independent representatives

Conclusion

The IORP II Directive has fundamentally altered how pension schemes are governed, how risk is managed and how the Pensions Authority supervises. The Irish pension landscape will continue to be transformed over the next 6 months, as employers and trustee boards attempt to achieve full IORP II compliance before the fast-approaching deadline of 31 December 2022.

We can help you to navigate the changing pensions landscape and support you in identifying a pension arrangement that will result in better member outcomes and that fits with your objectives and pension philosophy.