What is the objective of the regulations?
IORP II was transposed into Irish legislation on 22 April 2021.ts objective is to raise the governance bar for occupational pension schemes - with the aim of providing better outcomes for members.
The Irish Government chose to apply the directive across all occupational pension schemes regardless of scheme size.
As such one person pension schemes will be predominantly treated in the same manner as very large occupational pension schemes.
What are the key aspects of the Directive that will need to be considered?
Beyond the far reaching additional governance requirements (policies, procedures) and appointment of Key Function Holders there are two additional aspects that will need to be addressed by one man pension schemes:
- Investment Considerations - Prudent Person Principle
The regulations introduce the ‘prudent person principle’ to the management of one person pension schemes.
This requires trustees to consider the nature, scale, and complexity of a pension scheme. From an investment perspective it requires the assets of the scheme to be predominantly invested in regulated markets.
For one person pension schemes currently invested in unregulated investments this will require a change in investment approach.
In addition the ability to borrow within the pension scheme will no longer be permitted.
- Member Trustees - Fitness & Probity
The regulations require those that act as a trustee of a pension scheme to be ‘fit and proper’, and have the required experience and professional qualifications to fulfill their role.
For one person schemes this stipulation may require the replacement of member trustees, and appointment of professional trustees.
Where this is to be considered it will be important to understand how this changes the operation of the pension scheme, and how future investment opportunities will be considered, evaluated, and signed off by the professional trustee.
When do the changes apply?
For any one-member arrangement established on or after 22 April 2021 all requirements of the Directive apply from the date of establishment of the scheme.
For existing one person pension schemes a derogation from the new requirements applies until 22 April 2026 - with the exception of investment rules and borrowing restrictions:
An open-ended derogation from the investment rules and borrowing restrictions applies in respect of investments made or borrowings entered into before the 22nd April 2021.
There is no derogation for investments made or borrowings entered into by one member arrangements after 22 April 2026.
The Pensions Authority has released a draft Code of Practice for consultation. It will be followed by a final Code in November 2021.
Further information specifically for new one member arrangements is due to be released in October 2021. This will give further clarity on how the Authority expects schemes to address the new regulatory requirements.
For those who hold one person pension schemes it will be important to consider an impact assessment, with an increase in costs to manage the scheme likely.
With these new requirements, alongside the new restricted investment options, there may be a question mark over what value the one man pension scheme achieves and if it should be retained. If it is retained, it will need to be modified to reflect the new requirements.
With little by way of derogation for one man pension schemes, the new regulations may well be seen as disproportionate and the loss of the additional investment flexibility eliminates one of the more attractive features of these arrangements.
All in all a critical assessment of the ongoing benefit of such a pension arrangement is required.
Five actions to take now
- Understand the impact of the regulatory changes being introduced and who is responsible for taking steps to comply.
- Evaluate whether the current pension scheme remains fit for purpose. This will involve critically assessing whether the benefits of setting up such an arrangement remain.
- Where current pension arrangements are to be maintained, seek support from an adviser to help you plan how to invest pension assets into the future, and address any pre-existing unregulated investments held by the scheme.
- Where current pension arrangements are to be maintained, and professional trustees appointed, seek to understand how this will impact the current operational model of the pension scheme.
- Where it is established that the continuation of the one person pension arrangement is no longer appropriate, seek support to evaluate viable alternatives.
We are here to help you
The introduction of IORP II regulations need to be carefully evaluated by trustees, employers, and impacted individuals.
The requirements are significant and the Pensions Authority will be paying particular attention to one man pension arrangements.
In evaluating suitable options independent advice is required, and our team of experts are here to help.
Contact us today.