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Small business owners are being locked out of pension plans

Regulator’s shocking threat to prosecute trustees is excessive when no alternative pensions option is available

New pension rules lock business owners out of existing pension options with no other realistic alternative for their pension savings. Photograph: iStock
New pension rules lock business owners out of existing pension options with no other realistic alternative for their pension savings. Photograph: iStock
Rachel McGovern
Mon Jul 11 2022 - 05:00

For many years, business owners have had the option to save for retirement using trust-based one-member pension arrangements. These gave flexibility in saving for retirement, recognising the exigencies and the peaks and troughs in business

IORP II, a European Directive intended to “set common standards by ensuring the soundness of occupational pensions and better protecting pension scheme members and their beneficiaries”, was transposed into Irish law in April 2021. Ireland, like other EU Member States, had the option to exempt schemes with under 100 members but decided not to.

While 100-member schemes would be significant to remove from the regulations, the fact that one-member pension arrangements were not exempted came as something of a surprise to say the least. Ireland has a high number of these schemes that operate under a trust system that fall under IORP II, unlike other countries where there isn’t a requirement for a trust for a single-member pension scheme.

The regulations do provide for a derogation until 2026 from most of the new requirements for existing one-member schemes, except for investment rules and borrowing restrictions. But any new one-member arrangement set up after April 22nd, 2021, must comply with all of the new regulations.

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The only “concession” that was indicated is that schemes, including one-member arrangements, could take account of the size, nature and complexity of the scheme when meeting the new requirements. However, recent statements from the Pensions Authority, which regulates pension schemes in Ireland, seem to conflict with this concept of proportionate regulation. It has decided to treat one-member schemes the same as those with 500 members.

On June 24th, just one week ahead of the IORPII deadline, the Pensions Authority published a statement on its website on the issue of compliance by one-member schemes. The authority warned that trustees of such schemes face prosecution from July 1st unless they comply with the new rules.

A decision to compel all schemes operating a trust to comply with legislation is understandable. However, the severity of the Pensions Authority’s position in relation to one-member schemes was shocking. It did not give trustees any explanation of why the regulator believes that what many would consider robust protections across a large portfolio of single-member pension schemes – such as current standardised trustee services and policies, key function holder appointments and audited accounts – are unlikely to meet the compliance threshold intended by the IORPII Directive and specifically set in its application by the Irish Pensions Authority.

If you do not know what the rule-maker requires, it’s hardly reasonable that one could face prosecution for not meeting the opaque standard.

In any event, the industry providers of one-member pension schemes are already heavily regulated by the Central Bank.

Threatening prosecution will likely have a huge impact on the market and has already forced some providers to suspend new one-member schemes. This is to the detriment of consumers, very many of whom have no other realistic alternative for their pension savings.

Options

At the moment there are a number of differences between the current trust-based one-member pension schemes available on the market and an alternative pension product such as a Personal Retirement Savings Account (PRSA).

Employer contributions to single-member schemes are technically unlimited, subject only to an overall fund cap of €2 million. This is important because most businesspeople setting up a company may not be in a position to make pension contributions until later in life.

To make sure they adequately fund for retirement, they need to be able to put more away across a shorter number of years later in life. Indeed the very existence of one-member pensions amounts to recognition by the State of this particular phenomenon and is an enterprise-friendly incentive.

A particular advantage of these schemes is that once-off single contributions can be paid to make up for previous years when no pension funding was possible. PRSAs do not allow for this type of backdating other than making a contribution for the previous year. When you are only starting your pension funding in later life, to be able to avail of maximum contributions, as you can with the current single-member schemes, is extremely important to ensure adequate pension funding.

There is also the issue of the type of investments one-member schemes can make as opposed to a standard PRSA. Fund options for the latter are limited, whereas with an one member plan, an individual can invest in whatever is permitted by the Revenue Commissioners.

Following a report of the Interdepartmental Pension Reform and Taxation Group in 2020, it was understood the PRSA rules would be adapted to allow for the phasing out of one-member pensions under the new directive by increasing the allowable contributions that could be paid into a PRSA.

A reasonable solution surely would be for the Pensions Authority to provide for an extension of the compliance date by six months to January 2023, to allow time for the trustees of these schemes to address any concerns the authority may have and also to ensure the changes to the PRSA proposed by the interdepartmental report are made by Government in the forthcoming Finance Bill.