The clock is ticking on one of the biggest shake-ups to hit company pension plans in decades. On January 1st, new EU rules around the governance of pension plans kick in.
The rules, which are part of the IORP II Directive, seek to boost the governance of company pension plans. While this is largely a positive development for the workers saving into those plans, for the employers sponsoring them, and the trustees appointed to them, the new rules mean extra costs, more onerous regulatory requirements and potential penalties if the full regulations are not adopted.
Although the new rules will operate from January 1st, some much-needed breathing space – which gives employers until the end of 2023 to fully comply – was recently granted by the Irish pension regulator. The Pensions Authority essentially acknowledged the big challenge facing employers in the implementation of the new requirements.
It said that as long as a formal commitment is made before January 1st to wind up any existing group pension plan and transfer the assets of the plan to a master trust, then the existing plan will not be required to meet the new IORP II rules. There is one further requirement: the transfer to a master trust must be completed, and the existing plan wound up, by the end of 2023.
Alternatively, employers could consider the establishment of a Personal Retirement Savings Account (PRSA) which are undergoing some changes under the current Finance Act to bring them more in line with other company pension plans.
Most employers will, at least, consider the option of a master trust for the future as they will provide an efficient and sustainable vehicle for employee pension provision. A master trust is essentially a defined contribution company pension plan which is set up under trust – where multiple employers all coexist under the one trust deed.
Whilst some employers may opt to comply with the IORP's requirements themselves in the short term, it is probable that these vehicles will become one of the main sources for pension provision in time, particularly as the regulator itself has a stated ambition to bring the number of group pension plans to under 200.
Despite plans having until 2024 to fully comply, it is crucial that companies don’t take the end of 2023 as the new deadline for meeting their obligations as the wind-up of an existing plan and the transfer to a master trust will take time.
The extension should also allow employers to carefully consider an appropriate approach and take much-needed impartial advice.
The new rules for company pensions come at a time when company directors and executives are under increasing pressure to execute their responsibilities to the highest possible standards when it comes to corporate governance and delivering for consumers and/or employees.
The Central Bank (Individual Accountability Framework) Bill, which is expected to be enacted later next year, is the latest legislative or regulatory tool that will enforce meaningful change and result in higher standards across many firms.
Some 89 per cent of firms that took part in the recent Compliance Institute/Mazars survey said the introduction of the senior executive accountability regime would “bring about meaningful change” in the culture and behaviour of financial firms.
With this backdrop of increasing accountability, it’s a worry that many employers are signing up to a master trust provided by, or connected to, their advice without first assessing whether it is the best value or most appropriate for their employees. Not shopping around or not seeking impartial advice could come back to bite the decision-makers in the future.
The consequence of all of this for most employers is that they must now decide to either make changes to the trusteeship structures and governance, including the appointment of a professional trustee and a number of key function holders – or move to a master trust.
While a master trust may be the straightforward option, employers need to carefully consider their options and, if moving to a master trust take time to evaluate the 12 different master trust providers.
This is made somewhat more complex as the majority of advisers in the marketplace are also master trust providers and are actively promoting their own master trusts. There is clearly a potential for conflict in this scenario. Employers and independent trustees need to be aware of this and ideally look for impartial advice on future strategy and work with advisers who do not provide their own master trusts.
If a move to a master trust is the preferred course of action, the existing plan will need to be wound up once a master trust provider has been selected. This will take time and require significant engagement with pension plan members so that they are appropriately advised.
There is also the potential of pension auto-enrolment in 2024 which would require employers and employees (from the age of 23 and with earnings of more than €20,000) not already in a pension to contribute to a pension plan. Matching contributions from companies and employees starting at 1.5 per cent of salary and rising to 6 per cent of salary over 10 years may come into effect in 2024.
Through these complex issues, advice is critical to ensure impartiality, a sustainable long-term pension arrangement and that the interests of pension members are best served.
While good and improved governance is to be welcomed, the focus of the regulator should also be on how employers and trustees are advised through these decisions, as suboptimal decisions will negatively impact members’ retirement incomes and could come back to haunt the decision-makers in years to come.
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