The new Cost Transparency Standard plus SFT and AE news

Introducing the IAPF Cost Transparency Standard

Earlier this year, the Irish Association of Pension Funds (IAPF) launched the Cost Transparency Standard (CTS) in Ireland, with support from the Department of Social Protection (DSP). 

The CTS is a voluntary framework designed to bring employers, trustees and pension scheme members greater clarity and transparency around the full range of costs involved in managing pension schemes. This includes investment management fees, transaction costs, and administrative expenses.

Pension scheme trustees are responsible for ensuring positive outcomes for their members and beneficiaries. Given the significant impact of scheme costs on these outcomes, trustees must be fully aware of the expenses their pension scheme incurs and be able to justify the value received for these costs.

Defined benefit vs defined contribution

The impact of investment costs can differ significantly between defined benefit (DB) and defined contribution (DC) plans. A significant feature of DB schemes is that the investment risk and management costs fall on the employer, not the employee. This structure largely shields members from the direct impact of investment costs. Their benefits are predetermined, regardless of how the underlying investments perform.

In contrast, while DC scheme contributions are fixed, the benefits are not. Members of DC schemes are directly affected by investment costs, which can diminish the value of their pension savings over time, though such costs represent only a fraction of overall costs. 

Standardising cost reporting

The Pensions Authority expects asset owners to participate in the CTS. It will monitor participation closely and, if necessary, introduce formal legislation to mandate it. 

Asset managers of pension funds involved in the CTS programme will need to complete templates for each mandate they handle. This approach ensures a consistent and standardised method of cost reporting. 

To support the introduction and implementation of the CTS, the IAPF is collaborating with ClearGlass, which has developed templates and will process the data and present the results to the schemes. Schemes are free, however, to use other methods or providers to analyse their costs.

Limited impact?

It will be interesting to see how this develops. Our sense is the impact will be limited. DB pension scheme trustees may see some value in this analysis. For DC trustees, however, focusing on investment costs only may not offer the insights needed around costs and value for money.

The Pensions Council recommendations in 2022 (see pages 8-9 of its Report on Cost Transparency) are arguably far closer to what would be required to bring cost transparency to defined contribution arrangements. 

Key updates from the recent examination of the Standard Fund Threshold

On 18 September, Minister for Finance Jack Chambers published the report of the independent examination of the Standard Fund Threshold (SFT). The SFT represents the maximum limit on the total capital value of tax-relieved pension benefits an individual can draw down in their lifetime from all of their pension arrangements. 

Minister Chambers has already approved some recommendations from this report, and is considering others.

Approved recommendations:

1. Phased increase in SFT

The SFT will increase from its current level of €2 million to €2.8 million by 2029, with annual increments of €200,000 starting in 2026.

2. Indexing the SFT

From 2030, the SFT will be indexed in line with earnings to ensure it remains relevant to economic conditions.

3. Revised cash lump sum limit

The current 25% cash lump sum link to the SFT will be broken as part of Budget 2025. Instead, the lump sum will be limited to 25% of the pension fund, subject to a €500,000 cap. Any amount above this will be subject to marginal rate tax, USC and PRSI.

Recommendations under consideration:

1. Review of chargeable excess tax (CET)

By 2030, the current CET of 40% will be reviewed, with a recommendation to reduce it so the effective tax rate on benefits exceeding the SFT is not less than the maximum marginal tax rate. The report suggests a rate as low as 10%.

2. Valuation factors for defined benefit pensions

The valuation factors used to value defined benefit pensions for periods after 1 January 2014 will be reviewed. The recommended factors, if implemented, would significantly reduce the value of defined benefit pensions, allowing for higher defined benefit accruals within the SFT regime.

3. Removal of age and earnings limits

The report suggests removing the Revenue age and earnings limits for employee/self-employed pension contributions.

Next steps for employers

Effective communication with employees about the changes to the SFT is crucial. Key points to communicate include:

Overview of changes

For individuals who may be affected, explain the phased increase in the SFT, the new indexing method starting in 2030. Highlight how these changes may impact their pension planning considerations.

Impact on pension benefits

Provide examples of how the changes might affect different scenarios. This helps employees understand the practical implications for their own pension planning.

Timeline of changes

Outline the timeline for the changes, including when the phased increases will occur.

Tax implications

Explain the tax implications of the new lump sum limits and any potential changes to the chargeable excess tax (CET). Ensure employees understand how these changes might affect their retirement income.

We’ve prepared a sample Q&A document that addresses some of the questions employees may raise. If you’d like a copy, or need further help, please feel free to reach out.

Auto-enrolment implementation – 30 September 2025

The Department for Social Protection (DSP) has announced a revised implementation date for Ireland’s auto-enrolment (AE) system, now set for 30 September 2025 and called My Future Fund. 

This delay, confirmed in Budget 2025, provides employers with additional time to prepare for compliance and make necessary adjustments to their current pension arrangements. 

Employers must decide whether to adopt the AE system, continue with their existing schemes, or use a combination of both. The best approach will depend on these key considerations:

1. Identifying employees in scope

To understand the potential impact of the new system, determine which employees will be affected by AE. This involves assessing who’s enrolled in existing pension schemes and who’s not.

2. Budgeting

Evaluate the financial implications for non-participating employees who will become eligible under AE. If the government scheme is adopted for these employees, updates to payroll, HR, and finance processes will be necessary because of the structural differences between AE and existing schemes.

3. Considering practical requirements

Address practical aspects such as integrating AE with payroll systems and communicating changes to employees. Given that AE has no waiting period, employers may need to oexisting schemes to prevent automatic enrolment conflicts..