Pensions Update: Winter 2023
The update covers recent announcements from the Pensions Authority and Revenue Commissioners, pensions measures in the Finance Act 2022 and recent pensions case law.
1. IORP II compliance
1.1 IORP II compliance deadline
On 1 January 2023, the Pensions Authority’s (the “Authority”) IORP II compliance deadline for employer-sponsored schemes expired. Employers and trustees of schemes which are not in compliance with IORP II requirements after this date run the risk of investigation and prosecution by the Authority.
As noted in our Autumn Update, the Authority has confirmed that where a formal commitment has been made prior to 1 January 2023 to wind-up a pension scheme and transfer the assets of the scheme to a master trust or to PRSAs, the trustees will not be required to meet the new IORP II requirements provided that the transfer will be completed, and the scheme wound up, by the end of 2023.
A formal commitment to wind-up a scheme would include a written instruction from the employer to the trustees to wind-up the scheme or a notification from the trustees to the members confirming the trustees’ intention to wind-up the scheme.
2. Pensions Authority updates
2.1 2022 Annual Compliance Statement
Trustees of pension schemes must prepare an annual compliance statement (“ACS”) no later than 31 January each year for the preceding year for the purposes of prudential supervision. On 23 December 2022, the Authority published the form to be used for the 2022 ACS, which is available on its website. The 2022 ACS closely follows the format of the 2021 ACS and must be certified for accuracy and completeness by at least two trustees or in the case of a corporate trustee by at least two directors.
Trustees must complete the 2022 ACS by no later than 31 January 2023. While there is no requirement to submit the 2022 ACS to the Authority, it has stated that it will be conducting sample checks and audits of trustees’ compliance with their ACS obligations as part of its ongoing supervisory activity and that failure to complete the ACS may amount to an offence liable to prosecution.
2.2 Authority publishes Engagement and Audit Findings Report 2022
On 15 December 2022, the Authority published its Engagement and Audit Findings Report for 2022. The purpose of the report is to share observations on the key findings identified during the Authority’s engagement and audit activity in 2022. The engagement programme included face to face meetings with the trustees of a number of large defined benefit and defined contribution schemes. The Authority also conducted a series of compliance audits on one member arrangements and an audit of pension scheme trustees’ obligation to prepare the 2021 annual compliance statement.
The report found that most schemes the Authority reviewed appeared to be taking steps to address the significantly enhanced governance standards introduced in 2021, but the pace of change is slow and needs to be accelerated. The Authority found instances of non-compliance amongst the majority of schemes it looked at. Areas for improvement identified by the Authority included:
(a) The structure of trustee boards: the Authority found that few trustee boards had reviewed their composition to assess whether their mix of skills, knowledge and experience was adequate for the good governance of their scheme. Many trustee boards relied heavily on one individual who was considered to have superior knowledge or experience. The Authority expects all trustees to play an active part in scheme stewardship.
(b) Outsourcing: the Authority identified a lack of scrutiny by trustees over their outsourced service providers – in particular, scheme administrators. Trustees should regularly review the performance of service providers and evidence of such reviews should be documented and available for inspection by the Authority.
(c) Scheme policies: the Authority noted that, while plans for the completion of written scheme policies by the IORP II compliance deadline were in place, many schemes were adopting template policies without sufficient consideration of content and scheme specific appropriateness.
(d) Investment: the Authority noted that it did not see enough evidence of trustees reviewing investment information and evaluating fund performance, fund managers and their investment advisers. The Authority expects trustees to be active in assessing their investments, probing the investment information presented to them and considering value for money.
The Authority expects all trustee boards and their advisers to consider its findings and evaluate their own practices to establish if any improvements are required. The full report is available on the Authority’s website.
3. European updates
3.1 SFDR Level 2 Requirements
The Sustainable Finance Disclosure Regulation (“SFDR”) requires “financial market participants” (which includes pension schemes) to publish information on the extent to which they take into account sustainability risks and adverse sustainability impacts in their investment decision-making and remuneration policies. The SFDR also requires certain additional disclosures in respect of “financial products” that promote environmental and social characteristics. A “financial product” includes retail pension products such as a PRSA and investment funds – it is a grey area as to the extent to which it covers an occupational pension scheme or its trustees.
From 1 January 2023, financial market participants will need to comply with the SFDR Level 2 requirements, which expand and build upon the Level 1 requirements introduced on 10 March 2021.
