Ireland is home to around half of the IORPs in the European Union, despite only having 1% of its population. The Pensions Authority, which regulates Irish pensions, believes that a smaller number of larger schemes would better serve pension savers.
The Pension Authority’s medium term goal is to reduce the number of Irish pension schemes from approximately 160,000 to 100-150. This will require the expansion of multi-employer pension schemes, or master trusts.
The transposition of the IORP II Directive into Irish law took place on 22nd April 2021. It is expected to have a significant impact on the large number of small DC schemes within the Irish market. For those schemes that will struggle with the requirements of IORPS II and its associated costs, it will be important that there are clear alternatives available.
The Master Trust options within the Irish market are in their infancy. There has been no information in relation to transitions to Master Trusts to date and guidance on the minimum standards expected for Master Trusts are due to be published in December 2021.
The Pensions Authority published a report on engagement with Master Trusts in November 2020 which expressed considerable doubt that many of the Master Trusts currently available within the local market would meet the minimum standards expected after the transposition of the Directive.
This Pension Authority engagement programme is especially significant given the important part that master trusts are likely to play in future Irish pensions provision (e.g. the proposed introduction of Auto Enrolment at some stage in the next few years). The Authority found issues with every master trust, some of which were significant. Trustees must address these matters if their master trust is to meet the standards expected after the transposition of the Directive.
Almost every master trust has been set up by a sponsoring organisation, usually a financial institution or a consulting firm (referred to as the founder). The Pensions Authority is not seeking to change this fact, and accepts founders have their own legitimate commercial objectives. However, these objectives must not limit the obligations of trustees to the members of these master trusts and there must be a clear and recognised separation of the roles of trustee and founder.
The main issues that emerged from The Pensions Authority engagement programme were outlined in the report and some are extracted below:
“▪ In many cases, trustees do not seem to understand the breadth of their responsibilities. Clearly, in some cases, trustees believe that their role is limited to a series of administrative and compliance tasks, and that they should follow the instruction of the founder in carrying out this work.
The two essentials of the trustees’ responsibility are that they prioritise the interests of the members and that they should be proactive.
▪ Related to the previous point, many of these master trusts seem to be unaware of or unconcerned about the provisions of the Directive. The Directive sets out a European-wide standard for the proper management of a pension scheme. This information is important of itself, but it is especially relevant given that the Directive will shortly be transposed into Irish pensions law.
A well-run pension scheme should already meet the main requirements of the Directive. The least we might expect is that the trustees of a master trust, considering its scale and resources, would have made substantial progress towards that goal, given that the text of the Directive has been available for over three years. But in several of these master trusts, there is inadequate oversight and measurement of service provider performance, little or no risk management, and no internal audit function, formal or informal.
▪ In a number of cases, the rules of the master trust place unacceptable constraints on the trustees to act in the members’ interests. In some instances, the rules do not allow the trustees to replace the administrator, irrespective of how inadequate or expensive the administration services might be. In another case, the investment of members’ money is placed wholly under the control of the founder. This raises serious concerns for the Authority. The investment of scheme assets is one of the most fundamental objectives of a trust and it can never be appropriate that the trustees are so far removed from this activity.
We recognise that the trustees usually have no control over the master trust rules. Nonetheless, the Authority considers it utterly inappropriate that trustees’ powers and responsibilities be constrained as described above. We will strongly advise any employer against participating in such a master trust and would have strong reservations about the action of any trustee of an existing scheme that facilitated a transfer into such an arrangement.
▪ Our examination uncovered a number of actual and potential conflicts of interest. It is clear in many cases that conflicts have not been given any significant consideration. There were some master trusts where we found no evidence that matters such as conflict inherent in trustees’ employment and remuneration had been discussed. “
See www.pensionsauthority.ie for further details.
The matters raised in the Pensions Authority report should not be taken as exhaustive but rather as an overview of the main issues identified during their recent engagement programme. The Pensions Authority expects all trustee boards, and their advisers, to fully consider these findings and evaluate their own practices to establish if improvements are required.
The Authority will continue its engagement with current and future master trusts. An important part of their work in the period following IORP II transposition will be to publish guidance in December 2021 for the public, and especially for employers, about the minimum standards they should seek from master trusts before participating. Many of the master trusts they have examined would not meet such standards without addressing their findings.
The Pensions Authority report is a useful signpost to some of the material issues that employers and trustees need to fully consider in the context of evaluating the merits of any proposal to join or migrate to a master trust arrangement.
In an Irish DC market context, this leaves much work to be done in order for Employers and Trustees to be in a position to continue to operate cost- effective pension arrangements where members’ interests are front and centre.
For Employers the need for independent advice has never been greater.
We look forward to monitoring further developments during the course of 2021.
Joe Byrne FIA FSAI ASA