Ireland signs up to EU pensions revolution

The need for reform in Ireland’s pension regime has been widely recognised for some years (see an AB article from November 2019 about tax relief on pensions), but despite concerns about provision for younger workers, the government has been slow to act.

Last October, The Irish Times reported that the pandemic was stalling already glacially slow progress on the national auto-enrolment programme, with some analysts predicting Covid-19 might set its introduction back a further decade. Without auto-enrolment, any reform of the current pillar of Irish pensions – tax reliefs that favour older, higher income earners – also looks set to be deferred.

Yet change of a profound nature is coming to Irish pensions. Institutions for Occupational Retirement Provision (IORP) II is the unwieldy name of an EU directive that has been described by the Pensions Authority as presenting the ‘most significant changes in at least a generation’ in Irish pension provision.

While the directive was enacted in 2016 by the EU, it has taken until now for it to be transposed into law in Ireland. The CEO of the Irish Association of Pension Funds, Jerry Moriarty, undoubtedly spoke for many when he described the prolonged delay and resulting lack of clarity as ‘frustrating’ for pensions trustees. ‘With no draft legislation or regulations published and no consultation, it has been impossible for them to properly plan for what they need to do,’ he said.

Recent research by the Pensions Authority supports these concerns. In February, it published the results of a survey on preparations for IORP II. While finding generally high levels of awareness among pension trustees, it expressed disappointment at ‘inadequate preparation’ among many schemes. According to the survey, only 25% of defined benefit pension schemes and 26% of defined contribution schemes have risk management policies in place, while just 13% of defined benefit and 11% of defined contribution schemes have internal control policies in place.

A new reality

IORP II requires high common standards across pension scheme management, along with the kind of administrative guardrails in risk, governance and supervision that advocates say will protect employees far into the future but which critics may seize on as an example of EU bureaucratic overreach.

It’s a situation that points to the challenges that smaller schemes in particular will face as a result of IORP II’s introduction. The new obligations will have no exemptions, meaning that many schemes will struggle with the cost of meeting sometimes onerous requirements, while they will also significantly limit the current freedom of smaller schemes to invest in unregulated investments and to borrow within funds for investment.

Small scale

Ireland's pensions landscape is unusual, because of the proliferation of small pension schemes.  Despite accounting for only 1% of EU population, Ireland has half of all pension schemes in the EU, and estimates suggest as many as 66,000 of the 75,000 registered occupational schemes have only one member, while around 8,000 company schemes have under 500 members and average membership among these schemes is less than 20.

Announcing the transposition of IORP II, the Department of Social Protection said the requirements  will apply to all schemes and trust Retirement Annuity Contracts (RACs), including small schemes and one-member arrangements. In relation to existing one-member arrangements, post-transposition, IORP II investment and borrowing rules will apply only to new investments or borrowings entered into by such arrangements. A five-year transitional period will also apply to existing one-member arrangements in respect of new IORP II requirements (other than investment and borrowing related requirements).

Ray Clarke, director of consulting at Aon, says that many pension scheme trustees will simply conclude that ‘the burden of increased legislation is not for them’. He adds: ‘They are increasingly looking at other ways to mitigate the risks the new regulation poses to their future operation.’

Meet the master trust

The solution for many is likely to lie in ‘master trusts’, a system whereby organisations pool their resources to create larger, professionally run pension trusts.  While the Pensions Authority sees great promise in this approach, it also cautions that the environment may not yet be in place for a mass transition to such schemes. In its 2020 report on master trusts, it raised issues around governance and risk obligations in existing ones and suggested that work remains to be done to make them fit for purpose.

In addressing this, many will look to the UK, where the introduction of auto-enrolment in 2012 proved a catalyst for the development of master trusts. In 2018, the UK Pensions Regulator’s new code of practice brought major reform and consolidation to the market. Today, just 38 authorised master trusts serve the needs of more than 16 million people in the UK.

The introduction of IORP II at a time when many employers would rather dedicate resources to plotting their post-pandemic future may seem an unwelcome headache to many, but the opportunity it presents to ‘professionalise’ pension management is a compelling one.

At the formal signing the Minister for Social Protection, Heather Humphreys, said: 'The IORP II directive is a substantial directive with many of the provisions supporting positive reform of the Irish occupational pension sector.

'The regulations  will provide for a number of improvements  such as enhanced governance standards for schemes and trust RACs in Ireland; better protections for pension scheme members and beneficiaries; enhanced information provision to scheme members and beneficiaries including the introduction of a Pension Benefit Statement on an annual basis; the removal of obstacles for cross-border provision of services and transfers; and  promotion of long-term investment in growth, environment and employment enhancing economic activities.'

The Pensions Regulator, Brendan Kennedy, acknowledged the significance of these changes for Irish pensions, and said: 'The objective is to improve the outcomes for members of Irish pension schemes, but many schemes will need to do a lot of work to meet the standards and obligations set out in these new provisions.'