The practical steps required to comply with the SFDR Level 2 requirements are set out in the Regulatory Technical Standards (“RTS”) published by the European Commission in April 2022. The RTS set out a template adverse sustainability impacts statement to be completed by financial market participants and published on their website by 30 June each year, covering the period from 1 January to 31 December in the preceding year. If financial market participants do not complete an adverse sustainability impacts statement they must instead publish a statement on their website stating that they do not consider the adverse impacts of their investment decisions on sustainability factors.
The RTS also set out template pre-contractual disclosures and periodic reporting disclosures for financial products falling within article 8 or article 9 of the SFDR, namely products that promote, among other characteristics, environmental or social characteristics (e.g. so-called “article 8” investment fund options) or products that have sustainable investment as their objective (e.g. “article 9” investment fund options).
To date, the Authority has not published any guidance on how it expects Irish pension schemes to address the SFDR Level 2 requirements. Most trustees will have recently reviewed their Statement of Investment Policy Principles (“SIPP”) and Statement of Investment Governance Objectives (“SIGO”) as part of their IORP II governance implementation exercise. Any trustees who have not yet implemented an initial update to their SIPP and SIGO for the Shareholder Rights Directive and SFDR should in the first instance liaise with their Investment Managers to ensure that they are undertaking and publishing the necessary sustainability impacts assessments and, if they have not already done so, ensure that their scheme documentation (including investment guides and member booklets) is updated. These documents will all need to be further reviewed once guidance is available on local implementation of the SFDR Level 2 requirements.
Please contact us if we can assist in providing any further advice on the applicability of SFDR Level 2 requirements and/or the steps required to address them.
3.2 EIOPA 2022 Climate Stress Test Report
The European Insurance and Occupational Pensions Authority (“EIOPA”) has carried out its first climate stress test for pension schemes in the European Economic Area (“EEA”) to gain insights into the effects of environmental risks on the occupational pension sector. 187 schemes from 18 countries (including Ireland) participated in the stress test exercise.
The scenario modelled by EIOPA simulated a sudden, disorderly transition to a green economy that results from the delayed implementation of climate policy measures.
The findings of the stress test indicate that pension schemes across the EEA have a material exposure to climate transition risk. In the scenario modelled, DB schemes would on average experience a 12.9% decrease in asset values and DC schemes would experience a 10.1% decrease. An anticipated increase in interest rates would cushion the impact on the funding position of DB schemes but not fully offset it.
4. Automatic enrolment
On 10 November 2022, the Draft Heads and General Scheme of the Automatic Enrolment Retirement Savings System Bill 2022 was published by the Department for Social Protection.
The Bill has been submitted to the Joint Oireachtas Committee on Social Protection for pre-legislative scrutiny and is listed as a priority for publication in the Government’s Legislation Programme for the spring 2023 Oireachtas session.
5. Finance Act 2022
The Finance Act 2022 was signed into law on 15 December 2022 and implements a number of taxation changes which were announced in the budget in September 2022. The Act includes the following pension tax measures:
(a) Amending the tax treatment of employer contributions to a PRSA on behalf of an employee so that such contributions:
- no longer count towards the Revenue limits for the maximum tax relieved contributions that an employee can make to a PRSA in a single year; and
- 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;
(b) 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
(c) Providing that Irish tax residents can receive a tax free lump sum of up to €200,000 from a foreign pension (see further below).
6. Revenue’s position on the tax treatment of lump sums drawn down from foreign pensions
In correspondence with the Irish Tax Institute, Revenue has confirmed its approach in respect of the tax treatment of lump sums drawn down from foreign pension schemes by Irish residents. Revenue has stated that its previous guidance on the topic contained in Precedent 28, which provided that tax free lump sums in commutation of foreign pensions were not taxable in Ireland should the individual come to reside in the country following their retirement, is no longer applicable. Revenue’s current approach is that the payment of these lump sums is subject to income tax as it is income from a “foreign possession”, assuming the taxpayer is resident in Ireland on the date of the payment.
As noted above, the Finance Act 2022 introduced a new taxation regime which seeks to align the tax treatment of foreign pension lump sums drawn down by Irish tax residents with the tax treatment of Irish pension lump sums. In respect of foreign lump sums received on or after 1 January 2023, a tax-free exemption of €200,000 may be claimed on the lump sum. Amounts in excess of this tax-free limit are subject to tax in two stages. The portion between €200,000 and €500,000 is taxed at the standard rate of 20%, while any portion above that level is taxed at the individual’s marginal rate of tax and USC.
7. Revenue issues guidance on opinions/confirmations
On 17 January 2023, Revenue issued guidance to taxpayers who wish to continue to rely on an opinion or confirmation issued in the period between 1 January and 31 December 2017 in respect of a transaction, period or part of a period, on or after 1 January 2023. A taxpayer who wishes to continue to rely on such an opinion or confirmation is required to make an application for its renewal or extension on or before 31 March 2023.
