The long-awaited publication of the IORP II legislation arrived on 27th April, 5 days after Minister for Social Protection, Heather Humphreys, T.D., signed document into Irish law. The new legislation will apply to all occupational schemes and trust Retirement Annuity Contracts (RACs), including one-member arrangements which previously benefited from a derogation under IORP I. It is important to note that this legislation only applies to occupational pension schemes and AVCs. A(M)RFs, Buy-Out-Bonds, PRSAs and PRSA AVC’s are unaffected.
Although the E.U. Directive on the activities and supervision of institutions for occupational retirement provision (IORP II) has been written primarily with group pension arrangements in mind, Minister Humphrey’s decision not to avail of the single member scheme derogation, as the Government did with IORP I, means that these rules now apply to schemes where they seem inappropriate.
The new rules affect single member schemes in two ways:
- New governance and reporting requirements
- New investment rules
Existing single member schemes have received a 5-year derogation from some of the new rules, but some important investment restrictions will kick in immediately. From the 27th of April, unregulated investments are now capped at 50% of the value of each individual occupational scheme. This means that a maximum of 50% can be invested in property. Furthermore, borrowing in an occupational scheme is no longer permitted. It is also important to note the restrictions limiting investment in property includes a look through to any property element in a managed or multi-asset fund. This last rule will make life quite difficult for pension providers.
There are also more general requirements placed on trustees. Trustees must now invest the assets in such a manner that the resources are properly diversified. This is to avoid excessive reliance on any particular asset, issuer, or group of undertakings and to avoid accumulations of risk in the portfolio as a whole. If assets from the same issuer are chosen, the trustees must invest in such a manner that shall not expose the scheme to excessive risk concentration. Environmental, Social and Governance (ESG) issues must also be considered when making investments. Schemes can invest in multiple investment types, but they must be properly diversified.
While the key tenets of these investment rules make a lot of sense, their application to single-member schemes is puzzling. During the financial crisis of 2008 a lot of pension funds were heavily impacted by investment losses. However, anecdotal evidence would say that an over-exposure to Irish banks was of far more concern than an over-exposure to ungeared property or unregulated investments. Furthermore, from a domestic investment point of view, restricting the ability of single member occupational pension schemes to invest in domestic property and domestic businesses, may direct investors’ attention to foreign economies rather than our own.
Now, having considered the generalities of the legislation, let us look at the specifics of IORP II on pension investors who have single member occupational pension schemes. Firstly, some good news. All existing investments are exempt from these rules. This means that someone who holds unregulated assets or a property in their occupational pension has no immediate concerns. On the bad news front, pension investors who had investments in train but were not far enough through the process will have to change course. For example, if an investor placed a booking deposit on a property on the 28th of April having been in negotiations to purchase the property for the previous three months, it is very likely that this investment will be deemed as a new investment and will fall foul of the IORP II requirements. Should investors be determined to proceed with the purchase they will have to transfer their pension funds into a PRSA or a Buy Out Bond before closing the deal.
There are further complications for investors in unregulated assets that account for more than 50% of the occupational schemes’ value. For instance, if an unregulated investment contains a roll-over option which a pension investor wishes to avail of this will not be possible for the investor to avail of it as it will be deemed as a new investment. In this scenario the investor has two options:
- Choose an alternative investment
- Close down the occupational pension scheme and move it to another pension arrangement that does not have the same rules attached.
Neither of these options will sit well with many investors.
While I am on the subject of unregulated investments it may be helpful to clarify the difference between regulated and unregulated. For the purpose of the IORP Directive, only cash and securities which are traded on the main Exchange are considered regulated. In addition to this investment in a collective investment, investment in an insurance policy (subject to certain criteria) and investment in bonds issued by the government of any Member State are also allowable. Unregulated investments is everything else. It is hoped that more clarification around these rules will be forthcoming from the Pensions Authority in the coming days.
You may have noticed that I have glossed over the new reporting and governance requirements for new occupational pension schemes. There is a good reason for that, at the time of writing this article these new requirements require clarification from the Pensions Authority on how they are to be put into practice. Indeed, there is even confusion in the industry as to whether the rules will apply to newly established occupational pension schemes or if they will have a grace period or a 5-year derogation along with existing schemes. The Pensions Authority are due to provide more detail on the new rules in the week commencing 10th May and hopefully we will have more clarity then.
In summary these new rules, while not without merit, will not sit well with pension investors. I suspect in most cases it will prove to just create a heavy administration burden as assets move to other pension arrangements not effected by the legislation.
Author: Eoin Hassett, Independent Trustee Company. For further information, please talk to your Financial Advisor or email email@example.com