The slow march that has been the implementation of the IORP directive in Ireland has been the subject of many a recent webinar and article – indeed with a number here in the FM Report. The Pensions Authority recently published the Codes of Practice for Trustees, which is to complement the primary text of the directive and can perhaps be seen as a ‘playbook’ for practitioners in the industry. The bar in terms of trustee requirements and obligations is certainly being raised and the industry looks set to continue the inexorable shift towards Master Trusts or a Group PRSA arrangement, as the landscape for smaller schemes and one-man arrangements continues to be eroded by increasing scheme regulatory complexity and cost. The purpose of this piece is to look at some of the investment related points in the draft codes and hopefully provide some further insight into the implications of the information included in Chapter 4 of the Codes. Ultimately the Codes of Practice for Trustees aims to put a greater focus on the standards of pensions management. The full impact remains to be seen but here are some of the actions you can begin to implement now to demonstrate compliance.
Improve record retention
One point that is clear, is that going forward there will be a requirement for a lot more record keeping in relation to investment selection, governance, and ongoing oversight. Much of the work in this area is already being done, but perhaps not to the level of formality indicated by the new Codes of Practice for Trustees. A common theme evident throughout the consultation period was the concerns surrounding proportionality and the risk of duplication. This is also true in respect to investments with the new ‘Statement of Investment Governance’ a clear example. Just to note, this does not replace the existing Statement of Investment Policy Principles (SIPP) and is a distinct and separate requirement.
Included in new ‘Statement of Investment Governance’ will be items such as:
- Investment objectives
- Number of fund choices
- Risk tolerance applicable to each choice
- Consideration given to ESG factors
Whilst the ESG consideration under IORP II, is distinct to any classification under SFDR, it would certainly be prudent to consider both aspects simultaneously.
Regular reviews and potential pitfalls
One interesting aspect is the concept of investment manager review frequency, including ‘under what circumstances would they be subjected to an immediate review’. I think it will be important that such guidelines don’t leave trustees susceptible to a knee jerk reaction as a result of market shocks. The history of investment markets is littered with examples of when doing nothing was a perfectly acceptable, and indeed preferable, course of action.
The potential for increased duplication
The concept of potential duplication rears its head once again under the heading of ‘investment contracts’ which appears to cover many of the same topics in the aforementioned Statement of Investment Governance. Viewed through the lens of an insured arrangement it could be argued that much of the requirements in this particular piece are already covered by existing contractual and trusteeship instruments.
Selecting an appropriate benchmark
The concept of benchmarking is mentioned a number of times in the codes and is also directly addressed in the Pension Authority’s response to the consultation submissions. Several submissions recommended the concept of peer group averages and reference benchmarks as opposed to absolute quantitative risk and return metrics. The Authority notes that such an approach ‘creates the risk of encouraging herd behaviour’. Again, this seems like a logical approach for larger schemes with economies of scale and significant in-house expertise. For those of a smaller scale, comparing the chosen investment fund with the direct alternatives available in the marketplace would appear to be a much more practical, and indeed logical approach. It remains to be seen how trustees will implement some of the proposals in respect to performance evaluation. The idea of assigning expected return values to funds and asset classes on an ‘ex-ante’ basis is open to justified criticism.
Establishing an Investment Committee
We have spoken on these pages previously in relation to the concept of an Investment Committee and some of the regulatory ‘push’ the industry is experiencing is creating these in all but name. In terms of next steps, it is prudent for all advisors and trustees to familiarise themselves with the codes in their entirety. Overall, there are potentially at least a dozen new policies or statements to be constructed across all the main areas and the initial work for trustees and advisors will be significant.
Whilst the codes are indeed prescriptive, the Pensions Authority do note that they are looking to implement a minimum standard for the processes in which decisions are made, but not necessarily appraise the decisions themselves. I think this remains an important point for trustees and ultimately their advisors. ‘Paralysis by analysis’ is not the aim here, and it should not be the outcome. Trustees and advisors who have always made good decisions, within a good governance framework will continue to do so.
Principles and Practicalities
The practical implications of the codes of practice will become more apparent in the coming weeks and months, and there is sure to be some unintended consequences for advisors, trustees, and ultimately scheme members. However, at the very least it should serve as a ‘call to action’ in the marketplace with a significant amount of work and resources needed in order for pension schemes and their trustees to fully comply.
Author: Ian Slattery is an Investment Consultant with Zurich Life. Information about investing with Zurich can be found at https://www.zurich.ie/savings-and-investments/
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