2022 was a key year for Irish pensions. Developments include reforms to the State pension system, Government approval of the auto-enrolment design, IORP II regulatory changes, the evolution of master trusts, the cessation of new one member arrangements (OMAs), amendments to personal retirement savings accounts (PRSAs) and regulations for a Pan-European Personal Pension (PEPP). Inflation also took hold, which caused central banks to respond with a series of interest rate increases. This has implications for how pension schemes operate. In this update, we reflect on 2022 and outline the important pension considerations for employers in 2023.
2022—the start of change
The State Pension Commission report, the EU IORP II Directive and the Government’s commitment to introduce a pensions auto-enrolment system marked the start of 2022. The overarching objectives from the Government include ensuring the sustainability of the State pension, increasing workplace pensions coverage and the consolidation of pension schemes.
State pension reform
A new flexible State pension system will be introduced from January 2024. The State pension age will remain at 66, but people will have the option to defer drawing a benefit until age 70 in return for a higher amount. A “total contributions approach” will be introduced to determine the levels of State pension payable and social insurance rates will increase incrementally.
Legislation will be introduced to allow workers to work until they reach the State pension age. This change is significant as it will introduce legislation around employers’ ability to enforce a retirement age—a point that has been the subject of increasing levels of challenge in recent years.
IORP II deadline approaches
All trust-based occupational pension schemes have until the end of 2022 to become compliant with IORP II regulations. Many schemes have sought to implement the necessary policies and procedures, consider the implications for existing trustees and appoint risk and internal audit key function holders.
For those who still have progress to make, there are two options. First, commit to transition to a master trust or PRSA and wind-up the existing scheme. Second, remedy IORP II compliance as soon as possible—but with a limited supply of suitably qualified/professional trustees and key function holders, this is becoming increasingly difficult.
Master trusts emerge
A master trust is a single trust-based pension scheme established for multiple and unconnected employers. They have been growing in the market with 12 master trusts now in operation in Ireland. Master trusts are progressing rapidly towards €10 billion in assets under management and have become the pension vehicle of choice for many employers. This trend will continue in the coming years.
Employers with up to €600m in assets under management are choosing to transition to a master trust on the basis that they see an opportunity to direct their cost and governance budget more effectively via a master trust structure. A master trust frees valuable company time to focus on the impact of the pension scheme on employees rather than onerous compliance requirements.
Master trusts had an IORP II compliance deadline of 1 July 2022 and the Pensions Authority acknowledged that all master trusts complied with the core requirements of the regulations and the Code of Practice by this date. This is important given the systemic importance of master trusts to the future of occupational pensions in Ireland.
One member arrangements
In June 2022, the Pensions Authority released a statement highlighting its concerns with regard to the compliance of OMAs set up after 21 April 2021. As a result of this statement, providers discontinued the establishment of OMAs. This created challenges in the market with no viable alternatives for OMAs in the short-term. The recent amendments to PRSAs as part of the Finance Bill now present an alternative product for OMAs and, in addition, providers have established and launched retail master trusts that will accommodate OMAs established after 21 April 2021 and any subsequent new requests. Existing OMAs set up from 21 April 2021 will need to be revisited and consideration given to the PRSA or retail master trust options in the market.
The key lesson was the potential for onerous legislation to drive behaviour change—overnight, a key pension product was effectively withdrawn from the market. As the Pensions Authority engages with pension schemes on IORP II compliance in 2023 and beyond, this lesson may well be revisited.
Changing economic conditions
Since the start of 2022, rising inflation expectations have triggered a change in the interest rate cycle and in turn, created volatile stock market conditions. These changing economic conditions have an impact on pension schemes and their members.
For defined benefit schemes, rising bond yields impact positively on a pension scheme’s funding position. This in turn creates opportunities for pension schemes to de-risk, whether through investment allocation changes or the transfer of liabilities to third parties.
For defined contribution schemes, rising bond yields have increased the income offered by annuities, which is a step change when compared to the previous decade. Against this, the volatility in investment markets requires attention and careful management and communication to ensure that the long-term nature of pension savings is appropriately understood and that there is no over-reaction to shorter term periods of volatility.
The four key themes for 2023
So, is 2022 the beginning or end of a period of change? And what can we expect in 2023? In our view, 2023 can be summarised in four broad themes:
- Regulatory scrutiny
- Further consolidation
- Auto-enrolment impact
- Continued economic uncertainty
Regulatory scrutiny
The Pensions Authority demonstrated in 2022 that it will scrutinise regulatory compliance very closely. OMAs and master trusts were in the spotlight in 2022 but for those defined benefit and defined contribution schemes that remain on a standalone basis, there is an expectation that the Pensions Authority will become more intrusive with regard to how the schemes are being managed.
Further consolidation
With some 75,000 defined contribution schemes in Ireland (of which roughly 66,000 are OMAs), there is some distance yet to travel to achieve the Pension Authority’s objective of 100-200 defined contribution schemes and 10-15 master trusts by 2027. Many employers have determined, or will determine, to move to a master trust by the end of 2022—either that of their current pension provider or an alternative.
2023 will see master trusts confirm their position as the key vehicle for defined contribution pension provision in Ireland. There will be value for employers in seeking an independent assessment of the benefit (or otherwise) of using a master trust structure and which of the range of master trust propositions in the market might best suit their needs and those of their employees.
Auto-enrolment impact
On the back of reshaping how pensions are managed in organisations, either on a standalone basis or through a PRSA/master trust, the implications of auto-enrolment will need to be considered. For those employers whose employees automatically jaoin the pension scheme, this should create minimal headaches. For those where not everyone joins the pension scheme, a change may be required to eligibility or those impacted will need to be integrated with the auto-enrolment system, which will create additional administrative and cost burdens.
Continued economic uncertainty
Economic growth may contract and possibly lead to recession. Interest rates and inflation may also take some time to return to more sustainable levels. For those operating defined benefit schemes, there may be opportunities to reconsider asset strategies or go even further to consider end-game solutions. And for those managing defined contribution schemes, the appropriateness of the investments in place (and in particular, the default strategy) should be reviewed. This is critically important in the context of those schemes moving to a master trust in 2023.
We are here to help you
2022 has seen a level of activity in the pensions industry not seen in a generation. The next few years promise to bring even more change but in the words of Socrates, “The secret of change is to focus all of your energy not on fighting the old, but on building the new”. If you would like to discuss any of the above with us and get an impartial market perspective on the changes, please get in touch.
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