Pensions Update: Autumn 2022
This is the Autumn update from our Pensions Group. The update covers recent announcements from the Pensions Authority; the latest developments regarding IORP II compliance; master trusts; and recent Government announcements including the Finance Bill 2022, auto-enrolment and reform of the State Pension.
Pensions Authority Updates
Pensions Authority Guidance in relation to Benefit Statement projection assumptions
Under Regulation 33 of the European Union (Occupational Pension Schemes) Regulations 2021 (the “IORP II Regulations”), the trustees of a funded scheme must provide active and deferred members with an annual Pension Benefit Statement (“PBS”) which contains key information prescribed in the IORP II Regulations in relation to their pension benefits. For funded schemes this requirement replaces the previous obligation under the “disclosure regulations” to provide active members with an annual benefit statement (“ABS”). Somewhat confusingly the disclosure regulation ABS requirements continue in force for unfunded schemes. The distinction means that deferred members of funded private sector (and commercial semi-state) schemes will receive a PBS each year while deferred members of unfunded public sector schemes will not receive either a PBS or an ABS.
A PBS must include “information” about a projection of the estimated value of the member’s benefits at retirement. The projection is based on assumptions such as the amount of future contribution paid in and future investment returns. On 28 July 2022, the Pensions Authority (the “Authority”) published guidance setting out principles regarding the assumptions to be used in preparing benefit projections. The guidance states that a projected retirement fund must be determined as “the sum of the fund value at the effective date of the statement plus projected investment growth less projected total deductions to cover expenses and charges less projected deductions for the cost of protection benefits less, if [applicable], projected stamp duty or pension”. The guidance goes on to set out the assumptions that should be applied in calculating each aspect of this formula.
The Authority’s guidance states that in unusual circumstances, where the methodology set out in the guidance is not possible or not in the best interest of the scheme member, the Authority requires the trustees, as an element of good scheme governance, to satisfy themselves that the methodology actually used is appropriate and in the best interest of the member, on a best efforts basis. This appears to give trustees the option of preparing a benefits projection on a basis other than that set out in the guidance if advised that it is appropriate to do so.
The Authority notes that it may amend or supplement the guidance periodically. Indeed, a revision to the assumptions relating to increases in general earnings (1.5% p.a.) and consumer prices (1% p.a.) may be necessary if the current high inflation environment persists.
A PBS is not required to be prepared with an effective date earlier than 1 January 2023 as long as trustees or registered administrators of a funded scheme continue to provide an ABS or statements of reasonable projection to active members.
Annual statistics for defined benefit schemes
On 29 July 2022, the Authority published a set of statistics on defined benefit schemes, collected from the Annual Actuarial Data Return (AADR) which trustees of defined benefit schemes are required to submit to the Authority within nine months of a scheme’s year end.
The report noted that there were 526 ‘continuing’ schemes (i.e. schemes not in wind-up, of which 343 were current and 183 were frozen) in 2021, a decrease from 558 such schemes in 2020. Of the 525 continuing schemes analysed (one was excluded), 89% satisfied the funding standard at the effective date of their most recent AADR (an increase from a figure of 80% in 2020). Total assets were valued at €73.7bn while funding standard liabilities were said to be €65bn including the funding standard reserve.
It was noted that the above data indicated an overall improvement in funding levels compared to previous reports. However, due to the time needed for AADR submissions and analysis, the effects of the recent increased bond yields and stock market losses are not captured by the report.
The Authority’s annual report
On 3 October 2022 the Authority published its annual report and accounts for 2021.
The report noted that the Authority had concluded six prosecutions in 2021, resulting in three convictions – two in relation to non-remittance of employee contributions under s.58A(1) of the Pensions Act and one in relation to non-remittance of employer contributions under s.58A(2) of the Pensions Act. The three other prosecutions were struck out due to payment of arrears or the underlying matter being rectified in advance of the court date.
The Authority also opened 15 new investigations in 2021 into various alleged breaches of the Pensions Act whilst 24 investigations were finalised and closed. The Authority was also involved in several complex compliance cases including cases in relation to trustees’ failure to submit a funding proposal for a DB scheme; investigations into trustee conduct and behaviour in the small self-administered scheme (SSAS) sector; and initiating High Court proceedings to remove a trustee in accordance with s.63 of the Pensions Act.
IORP II Compliance
Authority publishes findings from 2022 scheme survey
As noted in our summer update, the Authority conducted a short survey of a selection of defined benefit and defined contribution schemes in June 2022 to assess IORP II preparedness. The Authority published the report on its findings from the survey on 11 October 2022.
