Last week saw the Pensions Authority (Authority) publish a draft code of practice (Code), setting out what it expects of pension trustees when it comes to complying with their obligations under the European Union (Occupational Pension Schemes) Regulations 2021 (Regulations). The Authority will publish the finalised Code in the week commencing 15 November 2021. A consultation period remains open on the Code, with submissions welcome until 16 September 2021.
The Authority has previously stated that it expects trustees to have a plan in place detailing milestones and timelines towards achieving compliance with the requirements of the Regulations. The Code will provide some assistance to trustees with their IORP II compliance planning. It fills in some of the information gaps left open by the Regulations by, for instance:
- providing detail on what information some of the key IORP II policies should contain;
- providing an insight into what “collectively adequate” qualifications, knowledge, and experience means when it comes to trustee fit and proper requirements, albeit the list of recognised trustee qualification courses will be published at some point before the Code is finalised; and
- detailing the minimum terms any contracts with service providers must contain, with additional terms required for contracts with scheme administrators and investment managers.
Increased Regulatory Burden
The Code sets out the minimum expectations for all schemes, but trustees can implement additional measures. Therefore, the Code, which is very prescriptive in several areas, does not allow for the dilution of some of its requirements for smaller schemes on proportionality grounds, something which is a feature of the Regulations. The journey to achieving compliance with the proposals in the Code will prove challenging in practice for the vast majority of Irish pension schemes. Some of the key challenges are likely to include:
- The costs and time associated with putting in place the range of policy documents required under the Regulations as supplemented by new policies proposed in the Code, such as those related to member engagement and selecting/removing key function holders (KFHs).
- The costs and time associated with establishing the risk management and internal audit function, including the appointment of those KFHs. The need to document various scheme processes, such as general scheme management, procedures for appointing service providers, accounting procedures and internal control procedures.
- The need to carry out and document the ongoing review of administrators’ and investment managers’ performance, including critical reviews of performance every three years and documenting the reasons for retaining incumbent providers in preference to available alternatives.
- The obligation on trustees to review and document the compliance by trustees and KFHs with fit and proper requirements annually.
The Authority’s consultation process on the Code is to be welcomed. Trustees and employers alike now have an opportunity to make submissions to the Authority on the proposed terms of the Code to seek to address some of the challenges that this new regime brings with it.
The Authority has stated that it will focus on full compliance with the Regulations beginning in 2023. Therefore, between now and then, trustees will need to progress their IORP II compliance planning with their advisers and, as necessary, engage with sponsoring employers on the additional resources achieving compliance will require. Employers will need to budget and make plans to support trustees in meeting those compliance requirements or assess with their advisers whether it is now time to consider consolidating pension schemes or using an alternative vehicle for future pension provision.