IORP II: A bigger deal than it sounds for standalone pensions

Ireland’s position as a European “outlier” when it comes to our high number of standalone pension schemes – almost 150,000 at last count – is finally set to change with the signing into law of the Institutions for Occupational Retirement Provision (the IORP II Directive) in spring of this year.

At its core is an obligation on trustees of private occupational pension schemes to put in place an effective governance system with a clear allocation and segregation of responsibilities. But the directive heralds something of a sea change in how pensions are operated here and there will be far-reaching implications for Irish pension schemes and their members.

Occupational pensions in Ireland are changing in an "unprecedented" way, says the Pensions Regulator, Brendan Kennedy.

Triggered by the IORP II Directive, as well as the Government’s own Roadmap for Pensions Reform, these changes will see a significant improvement in consumer protection for pension savers and beneficiaries, Kennedy says.

The directive commits the Pensions Authority, which is responsible for the supervision of Irish pensions, to implementing forward-looking, risk-based supervision. "In future, our supervision will be more intrusive, more qualitative, and more demanding. It is not the authority's job to dictate to trustees how they should run their pension schemes. It is our job to assess how well they are doing it," states Kennedy.

The introduction of the IORP II regime in Ireland is probably the biggest change in the pensions regulatory landscape for a generation, according to James Campbell, Head of Legal Consulting with Mercer. "IORP II is a comprehensive and wide-ranging piece of legislation that seeks to improve outcomes for members of private occupational pension schemes by mandating higher standards of governance, risk management and oversight," he says. "On the face of it, introducing mandatory minimum standards across the board has to be a positive development for pension scheme members and there are many positive elements in strengthening governance, risk management and communications requirements. Clearly this is better for members."

Yet these changes, while largely positive, will come at a cost. “Although it’s anticipated that employers will be absorbing the costs of implementing IORP II, in some cases depending on the nature and rules of the scheme, some costs may be passed on to members,” he notes.

The potentially onerous cost of meeting the requirements of the legislation has meant something of a backlash to IORP II, agrees Paul Dunne, Head of Distribution at State Street.

Dunne agrees. “IORP II offers a chance to refresh the legislation and deliver a quality check to schemes. But there has been a negative reaction in some quarters, mainly around the additional costs of the administrative burden that it will impose on schemes,” he explains. “The larger schemes may have already been meeting the requirements and have just a little bit of work to do. But one of the major concerns is about the proportionality of the legislation and potentially its impact on smaller schemes. The added governance burden and thus costs on smaller schemes will possibly threaten their viability.”

“Proper supervision and value for money will not be achieved unless there is a much smaller number of larger, more efficient schemes,” says Kennedy, who adds that consolidating pension schemes is a top priority for the Pensions Authority. “Multi-employer master trusts are expected to be an important part of future pension provision.”

It is likely that there will be a significant consolidation of pensions schemes, Dunne agrees. “Smaller schemes may close, and defined contribution schemes will move into multi-employer master trusts.”

According to Shane O'Farrell, director of products, Irish Life Corporate Business, this consolidation should mean the delivery of the new industry standards and increased member protection that IORP II was designed to achieve is "more likely to become a reality and remain as such in the longer term".

However, O’Farrell points out that the Pensions Authority has yet to publish their final code of practice, which is due mid-November; this will outline all of the specific deliverables in detail, along with the timelines or key milestones for the delivery of each element.

“At this point in time plans can obviously be actively preparing for what is expected to come in line with the draft, but they need the final code before they have the clarity to actively start meeting the requirements,” O’Farrell says. “For example, one big deliverable for plans in the short term is the preparation of a compliance statement, which we know is due in January. However, at this moment in time schemes haven’t been given the full scope of what the statement will entail, and as a result, can’t actually deliver on the requirement until they are given a clearer picture of what’s involved.”

It is likely that the full implication of these reforms will not be fully understood for some time. The Pensions Authority has said that while they expect existing schemes to be fully compliant with the legislation from the beginning of 2023, until then their expectation is that schemes put in place a plan with specified timelines and progress milestones to achieve compliance.

“Our experience is that the majority of schemes have now begun some form of substantive project to implement actions to meet IORP II compliance where there is sufficient clarity in the legislation and guidance to do so,” says Campbell.

IORP II compliance is seen by many as a massive headache because of the extensive work and resources involved, O’Farrell adds. “But in the greater scheme of things, if it actually delivers what it was designed to achieve, it could be beneficial for both pension plans and their members in the longer term, assuming a smooth transition journey.”