The current burning platform for pension schemes is IORP II and how to comply. The policy position is that consolidation in Ireland's defined contribution (DC) scheme market is fundamental to improving the Irish pension system. It is also a goal of the Pensions Authority, which recognises that compliance with IORP II will not be practical or cost-efficient for many existing schemes. Such sponsoring employers and trustees may therefore consider future provision through PRSAs or a Master Trust.
So, what does this mean for 2022?
Big is beautiful?
There is a narrative that 'small' DC schemes will transition to Master Trusts. This is being taken to mean that larger schemes will not, and our first prediction is that this will prove to be incorrect. This is not a pure prediction, as it is based on our current levels of engagement across the pensions market and the increase in interest among organisations as the detail of compliance with IORP II becomes clearer.
It is as much carrot as stick, however. Large DC schemes have significant purchasing power in the Master Trust market, and see value in exploring this route.
There is a complexity in the analysis. A key consideration for large schemes contemplating the Master Trust route is the extent to which they will end up subsidising smaller participants in that Master Trust. Clearly, larger employers that end up subsidising smaller schemes of unconnected employers will limit the extent to which 'best' terms can be achieved.
Developing this further, an issue to consider in any Master Trust selection process is the expected future ability of the Master Trust provider to leverage the scale of assets accumulated within the Master Trust to deliver efficiencies to all participants.
Could supply chains be impacted?
Many small DC schemes will certainly transition to a Master Trust. It will likely be uneconomic and risky for small DC schemes to continue to operate on a stand-alone basis. Indeed, such an approach would be contrary to the expectations of the Pensions Authority and to pension policy in Ireland, which is working towards consolidation.
This will have several effects. One to note is the potential for significant capacity issues to emerge across the Irish pensions industry in 2022. The greater the capacity issues that emerge, the more difficult it will be to secure cost-effective pricing terms for pension savers. We see this in the wider economy at present, where supply chain issues are driving significant cost inflation. The potential for this to arise in the pension administration and advisory market is clear.
In 2021, organisations that got ahead of IORP II compliance issues enjoyed a clear first mover advantage. In 2022, this effect may wane.
How important is cost?
Costs are important. And although value for money is the metric of interest, costs are simply easier to understand.
On costs, and this is not so much a prediction as a statement, cost transparency is coming. Pension costs are on the political and regulatory agenda and this is a one-way journey. The details in terms of the timing of implementation are uncertain, but the direction of travel is very clear. As such, ensuring that a pension scheme has been 'marked to market' will prove helpful as the cost transparency agenda builds momentum. In a number of other jurisdictions, pension schemes are required to disclose whether they provide good value for money, or whether their members could do better elsewhere. So, this is simply a case of 'watch this space'.
Right now, there is a focus on complying with IORP II and managing the cost of compliance. A market has developed around the services required to achieve compliance, but this may not be the extent of the commitment required. A potentially greater burden will be the costs associated with being regulated. The Pensions Authority has stated that it will have a "regulatory relationship" with each pension scheme; the implications of this must be considered.
What does being regulated look like?
If we extrapolate from the Pensions Authority's 2021 engagement programme, being regulated will involve an examination of the processes, policies and practices in place around risk management, financial controls, measuring and managing KPIs, investment, identification and management of conflict of interests, and the enhanced governance and risk management requirements under IORP II legislation.
In future, the supervision of pensions by the Pensions Authority will be more intrusive, more qualitative and more demanding. This is not a prediction; we know this to be true.
Is 2022 the start or end of the change?
Changes in 2022 are part of a much wider series of pension changes. Future-proofing will have a real value, and making decisions today that will endure over time will be important.
The coming years will see auto-enrolment, which will bring additional complexity around the pension taxation regime; implementation of further recommendations of the Interdepartmental Pensions Reform and Taxation Group; and adjustments to the State Retirement Pension age, with implications for retirement ages and patterns in the wider economy.
All this will occur against a backdrop of greater pension regulatory activity.
Four key actions organisations should consider
- Challenge your assumptions: the time for action on IORP II is upon us. Conduct appropriate analysis of the options available and consider the findings.
- Be proactive: capacity issues have the potential to arise across the pension market in 2022, and this should be factored into timelines. Proactivity will be rewarded.
- Assess your appetite for pension regulation: the regulatory environment will change, which will require significant additional commitment from employers. This appetite should be factored into the approach to pension provision.
- Be forward-looking: 2022 marks the beginning of a period of significant change. Ensure that your actions this year are future-proofed.
We are here to help you
2022 will be a period of change in the Irish pension market. Decisions made this year will have an impact for many years into the future, and independent support throughout this period will be key. We are ready to help you as you face the future. Contact us today.
