Is the end nigh for your pension scheme?

The European Union directive on the activities and supervision of institutions for occupational retirement provision, otherwise known as IORP II, may sound fairly innocuous but it is going to have far-reaching implications for the pensions landscape in Ireland.

The directive was transposed into Irish law in April 2021 and comes into effect on January 1st, 2023 and it imposes a raft of new requirements on pension scheme trustees and sponsoring employers.

“The introduction of the IORP II directive is bringing the biggest change we have seen in the occupational pensions landscape in Ireland for a generation,” says Caitríona MacGuinness, partner and DC and master trust market leader at Mercer. “The requirements under the directive are wide-ranging but with an overall goal of enhancing and strengthening the level of pension scheme governance. The requirements apply to all occupational pension schemes, irrespective of the size of each scheme.”

According to MacGuinness, some of the new requirements include the appointment of two new key function holders. “Schemes must focus on strengthening risk management and need to appoint a risk manager. They must also put in place an internal audit function and carry out an internal audit. There are more stringent governance, compliance monitoring, ongoing reporting and service provider oversight requirements. And there is a much broader scope of member communications requirements.”

Sustainability: A whole new set of reporting with potential to be transformative

---

Tools and applications, in common use elsewhere in life, are still not standard in healthcare settings

---

Futureproofing the health system requires a new prescription

---

Twenty years a-growing – Ireland’s most important health summit goes from strength to strength

---

And there are other requirements. “Most companies are not in the financial services sector and will have to look externally for these function holders,” explains Paul Dunne, head of client management and distribution at State Street Global Advisors Ireland. “They will also have to appoint a chairman and a secretary to the fund as well as have suitably qualified trustees.”

The implications of requirements should not be underestimated, according to Grace Guy, head of supervision and enforcement with the Pensions Authority. “There must be no misunderstanding about the significance of the new rules. Few if any occupational pension schemes were wholly compliant at the transposition date which was in April 2021. Pension scheme trustees, employers and advisers have been given time to consider and understand the new changes, but the countdown is on, and decisions need to be made now about whether pension schemes can satisfy the new rules.”

Indeed, it is anticipated that the great majority of trustees and employers will decide that their schemes will either be unable to satisfy the new rules or that it will be too costly to do so. “It is important to consider that the Pensions Authority has a clear strategy and goal of more consolidation into master trusts and fewer standalone schemes remaining,” MacGuinness points out. “They expect the number of standalone defined-contribution schemes to reduce from around 160,000 to a level of between 100 and 200 by 2027.”

For the great majority of schemes where this decision is made, the main option will be to move into a master trust arrangement. Put simply, this is a scheme of schemes where multiple pension schemes are housed under a single trust.

According to Shane O’Farrell, director of products at Irish Life Corporate Business, the biggest advantages to note are governance, economies of scale and the potential for what he terms flagship status.

“In terms of governance a major benefit of master trusts is that their nature and size mean the new regulations can be met centrally, by the master trust and its trustees,” he explains. “So, a master trust provides the professional governance required for IORP II compliance in the current climate and the ability to evolve over time to meet new industry challenges in the future.”

Another benefit is that companies who participate in a master trust experience the economies of scale and other benefits that go with being part of a larger entity, so the costs of IORP II compliance can be absorbed more easily than they might be in a standalone plan, he adds. “And, when you look at the costs of IORP II compliance, these economies of scale are particularly meaningful.”

And then there’s the flagship status. “What we see from international examples of successful master trusts in action is that they often become flagships for the providers, so participating companies and members tend to benefit from being first to experience significant innovations and new technologies.”

There are some downsides, of course. “The only real elements of concession in opting for a master trust is around control and the capacity to customise bespoke benefit packages to a certain degree,” he points out. “One of the perks of joining a master trust is outsourcing the governance of the plan. However, for plan sponsors who have historically been very involved in championing their plan, it may be hard to simply step back and hand over control, even in this case when putting it in the hands of a team of experts.”

Dunne points out that, historically, sponsoring employers have tended to bear the costs of the running a pension scheme and the increase resulting from IORP II may be hard to bear for smaller firms and this may drive the decision to move into a master trust arrangement. But there can be other reasons for the moving.

“If scheme trustees feel that they don’t have the necessary skills to perform their function they might say it is in the best interest of the members to move into a master trust,” he notes.

He doesn’t expect a mass exodus to master trusts in advance of the January 1st deadline, however. “Decisions like that take a long time,” he says. “Employers will have to carry out a cost-benefit analysis and that can months or longer. It won’t happen very quickly.”

Finally, MacGuinness explains that employers and scheme members can be assured that master trusts will be fully compliant with IORP II. “Master trusts were required to implement the IORP II directive by July 2022. Economies of scale in the master trust may also mean that member fees are lower, and it is important that a chosen master trust has a strong investment structure and clear and effective member communications. So, the introduction of IORP II and the changing pension environment should be a positive development for members, whether their employer decides to move to a master trust or remain in a standalone trust.”