The IORP II Directive, transposed into Irish law in April 2021, heralds a welcome improvement in how pensions are operated in Ireland. However, employers must act in a number of areas to become compliant. Munro O’Dwyer explains.
Pension provision has always been about managing risk. There are many risks for pension savers, including the performance of investments held, insufficient income in retirement, and dying too soon or living too long.
For employers who operate pension arrangements, the transposition of the IORP II Directive into Irish law in April 2021 changes the nature of pension regulatory risks. In simple terms, running a company pension scheme now carries a far more significant compliance burden because of this legislation. A high level of regulatory supervision has always been a feature of operating a defined benefit (DB) pension scheme, but that is now extended to defined contribution (DC) schemes.
To be clear, none of this intends to be negative. The new legislation brings positive reform and improves how pensions in Ireland operate through enhanced governance standards and information provision, and better protections for pension savers. This is to be welcomed.
However, employers must consider the changed regulatory requirements for the operation of pension schemes. As a starting point, the regulations introduce the need for a compliance statement by 31 January each year, which considers the prior calendar year and the pension scheme’s compliance with the regulations. This statement must be issued to the Pensions Authority (the regulator) in a form to be prescribed by the Pensions Authority. The Pensions Authority expects evidence of a plan with timelines and milestones to achieve compliance. Full compliance for company pension schemes is expected by the start of 2023. One-member arrangements in place on 21 April have until 22 April 2026 to meet the additional requirements, and new one-member arrangements have until 2022. No other derogations apply.
The supervisory approach will focus on the system of governance, whether the risks facing the pension scheme are being appropriately considered, and an assessment of the scheme’s ability to manage those risks.
Risks in DC pension schemes
The European Insurance and Occupational Pensions Authority (EIOPA) promotes a sound regulatory framework and consistent supervisory practices across the EU. It considers a risk to be anything that might negatively impact the pension saver.
The expectation is that investment strategy should be designed to provide for a stable and adequate individual future retirement income. Projections of future retirement income should be used in assessing long-term risks from the perspective of members and beneficiaries, and schemes should consider how the risk tolerance of pension savers is identified and how it feeds into the design of investment strategies. These exercises are not trivial – the view of EIOPA is that stochastic pension projections are appropriate.
The IORP II Directive requires the appointment of risk management and internal audit key function holders, which will require significant up-front and ongoing effort to support. Supervision of operational risks will also be required, encompassing outsourcing, data protection, and cyber risk.
Pensions going forward
The IORP II Directive has been described as a “once in a generation” event regarding its impact. Organisations want high-quality pension arrangements for their employees, and that now means adhering to very onerous regulations. This is all culminating in a desire to explore other options – and alternatives do exist. One positive risk management action for the coming weeks might be to explore how these options apply to your business.
Munro O’Dwyer is Pension Partner at PwC.