No Match Found
As implementation of IORP II draws near, we are seeing many more collaborative discussions with employers on the impact IORP II has for them as sponsor and this is causing many to rethink their pension strategy.
The Pensions Authority has been clear that the IORP II Directive is a watershed moment for Irish pensions. They describe it as “the most significant changes in at least a generation”.
The Authority has recruited a significant number of staff to implement risk-based supervision of occupational pension schemes. A mandate from the Directive, the Pensions Authority notes that for many schemes “the burden and cost of compliance will be too high”.
The Pensions Authority’s statement that “there can be no doubt that significant change is coming to Irish pensions, and the nature and direction of that change is clear. The Authority is well advanced in preparing for these changes” should leave no doubt as to their intent.
A late 2020 Pensions Authority survey noted that 43% of DC schemes had not discussed the potential effects of IORP II with the employer. However, 2021 is seeing a change in tempo.
There is clearly detailed consideration needed around the additional time, effort and cost that will be needed to comply with the new regulations.
Almost a third of DC schemes surveyed by the Pensions Authority said they would maintain the scheme in its current form and comply with the new regulations whilst 57% were undecided (or not yet considered) as to the future for their DC scheme.
So why is there such a disparate view between the Pensions Authority and the actions of pension schemes and how might things evolve?
The Pensions Authority suggests that there are still many schemes and employers who are unaware of the detail of IORP II and the implications it will have for their schemes. It may well be the case that the real costs and risks associated with compliance are underestimated at the current time given the evidence that many are taking a “wait and see” approach. The implementation date being missed by over 2 years has inevitably led to a level of inertia.
In addition, the detail on certain requirements of IORP II remains unclear - for example, the role of the Internal Audit Key Function Holder. Regulatory expectations on these aspects will be important.
This is a key point. Up to now the pension regulatory environment has been backward looking and compliance based - in effect, a “tick box” approach. This is changing, and this has been communicated by the Pensions Authority, however this message is slower to permeate the marketplace.
There are risks to operating a standalone DC scheme - one risk that has been communicated is that all existing pension schemes will be required to apply for authorisation, and to demonstrate that they are meeting the required regulatory requirements. Failure to do so could mean that tax relief is withdrawn.
We can also look to the UK to see what might be ahead. From October, UK Trustees of schemes with under £100m of assets under management will have to provide a holistic assessment of how their scheme delivers value for members. This assessment should consider:
Where the first two should be tested relative to three other schemes and the latter is on an absolute basis. Regulation of this nature would clearly be very challenging.
The Pensions Authority has identified that in the future their “role will be to examine the approach trustees are taking to their responsibilities” and “whether the trustees’ management and governance of the scheme pose a risk to the future interests of scheme members and beneficiaries”.
One possible outcome is that schemes comply and incur the upfront and ongoing additional risks and costs that this will involve. This route is likely to bring significant additional costs. It would also mean greater time and effort being spent on compliance and regulation, taking focus away from the job of delivering a best in class pension experience.
For employers, they need to be core to the decision making on IORP II transposition and there is a real risk of a gap in expectations between Trustees and employers if they are not involved. With many Trustees now looking at the gaps their schemes have with IORP II and putting in plans to mitigate these it is important that employers take stock and understand the potential impact of IORP II.
The other outcome is that there is the potential for a strain in capacity to emerge in the pension industry. It is well flagged that Ireland has far too many pension arrangements (50% of the European total with 1% of the population) and the ability of the marketplace to work through the consolidation required is uncertain. While a transition period will be allowed, this needs to be balanced against the sheer volume of employers in the position where a review of their arrangements will be required. Taking action now around your pension arrangements is likely to pay dividends.
Depending on the detail of the regulations and possible outcomes, you may well see the current disparate views of the Pensions Authority and schemes either diverging further or converging over the next 12-18 months.
Employers should not rest on their laurels and leave decision making to their Trustees. They should start to consider the following in anticipation of the new regulations under IORP II being introduced:
A simple inventory of pension arrangements in place, all parties involved (Trustees, advisors, administrators, investment managers) and the costs associated with each component will help define your baseline.
An analysis of the new requirements and what they are likely to mean for the existing arrangements (both defined benefit and defined contribution schemes) in terms of additional time and resource, cost and risk.
Once this analysis has been carried out, it will allow employers to identify where synergies may be possible (e.g. consolidation of multiple pension schemes; restructuring Trustee Boards and/or providers) or where a Master Trust may provide a more suitable alternative to the existing defined contribution scheme.
Once the alternative options are identified, employers can develop a cost benefit analysis which will help them to make an informed decision on the most suitable options based on their core objectives and to ensure the sustainability of its pension arrangements.
This thorough analysis will support the business case for any proposed changes and help in the communication with Trustees and pension scheme members as employers move to implement any changes.
The introduction of IORP II regulations is imminent. We realise that many Trustees and employers of pension schemes remain uncertain on the best path to follow. It will be a challenging environment when the regulations are implemented but employers can plan now and be prepared for the changing pension landscape. Our Pensions team can support employers on this journey. Contact us today.