Companies have been given another year to finalise key governance reforms of their occupational pension arrangements.
Having held firm to a strict deadline over recent months on the implementation of pension reforms under EU legislation known as IORP II, which significantly increases the governance requirements on company pension schemes, the regulator — the Pensions Authority — has now moved eight weeks ahead of the deadline to offer some relief.
Pension industry sources had been warning for months that there was not enough capacity in the sector to transfer all the companies that should do so into new master trust arrangements.
Under a master trust, the trust manages multiple pension schemes, spreading and therefore reducing the cost of compliance to individual schemes. Twelve master trusts have been registered with the regulator.
Though noting that occupational pension schemes must meet the new rules from January 1st next, the Pensions Authority added: “However, if a formal commitment is made before January 1st to wind-up a group pension scheme and transfer the assets of the scheme to a master trust or to PRSAs, trustees will not be required to meet the new IORP II requirements provided that the transfer will be completed, and the scheme wound up, by the end of 2023.”
It said such a “formal commitment” would involve either a written instruction from the employer to their pension scheme trustees to wind up their current pension arrangement or notification by the trustee to the scheme members of their intention to wind up the scheme. That effectively gives companies another 12 months to finalise their new pension arrangements.
Ray McKenna, a partner at employee benefit and pension specialists Lockton welcomed the announcement “which acknowledges the massive challenge employers are facing and the capacity constraints that exist in the industry. This will allow employers make better decisions regarding future pension provision for their employees.”
He argued that forcing companies over the line at a time when they are already contending with a difficult business environment, rising costs and labour shortages, would only lead to “suboptimal” decisions being made.
“Employers seeking independent advice can struggle as many pension advisers are also master trust providers or closely related to the master trust provider. There’s been much focus on ensuring people are getting advice yet less focus on having safeguards around the independence of advisers and product providers.
Non-compliant schemes
Mr McKenna warned that any scheme missing the new deadline runs the risk of prosecution by the regulator. In extremis, he noted, members of non-compliant schemes could lose the very valuable tax relief available on pension savings.
“This would be a very serious sanction as employees’ contributions to the scheme would no longer qualify for any tax relief and any drawdowns from the pension would not qualify for tax-free lump sums. Additionally, investment growth would no longer be tax free within the scheme and would be liable to tax,” he said.
The regulator has stated previously that it considers significant consolidation of Irish pension schemes as the “only practical means of achieving high standards of management, good value for money and effective supervision”.
But it has warned advisers, trustees and the new master trusts that compliance is “not just a matter of putting in place new processes and more formal governance practices, important though such changes are”.
“The objective of these actions is to make sure that the management of the scheme is informed, thoughtful and thorough. Trustees should at all times bear in mind their members’ interests and abide by the spirit as well as the letter of the new legislation,” it stated in its 2021 annual report.
The regulator said they would be monitoring the State’s company pension schemes from January to ensure they were operating within the new discretion. The Pensions Authority’s annual report for last year said there were more than 85,000 defined contribution pension schemes in Ireland.
Trustees are obliged to notify the regulator of a decision to wind up a pension scheme within 12 weeks of such a decision being made.