The Authority’s report noted while significant progress has been made by scheme trustees to meet the requirements of the Pensions Act, there is still work to be done by trustees to ensure compliance ahead of the 1 January 2023 deadline. For instance, 61% of DC schemes and 66% of DB schemes surveyed had not yet selected an internal audit manager at the time of the survey. However, 83% of DC schemes and 91% of DB schemes surveyed expected to be fully compliant by 1 January 2023.
The survey findings also indicated that 89% DB scheme trustees surveyed intended to continue their scheme, while 46% of the DC trustee respondents noted an intention to wind up their scheme and move to a master trust.
Information on key function holder appointments
On 27 September, the Authority provided information for trustees regarding the appointment of a single service provider to carry out multiple key functions within a scheme.
The Authority confirmed that trustees may appoint the same organisation to provide multiple key functions, provided that each specific key function is carried out by separate, named individuals. The different key functions must be operated independently and with appropriate safeguards against conflicts of interest, particularly in relation to the internal audit function. Trustees must notify the Authority of arrangements concerning the outsourcing of a key function within four weeks after agreeing such an arrangement but in any event before that arrangement enters into force.
OMA IORP II Compliance and master trust transfers
As noted in our summer update, on 23 June 2022 the Authority issued a specific reminder to trustees of One Member Arrangements (“OMAs”) established on or after 22 April 2021 of the imminent 1 July 2022 IORP II compliance deadline. In it, the Authority specifically noted that many of the new OMAs established by insurance companies were unlikely to meet the compliance threshold
Following the Authority’s statement, the main insurance companies in the Irish market suspended their provision of OMAs and some have begun the process of transferring their OMA portfolios to master trust arrangements.
On 29 September, the Authority published information in relation to exit charges, trustee annual reports and audited accounts for OMAs migrating into a master trust.
The Authority noted that while it remains the position that exit charges cannot be applied in respect of assets held under a master trust, the following charges may be applied for existing OMAs transferring to a master trust:
- charges in respect of ring-fenced assets being transferred to the master trust so that any pre-existing exit charge period can be carried forward for the ring-fenced assets; or
- charges in respect of contributions made to the OMA that are subject to an exit charge on the accumulated value of the relevant contributions if the member leaves within the exit charge period.
The Authority also stated that where an OMA was established after 22 April 2021 and the Trustees have made a formal commitment to wind up and transfer to a master trust or a PRSA prior to 31 December 2022, the trustees will not be expected to prepare an annual report and audited accounts provided that the OMA is wound-up within six months of the trustees making the commitment. A formal commitment would include a written instruction from the employer to the trustees to wind up the OMA or a notification of wind up to the members.
Information on group schemes transferring to master trusts or PRSAs
On 6 October, the Authority published information in relation to trustee annual reports and audited accounts for group pension schemes with less than 100 active or deferred members migrating into a master trust.
Where the trustees of such a group scheme have made a formal commitment to wind up the scheme and transfer the assets to a master trust or PRSA, the Authority will not expect the preparation of a trustee annual report and audited accounts provided that:
- a formal commitment to wind up the scheme is made by the trustees in advance of 1 January 2023 and the scheme is wound up before 31 December 2023; and
- a final alternative annual report is prepared or a notification is made to the Authority in accordance with article 16 of the Occupational Pension Schemes (Disclosure of Information) Regulations 2006 and a report containing the information specified in Schedule G of those regulations is produced in accordance with Article 16(3)(b).
A formal commitment would include a written instruction from the employer to the trustees to wind up the scheme or a notification of wind up to the members.
It is important to note that case law has long since indicated that it may not be possible to amend the governing documents of a pension scheme once a wind-up has commenced. It is therefore prudent to review the scheme documentation before triggering a wind-up to ensure that any necessary or facilitating amendments have been made before a wind-up commences as it may not be possible to alter the scheme provisions once the wind-up process has begun.
IORP II compliance deadline – 1 January 2023
In advance of the Authority’s 1 January 2023 IORP II compliance deadline, trustees should ensure that they have in place the six policies referred to in the IORP II Regulations and the various other processes that the Authority has listed in its Code of Practice.
Please contact us if we can assist with a high level review of policies, gap analysis or confirmation of compliance in advance of year end certification to the Authority in January.
Master trust compliance report
On 3 August 2022, the Authority published its assessment of the compliance levels among master trusts at 1 July 2022 (the date that the Authority had set for master trusts to be IORP II compliant). While the report does not set out findings in respect of any particular master trust, it gives an overall sense of the areas of focus for the Authority and highlights risk areas that prospective participating employers may wish to focus on when assessing potential master trust providers.
The Authority noted that master trusts have complied with the core requirements of the legislation and the Code of Practice in relation to IORP II. However, the Authority stated that these are minimum requirements and it will continue to apply an intensive supervisory focus to master trusts.
