Market developments
2022 is the beginning of a fundamental change in the occupational pension scheme landscape in Ireland. 2021 saw the transposition of the IORP II Directive and the Pensions Authority’s Code of Practice.
Since then, the market has been working through the scale of activity required to meet the Pensions Authority’s expectations. Many employers have concluded that, rather than continue to operate standalone defined contribution schemes, they will transition to a master trust arrangement.
This is consistent with most other markets globally. The challenge for the Irish market is managing the pace of the transition required.
The 1 July 2022 compliance deadline for master trusts is also approaching and good progress is being made. This will result in a marketplace where employers have access to a range of master trusts, all of which will provide an IORP II-compliant pension arrangement.
For employers that operate a standalone pension scheme, the deadline for compliance is effectively the end of 2022. All required policies and key function holder appointments must be in place by this date.
Below, we consider some of the market dynamics, how change is being implemented, and how employers are reacting.
Lift and drop
A number of master trusts are moving existing schemes where they currently provide bundled services to their master trust on a ‘no change’ basis. In this scenario, all investment options and associated fund charges remain the same, albeit the governance model operates under a different trustee structure. Some are also supporting schemes, where they can, to wind-up the existing arrangement on a ‘no fee’ basis.
This can create operational efficiencies given the scale involved, but a number of challenges can arise—the existing trustees may not be comfortable with this approach if they feel it is not in the interests of the members, and there may be an opportunity cost to not carrying out any wider diligence. Against that, there is a clear attraction to this route as it addresses the compliance challenges of IORP II.
Transition with changes
Other schemes are looking to transition into a master trust, be it with their existing pension provider or an alternative. The extent of change will depend on the existing set-up and the destination of the transition. There are several issues to consider when taking this approach, such as checking for the existence of any investment guarantees; dealing with risk benefits before and after; agreeing on how surplus units in the existing scheme are dealt with; the cost of transition and wind-up of the existing plan; treatment of deferred members; investment fund mapping; and out-of-market exposure.
For those standalone schemes continuing as they are, the coming months will be very different. They will also involve the documentation of comprehensive policies and procedures, fitness and probity assessments, risk and internal audit key function holder appointments, and the establishment of respective frameworks.
Supply chain challenges
Whether schemes will continue to operate as they are and comply with the regulations or transition to a master trust, capacity challenges are emerging in the pension market across all stakeholders (trustees, providers, advisors and employers). It is likely that this will continue into 2023 and beyond. We see the potential for capacity issues in a number of areas:
- Lack of sufficient fit and proper trustees to oversee the pension schemes they look after.
- Insufficient resources available with the pension skills and expertise to deliver the new concepts of risk management and internal audit in a ‘value add’ way. These roles are typically outsourced through a competitive tender exercise, which can take time. Many schemes are yet to formally take this on.
- There will be a time and cost commitment to drafting and reviewing policies and procedures.
- For those looking to move to a master trust, the providers are being stretched to participate in all tender exercises across the market.
- Onboarding to the master trust and supporting its roll-out to multiple employers must be carefully planned.
- There may be challenges around the ability of existing trustees, registered administrators and advisors to support the wind-up and bulk transfer of assets in a timely fashion.
How to navigate the changing pension market
The next steps for you as an employer will depend on your stage in the IORP II journey and your view on the appropriate final destination. We encourage you to consider the following:
1. For those who remain undecided
Many employers remain undecided on a way forward. For these employers, it is important to first understand the reasons for remaining undecided and look for validation of these one way or another. It can be helpful for employers to get impartial advice to support their decision-making, particularly given the time pressures that are emerging.
2. For those looking to comply with IORP II
Employers must work closely with the scheme trustees to understand the scale of change required to become compliant, and also the likely impact on the future management of the scheme in order to maintain compliance and satisfy the Pensions Authority’s future expectations. Structural changes may be required (such as trustees or key function holders, for example) and employers should consider the value to the scheme from the additional workload and cost. Where third-parties are to be appointed, time will be required to complete the selection process.
3. For those who have decided that a master trust is the correct option
The Pensions Authority’s guidance in late 2021 encouraged “shopping around” if employers were looking to move to a master trust. The evidence confirms that there is value to be had in doing so. A move to a master trust is a significant decision for employers; there are very nuanced differences between the master trust providers and simply adopting the solution of your existing provider or advisor may be challenged by existing trustees and employees.
4. Consider the future oversight model
For those complying with IORP II, the existing trustee relationship will continue although there may be a need to restructure its constituents. The governance bar is now higher for trustees and they will need to spend more time running the scheme and ensuring their continued fitness and probity. The sustainability, and added value, of this model will need to be kept under regular review by employers.
For those moving to a master trust, the need for a trustee board is eliminated—but this does not mean that pensions are forgotten. Employers are now looking to establish a ‘pensions committee’, which oversees the master trust as an outsourced pension solution. The focus is more on the performance of the pension arrangement for the benefit of the pension scheme members and there are no legal responsibilities. It nevertheless acts as an important conduit between the employer and the master trust. Being able to hold the master trust to account and independently assess it relative to the competition will be an important role of the pensions committee into the future.
We are here to help you
The occupational pensions landscape is changing at pace. Capacity challenges exist and are likely to prevail. Employers should be aware of the impact of these challenges as they look to make important strategic decisions on the future running of their pension scheme. The PwC Pensions team has the deep knowledge and expertise needed to support you in these important decisions and to bring clarity to the complex pensions landscape. Contact us today.
