There has been a lot of talk in the industry about the IORP (Institutions for Occupational Retirement Provision) II Directive.
In the following paragraphs I’m going to try to put in broad terms (and in in plain English) what IORP II is, why it is coming about, what some of the fundamental issues around it are from an Irish perspective and why it has culminated in High Court legal proceedings.
Strap yourself in folks, it’s about to get rather technical!
What is IORP II?
The first IORP Directive came in to effect in March 2005. The rationale behind the first IORP Directive was to enable cross border pension schemes (i.e. a company with employees in multiple jurisdictions around the EU would be able to have one centralised pension scheme and facilitate pensions for all staff regardless of their / its geographical location) by harmonising pension scheme rules around Europe.
At the time of IORP I, the then Minister for Social Welfare, the late Seamus Brennan decided that ‘one-member pension schemes’ would be granted a derogation (exemption) permitted by IORP I that disapplied some of the more onerous compliance burdens on schemes with fewer than 100 members – and most obligations applying to single member schemes. The Social Welfare and Pensions Act 2005 provided a legal definition of a one member pension scheme to cement the use of the derogation.
It should be noted that Ireland fought for, at an EU level, and got this derogation inserted in the first IORP Directive due to the nature of pension scheme landscape in Ireland, it’s worth noting this same derogation is contained in IORP II and the Directive specifically confirms a ‘one size fits all’ isn’t appropriate for its implementation.
Why is IORP II being implemented?
Well it appears, from my research, that IORP I didn’t really work in the sense that the harmonisation idea didn’t really filter through as much as was expected and there wasn’t as much cross border pension establishment and migration as had been hoped. So IORP II was introduced to encourage more cross-border schemes by harmonising pension scheme investment rules on an EU member state basis, simple example – you can acquire residential property in an Irish occupational pension scheme but you can’t in a UK one. Therefore, whereas the concept of cross-border schemes works well on paper, on a drill down basis, it becomes an issue where investment rules etc. are different in different jurisdictions.
Some real problems from an Irish perspective
The Irish pension landscape is quite unique from a European perspective as we have significantly more single-member pension schemes than larger multi-member pension schemes.
IORP II Directive has multiple articles, 66 in total, and it is worth noting that it was drafted to apply to multiple member pension schemes – a brief reading of the Directive and the explanatory document makes this clear.
This cause an issue as there are some significant aspects of the Directive that provide no benefit to smaller scheme, particularly one-member schemes, and will only cause an unnecessary cost burden for them.
What has been highlighted in the industry is the significant restriction on investment, limiting investment in unregulated investments (e.g. property) to less than 50% of the assets of a scheme, abolishing the right to borrow save for short term liquidity purposes, the requirement for a custodian, actuarial and audit requirements and technical provisions such areas as solvency requirements, biometric risks etc.
When dealing with a scheme with multiple members, the above requirements cannot really be challenged as they benefit the scheme members as a whole, from a prudential standpoint, and the additional costs of these measures will be spread across the members and as such the cost per member should be relatively insignificant.
However, having said that, there is little or no benefit of the Directive being implemented to single member pension schemes. Single member schemes have, by their very legal definition, only one member, and thus arguably cannot be an ‘IORP’ as they cannot facilitate multi-membership in multiple jurisdictions, nor do any of the above requirements actually benefit to any degree a DC pension scheme with only one member.
It has been estimated that the additional costs to existing single member pension schemes will ultimately make them unviable, with the estimated cost of maintaining a single member pension scheme being almost certain to increase by 250% – 300% per annum.
So what you may say, that this is about protecting consumers. Well what doesn’t seem to have been factored into the equation is the impact this will have on an essential source of domestic funding in Ireland – especially the funding of SMEs. Funding from self-administered pension schemes in the Irish economy will be lost – not just in residential and commercial property but also in the likes of;
- private equity investment in indigenous Irish companies – existing and start-up,
- Primary Care Centres (PCCs),
- the hotel industry,
- social housing,
- eco-energy industry – wind & bio-mass, the nursing home industry.
A part reason for the implementation of IORP II is to harmonise pension investment in the EU with the goals of the EU Capital Markets Union (CMU), to invest in infrastructure projects and to reduce the reliance on the banking sector in the event of another global crash by creating a source of finance from domestic pension schemes.
Unfortunately the implementation of the IORP II Directive on single-member pension schemes will have the opposite effect due to their funds being corralled by regulatory authorities into highly regulated financial products. Properties within schemes will be sold, tenants displaced, funds disinvested, potentially reduced returns for investors by restriction of investment etc., and future sources of the finance no longer being available to Irish indigenous industry / projects.
Don’t even get me started on the practical aspects of managing a scheme under the provisions of IORP II.
The impending High Court case
So why is there a court case coming down the tracks?
Well we did try to explain the negative implications of implementing the Directive on one-member schemes to the Department of Employment Affairs and Social Protection (DEASP) but they appeared unmoved by our points. Maybe they were more focused on introducing Public Service Cards than listening to us…….
To protect the interests of single-member pension schemes we made an application for a Judicial Review of the decision made by DEASP. Broadly speaking there is a process that is required when implementing an EU Directive and we feel strongly that the process wasn’t followed, and had it been adhered to, the decision would have been different.
The date for the hearing is the 15th October coming so you may be hearing from me again soon.
Author: Paul Murray is a Director at Quest Capital Trustees, www.qct.ie, 9 Fitzwilliam Square, Dublin 2