The Authority’s report identified a number of key risk areas that it will continue to focus on, including:
- trustee structure and directorships – the Authority noted that many of the directors of trustee DACs are employees of the organisation which founded the relevant master trust and reminded trustees to closely monitor the potential for conflicts of interest arising from such appointments.
- trustee fit and proper requirements – the Authority expects that master trust directors will meet either the “experience” (i.e. have been a trustee of a similar type of scheme for at least two of the previous three years) or the “qualification” (i.e. have completed a recognised trustee qualification course) requirements set out in the Code. The Authority also reminded trustee directors to review the fit and proper requirements of the trustee board at regular intervals and in particular when appointments of new directors arise.
- trustee decision-making – the Authority noted that master trust rules often require trustees to consult with the founder in relation to certain decisions. The Authority expects that such consultations will be a bona fide process and should not involve the trustee seeking consent from the founder.
- trustee policies and procedures – the Authority noted that master trusts have made good progress with the policies and procedures required under the Code, but that it is not sufficient to have a policy in place: trustees must be able to evidence that the policy is being followed and determining behaviour. Further, trustees should ensure there is a structured process for the ongoing review of policies and documented evidence of such reviews.
- key function holder appointments – the Authority noted the potential for conflicts of interest to arise where trustees appoint key function holders from within the founder organisation or who are also providing services to the founder. The Authority expects trustees to clearly demarcate the role and responsibilities of all service providers and to document this via appropriate written legal agreements.
Finance Bill 2022
On 20 October 2022, the Minister for Finance published the Finance Bill 2022. The Bill includes the following pension tax measures:
- amending the tax treatment of employer contributions to a PRSA on behalf of an employee so that they are no longer considered a benefit in kind for the employee. This brings the tax relief available to employees for employer contributions to a PRSA in line with the relief available for employer contributions to an occupational pension scheme;
- introducing a new chapter of the Taxes Consolidation Act 1997 to set out the tax treatment of contributions to and payments out of Pan-European Pension Products, a new form of personal pension product introduced by EU Regulation 2019/1238; and
- providing that Irish tax residents can receive a tax free lump sum of up to €200,000 from a foreign pension.
The Finance Bill is expected to be brought through the Oireachtas in the coming weeks.
Government’s Autumn Legislative Programme
Automatic Enrolment Retirement Saving System Bill
The Automatic Enrolment Retirement Saving System Bill has been listed in priority legislation for drafting this session. Once enacted, this will provide a legislative framework for the new auto enrolment system which was previously announced by Government.
On 10 October 2022, the Minister for Social Protection confirmed that the General Scheme of the Bill had been approved by the Government and referred to the Joint Oireachtas Committee on Social Protection for pre-legislative scrutiny.
It is expected that the Bill will be introduced in the Oireachtas in early 2023.
Financial Services and Pensions Ombudsman (Amendment) Bill
The Financial Services and Pensions Ombudsman (Amendment) Bill is listed in “All other legislation” for the autumn session. The Heads of Bill are currently being drafted.
This Bill, once enacted will amend the Financial Services and Pensions Ombudsman (FSPO) Act 2017 (the “2017 Act”) to take account of the Zalewski decision and update the 2017 Act where the FSPO could be viewed as administering justice.
In the Zalewski decision, the Supreme Court determined that the exercise of powers of adjudication officers of the Workplace Relations Commission was an administration of justice within the meaning of Article 37 of the Constitution. It followed that two sections of the Workplace Relations Act 2015 were found to be incompatible with the Constitution. Previously, WRC hearings were heard in private and evidence heard orally during such hearings was not given under oath.
Reform of the State Pension
On 20 September 2022 the Minister for Social Protection announced the Government’s proposed reforms to the State pension system. The measures are in response to the recommendations from the Pensions Commission, whose report was published in October 2021. The Minister for Social Protection confirmed that it is the Government’s intention that the State Pension age will remain at 66. The Minister also announced that it is proposed to introduce a new ‘flexible pension age’ model, which would allow workers to continue working until 70 in return for a higher pension from January 2024. Based on current (2022) payment rates, the illustrative estimated full weekly rates under this proposed ‘flexible pension’ model were given as follows: €253 for those aged 66, €266 for age 67, €281 for age 68, €297 for age 69 and €315 for age 70.
Under the proposals, a ‘Total Contributions Approach’ will be introduced over a 10 year phased-basis from January 2024. It will provide for pension rates based on the number of years a person has worked and paid contributions. A credit will also be introduced for long-term carers.
In addition, the Minister confirmed that the Department of Enterprise, Trade and Employment will introduce measures that allow, but do not compel, an employee to stay in employment until the State Pension age. Workers are also to be provided with access to a PRSI contribution statement service each year, in a manner that enables them to understand their entitlements.
The Minister has indicated that there will be gradual increases in PRSI rates in the years to come to ensure the long-term sustainability of the State Pension.