New pension options now available for business owners and the self-employed

Last summer, the five insurers selling pension schemes aimed at business owners and the self-employed in the Irish market closed their plans to new business.

The reason? The Irish interpretation of European regulations, which upped the oversight required for such schemes.

However, after some months reviewing and discussing what’s possible, most of these same insurers have brought new products to the market.

So what does this mean for pension savers?

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What happened

In July, Irish Life, Aviva, Zurich, Standard Life and New Ireland stopped offering single-member pension schemes, so-called executive pensions, due to regulatory developments.

The pension schemes, which have been around for years, are popular, with about 1,000 such schemes established each month. They allow people, often business owners, save a multiple of the amount they would be entitled to save in a regular pension.

Figures from Brokers Ireland show that a single member scheme saver could put €150,000 a year into their pension fund at the age of 40, more than five times the €28,750 a PAYE worker can do – a 40-year-old is allowed get tax relief on 25 per cent of their gross earnings, but only up to an annual earnings cap of €115,000. Employer contributions to a single-member scheme, on the other hand, are unlimited up to an overall fund cap of €2 million.

The idea of such flexibility is that it allows business owners, who may not be able to afford pension contributions in certain years, to maximise their tax relief. Such schemes also allowed a broader range of investments than a standard PRSA, for example.

The closure of the schemes followed the transposition of EU directive IORP II into Irish law in April 2021, which imposed higher regulatory standards. The new regulations restrict investment for executive pension savers, as well as imposing additional regulatory and administrative burdens.

While Ireland had the choice of opting for a derogation for schemes with 100 or fewer members, it chose not to. It also chose not to opt for a derogation for one-member schemes. This meant that any one-member arrangement set up after April 22nd, 2021, had to comply with all of the new regulations.

Subsequently, the Pensions Authority took the view that when regulating one-member schemes, these should be treated 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 would face prosecution from July 1st unless they complied with the new rules.

As a result, life companies offering such schemes announced in early July that they would suspend their products to new business.

In a note to brokers last summer, Irish Life wrote: “In light of these developments and, specifically, the more recent update in relation to the audited accounts requirement, we have considered the potential impact and decided to suspend accepting and issuing new one-member company pensions plans.”

Similarly, Standard Life closed its Synergy executive plan to new business last July, citing “disclosure requirements specified recently in the legislation mean that a trustee annual report and audited accounts are to be produced for each scheme”, while Zurich Life also closed its ZTSL individual Executive Pension Plans.

The closures did not impact top-ups or transfers into existing schemes.

PRSA instead

What could those in search of one-member schemes do instead? Putative single-member pension savers were told to consider PRSAs.

However, this was not seen as attractive, given the aforementioned funding differences.

Now, however, life companies have found ways of meeting demand for these products by introducing trust-type structures.

Rachel McGovern, a director with Brokers Ireland, says the move follows some work proposed by the industry, which led to Revenue approving a number of master trust structures for one-member schemes.

“They have literally just come onto the market,” she says. “It’s good they’re back, because obviously for people in the situation of being 10 years off retirement who hadn’t been funding up to now, at least there’s an option there for them now, which is very positive.”

Irish Life says its Revenue-approved Irish Life Retail Master Trust is now available for such savers. “This allows us to recommence supporting our brokers and advisers in providing company pensions for their customers. All new company pension plans will participate in the Irish Life Retail Master Trust, which means they will meet all the requirements of the IORPII regulations,” a spokeswoman says.

Zurich Life has also brought a new solution to the market, which facilitates this type of business in the Zurich Master Trust.

“The new solution allows employers to make pension contributions at the same levels as previously allowed under one-member arrangements,” a spokeswoman says.

Aviva launched its master trust offering on November 7th, while New Ireland has launched the Navigator Master Trust – Executive, which, it says, “provides a solution to the IORP II governance, compliance and regulatory reporting requirements offering strong and sustainable governance at a lower cost”.

New trusts

The new trusts offer a similar proposal to the old executive-style pension, with the same flexibility for funding, “the most important thing for clients”, says McGovern.

They may differ, however, in that they may not have the same flexibility for savers to invest in different products, as there is a limit as to what master trusts can invest in.

“I think it’s a bit of a shame,” says McGovern.

It does depend, however, on the product. Irish Life, for example, says that you can fund its master trust product to the same levels, and in the same ways, as on its previous pension plans, and you can also access the same range of investment options that were previously available.

However, as Jonathan Sheahan, managing director with Compass Private Wealth, says: “This isn’t a big deal for 99 per cent of individuals,” adding that the new master trusts cannot have any early exit penalties, “which will be welcomed by individuals as it gives freedom to move if needed”.

Another difference is the fee structure. Sometimes advice will not be included in the annual management charge (AMC) and will come as an extra fee.

“Some aren’t as flexible as previously,” says McGovern.

Revamped PRSA

But it’s not just the trust structure that might suit single-member pension savers.

An amendment in the Finance Bill 2022, which is due to be enacted by the end of the year, proposes to make PRSAs more attractive by abolishing the benefit in kind (BIK) charge for employer-related PRSA contributions. This means employer contributions can be funded to the maximum amount.

“Furthermore, the individual member will be able to maximise his or her own personal/AVC [voluntary] contributions right up to the age-based limit, and the employer contribution then is separate. This was a great result,” says Sheehan.

As a result, product providers expect to be delivering PRSAs in the new year to the old executive-pension cohort.

“It would be a viable alternative [if it goes ahead], as it might suit one-member arrangements a bit better,” says McGovern.

A spokeswoman for Standard Life says the changes “will make the PRSA a comparable alternative to an executive pension plan by providing the same benefits, features and investment choice”.

Standard Life says that due to this change, it will be offering this product to customers as an alternative, rather than a master trust structure.

“It is now great to finally have the PRSA and the master trust as two really good solutions for future pension funding needs. As a pensions adviser, we now have the same range of options that we previously had, but I believe that the range of options is now better from the client’s perspective,” says Sheahan.