This guidance is in line with the recent Revenue approach that its opinions and confirmations expire after five years.
It remains to be seen how the withdrawal of opinions or confirmations issued will operate in connection with long-term investments/decisions such as pension arrangements. Any employers or trustees who applied successfully in 2017 to Revenue for a concession in connection with pension arrangements should act to renew/extend in order to protect the previous concession.
8. Recent UK case law
8.1 CMG Pension Trustees Ltd v CGI IT UK Ltd
The UK High Court interpreted a provision in the rules governing a defined benefit pension scheme as a forfeiture provision where it stipulated that a benefit or instalment of benefits not claimed by the member within six years of the date on which payment fell due “shall be retained by the trustee for the purposes of the scheme”.
In this case a scheme provision provided that where benefits went unclaimed for six years they were retained by the trustees for the benefit of the scheme. The principal employer of the scheme argued that this was a forfeiture provision whereas the trustees had argued that this provision operated in relation to unclaimed benefits of missing beneficiaries. In this case there had been underpayments to beneficiaries of the scheme and the trustees argued that the provision did not operate to extinguish the rights of members to benefits that had been unclaimed after six years where they had been underpaid.
The court rejected the trustees’ submission that the provision was solely intended to deal with missing beneficiaries and did not extinguish the benefits of identifiable members for shortfalls where a lump sum or pension instalments had been regularly underpaid. The court determined that the provision applied to all unclaimed benefits irrespective of whether or not the beneficiary had knowledge of the claim.
The matter of the Statute of Limitations and pensions claims is somewhat of a grey one and there has always been a risk that the Irish courts would view the requirement set out in that Statute that a claim must be taken within six years of an individual becoming aware (or where they ought to have become aware) of a matter giving rise to a claim, as not applying to pension schemes. The argument that is often run is that because a pension is typically paid monthly, each time a new payment is made, the six-year clock is re-set. This is an interesting case, as it appears to suggest that an internal scheme provision could be used to frustrate a member claim in relation to pension benefits. It would be interesting to see whether the same approach would be taken by the Irish courts.
8.2 Dooley v Castle Trust and Management Ltd (2022) EWCA Civ 1569
The UK Court of Appeal, in overturning a 2021 High Court of England and Wales decision, has ruled that Article 13(3) of the Brussels Convention 1968, which allows consumers to bring legal actions relating to consumer contracts in the courts of their own country, applied in a case involving pension scheme members that alleged they were misled into transferring their pensions to offshore investment funds administered in Gibraltar.
Before the High Court, the 62 pensioners argued that they received negligent financial advice when they collectively transferred over £10m from their existing defined benefit occupation pension schemes to the investment funds operated by the Gibraltar based defendant.
The pensioners transferred the pensions following advice given by unregulated intermediaries operating in the United Kingdom, the principal unregulated intermediary being a Cypriot firm named Montegue Smyth (“MS”). The High Court held that there was no jurisdiction as two requirements of Article 13(3) were not satisfied. Firstly, the Court found that there was no contract for services established, in that the claims arose out of the pension deeds. Secondly, the court found that there was no plausible basis for “specific invitations” established by the pensioners. Therefore the defendant was entitled to be sued in its jurisdiction or under the trust deed itself.
In the UK Court of Appeal, Carr LJ held that the purpose of the requirements of Article 13(3) is to ensure a sufficiently strong connection between the contract and the country of domicile of the consumer. The Court held that by each application form, the defendant made an offer to provide services by reference to an agreed schedule of costs and on its standard terms and conditions and this accordingly met the requirement for a “contract”.
On the “specific invitation” point, Carr LJ thought there was a plausible evidential basis that the pensioners received a specific invitation addressed to them from MS as intermediaries who were acting on behalf of the Gibraltar-based investment fund defendant as “middlemen”. This was supported by the commission arrangements between the defendant and MS, whereby MS would receive a fee for each pensioner introduced to the scheme and would assist with the completion of the relevant application forms.
This case serves as an important reminder that Courts of European Member States may still have jurisdiction in cases involving offshore pension schemes, provided a sufficiently strong connection is established between the contract and the country of domicile and the contract was preceded by a specific invitation in relation to same. Furthermore, the case highlights the importance of appropriate financial advice and the provision of information on the risks of certain investments to investors, particularly in respect of investors wishing the transfer their pension funds to another pension scheme in order to have greater control over their investment options.