This month, we reflect on the introduction of the Cost Transparency Standard, key updates from the Standard Fund Threshold (SFT) review and the revised launch date for auto-enrolment (AE).
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..
How can we help?
As we navigate the evolving pensions landscape, we can’t overstate the importance of staying abreast with regulatory changes and market trends. Trustees and sponsors of pension schemes are facing new risks and opportunities across funding, investment, governance, and regulation.
Getting an independent perspective on how to mitigate and manage these risks, and to seize these opportunities, gives you additional value and support. Our Pensions team can help you to determine and manage an optimal pension strategy.
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1. Pensions in the news
September saw the Pensions Authority publish its Annual report and accounts for 2022. So, what can we glean from the report and the Pensions Authority’s statement? Several trends are emerging in the market:
New one-member arrangements (OMAs) are no longer. Any established after 21 April 2021 are being wound up and typically put into a Master Trust. Any established before 21 April 2021 have until 21 April 2026 to wind up. The feasibility of a master trust or PRSA should be considered instead of these options.
There has been a reduction of 940 in group (i.e. more than one member) defined contribution schemes as a result of moving to a master trust or PRSA during 2022. By the middle of 2023, we estimate that roughly 4,000 employers will participate in master trusts for group pension schemes. Consolidation is happening across the market and at the end of 2022, there were 14 active master trusts registered with the Pensions Authority.
Given the shift in interest rates, coupled with the additional requirements under IORP II, we see a larger number of defined benefit pension scheme sponsors consider the end game and potential for settlement of liabilities. Nineteen defined benefit schemes were wound up in 2022, and we expect this trend to increase further in 2023.
The UK’s liability-driven investment (LDI) crisis did not have serious knock-on effects in Ireland. However, the Pensions Authority is keen to ensure that any LDI strategies schemes have in place are well-considered. Coupled with the significant volatility in 2022, it reinforces the need for a robust investment governance process.
During 2022, the Pensions Authority took a ‘light touch’ approach to regulatory compliance with 21 spot-checks on schemes’ annual compliance statements. We expect this to change in 2023, as all schemes will be required to submit their 2022 annual compliance statement to the Pensions Authority, and there is an expectation that defined contribution schemes that are winding up will complete this before 31 December 2023.
2. Key economic statistics
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3. Spotlight on retirement
The Irish pension fund sector had total assets worth €128bn at the end of June 2023. This represents an average of circa €75,000 for workers with pension benefits.
The low pension coverage among private sector workers has been widely publicised, and auto-enrolment in 2024 aims to address this. While coverage is one piece of the puzzle, retirement security is another.
Natixis investment managers recently published a 2023 Global Retirement Index, which incorporates 18 performance indicators across four themes—health, finances in retirement, quality of life and material wellbeing. It is encouraging to see Ireland placed fourth in the index behind Iceland, Switzerland and Norway. This is due to low unemployment, a strong economic outlook and rising interest rates. In 2013, by comparison, Ireland was in 25th place.
Retirement is not solely finance-driven, but it is important. We expect the Irish pensions landscape to shift over the years to come—particularly as the cohort of retirees becomes entirely dependent on defined contribution pension savings. With interest rates rising, pension scheme members may be more likely to consider annuities, which had been out of favour. There is also likely to be a trend to ‘whole of life’ products and ‘in scheme’ drawdown compared to the existing dual pre- and post-retirement regime. With the current wide range of products and providers in the market, retirement decision-making can be challenging and we see more organisations looking to implement a suitable retirement support framework for their employees.
4. Auto-enrolment update
During the summer, the Government launched a pre-qualification questionnaire for interested parties to manage the operation of the auto-enrolment scheme. The intention is to have a selected technology provider in place by the end of 2023 to begin auto-enrolment in Q3 2024. With 12 months (or thereabouts) to go to the introduction of auto-enrolment, many organisations are considering how they would deal with its introduction, including the financial impacts. With this in mind, we have developed a tool to help employers analyse the additional costs of auto-enrolment.
5. Budget 2024 and Finance Act 2023
Budget 2024 saw an increase to the maximum rate of the State pension (non-contributory) of €12 per week from January 2024. The Finance Bill may bring more changes for private pensions with particular reference to the recommendations from the Interdepartmental Pensions Reform & Taxation Group in 2020.
6. Administration and investment critical reviews
Trustees of defined benefit and defined contribution pension schemes must conduct an in-depth review of administrator and investment manager performance by April 2024. We can support trustees and employers as they look to carry out this critical assessment of service delivery and performance by providing impartial insight and relevant market benchmarking comparisons.
7. Pensions Authority Risk Management Conference
On 11 October 2023, the Pensions Authority held its Risk Conference and published its guidance for trustees on carrying out an own risk assessment, which must be completed by 22 April 2024. This will form part of the Pensions Authority’s supervisory reviews in 2024, and they expect trustees to conduct a comprehensive, objective assessment.
In the period to April 2024, trustees will also oversee the delivery of both a critical administration review and a critical investment review.
How can we help?
The Irish pensions landscape will change significantly, and actions taken in the next 12 months will have long-term impacts. Our pensions team can provide an independent market perspective and expert advice to help you navigate a sustainable way forward.
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