Over the past two years there was speculation, concern and a good degree of confusion when it came to the IORP II Directive (Directive) and its transposition.
We also saw pre-emptive legal proceedings initiated by the Association of Pension Trustees of Ireland on the applicability of the Directive to one-member arrangements. We discuss these proceedings in detail here.
The European Union (Occupational Pension Schemes) Regulations 2021 (Regulations) transpose the requirements of the Directive into Irish law and make a number of significant changes to the Pensions Act 1990 (Principal Act). The purpose of the Directive is to improve the governance, risk management, and transparency of pension schemes. It is hoped that provisions of the Directive when fully transposed across the EU will lead to an increase in cross-border pensions activity and strengthen the internal market.
The new Regulations and trustee action
Trustees of all scheme types will need to immediately consider and understand the requirements of the Regulations for their schemes. Depending on a scheme’s existing level of preparedness trustees should:
Consider whether their trustee board meets the Regulations’ experience and qualification requirements.
Understand the role and responsibility of each of the key function holders and consider if any appointments need to be made for their scheme. The key function holders are the internal auditor, risk manager and scheme actuary in the case of defined benefit schemes.
Ensure that existing written policies are fit for purpose and consider putting in place policies relating to risk management, scheme administration, outsourcing activities and remuneration.
The new Regulations and the Pensions Authority
The Pensions Authority has been very active over the past number of years in preparation for transposition of the Directive. Under the Regulations it will have significantly increased powers of intervention and new obligations. It stated in its press release after the Regulations were published that:
“IORP II also requires the Pensions Authority to adopt a forward-looking and risk-based approach to supervising pension schemes and to intervene where the interests of members are believed to be under threat.”
Under the Regulations the Pensions Authority is also obliged to collaborate with the EU Commission on supervision of schemes and trust RACs and co-operate with EIOPA for specified purposes.
The Pensions Authority has also confirmed that it is reviewing details of transposition and will provide further guidance on the various new provisions over the coming weeks and months.
The new Regulations and one-member arrangements
It won’t come as a surprise to many that the Regulations do not provide an exemption for one-member arrangements. In its press release the Government has noted that the application of the Directive to all schemes is in keeping with its Roadmap for Pensions Reform. The Government’s stated rationale for this decision is to “ensure that all members and beneficiaries are afforded equal protection” no matter the size of the scheme.
Article 19 of the Directive states that scheme assets must be predominantly invested in regulated markets and it restricts the extent to which schemes can invest in property and borrow. The Regulations provide that these restrictions will apply to one-member arrangements but only in respect of new investments and borrowings, i.e. the Regulations will not be retroactive for or impact upon existing scheme assets or borrowings.
The Regulations do provide some breathing room for providers of one-member arrangements. The requirements of the Directive, other than the investment and borrowing rules, will not apply to existing one member arrangements until the end of a five year transitional period which began on 27 April.
The new Regulations at a glance
There is no question that many trustees will welcome the fact that transposition of the Directive has now occurred and that they can at last get on with the necessary work. However, for other trustees the Regulations will be entirely new territory and there will be a considerable amount of work to be done to ensure that their schemes are compliant.
There are 9 parts to the Regulations, so covering every notable provision would make for a very long and tedious read. Instead we have focussed on what we consider to be some of the stand out provisions at this early stage:
The Regulations insert a range of new definitions into the Principal Act including a new definition of “one-member arrangement” which will apply to all single member schemes and trust Retirement Annuity Contracts (RACs) that are established for one person.
Part 3 of the Regulations removes the old exemptions that were in place for one-member arrangements and small trust RACs and provide for transitional periods. The transitional period for small trust RACs extends to the 31 December 2021 and the transitional period for one-member arrangements is five years. Part 3 also confirms that existing borrowing arrangements entered into by the trustees of one-member arrangements are exempt from the Regulations.
Part 4 of the Regulations contains a set of investment rules. Unsurprisingly, it echoes the language of Article 19 of the Directive and requires the trustees of all schemes and trust RACs to invest in accordance with the prudent person rule. It also confirms that the resources of all schemes and trust RACs must be predominantly invested in regulated markets while investment in unregulated assets must be kept to “prudent levels”.
Part 5 of the Regulations contains the governance provisions. It amends the Principal Act with the inclusion of a number of experience and qualification requirements for trustees. It also deals with the appointment by trustees of key function holders for their schemes. Part 5 also contains the fitness and probity provisions which relate to trustees, key function holders and the outsourced providers of key functions.
Part 6 of the Regulations makes the preparation of a member’s key information document, which must be referred to as a Pension Benefit Statement, a requirement for trustees. Trustees must make a Pension Benefit Statement available to each scheme member free of charge and through electronic means or paper at least annually.
Trustees and employers cannot afford to ignore the Regulations or choose to “wait and see”. Ensuring compliance with the Regulations will impact every aspect of the day to day operation of all pension schemes. The Pensions Authority has confirmed that it will provide an overview of the key aspects of transposition as well as the effect of derogations and transitional periods in the week commencing 10 May 2021. Now that the Regulations are upon us, trustees and employees should ensure that legal advice is sought as a first step to ensuring that compliance is achieved.