Master Trusts are an attractive option for companies that want to make their defined contribution pension schemes fully IORP II compliant before the end of 2022, but defined benefit pension schemes have little choice but to take steps to comply within their existing structures, says Garry Clark, Head of Consulting, Dublin at Aon.
The Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) – IORP II – was transposed into Irish law on 22 April 2021.
IORP II lays out minimum standards for the management and supervision of pension schemes to protect the entitlements of members and beneficiaries. In doing so, it introduces many new obligations on Irish pension schemes.
IORP II is already changing the landscape for Irish pension schemes. Over the coming months, the need to be IORP II compliant will oblige all Irish companies to re-examine their existing arrangements.
Garry Clark, who has 32-years’ experience in the pension industry and is responsible for a mixture of defined benefit (DB) and defined contribution (DC) clients, leads Aon’s IORP II Implementation Project Group. He is ideally placed to advise clients on the challenges they will be facing over the remaining months of 2022.
“We expect to see many employers that currently sponsor DC schemes transitioning from their ‘own trust’ schemes to Master Trusts in the coming months,” says Clark. “A Master Trust can be used by any number of unrelated employers and their employees, while ‘own trust’ schemes can only be used by related employers.”
Clark says that it is imperative that those who plan to transition from their ‘own trust’ plans to a Master Trust in the coming months start to plan now and that they do not delay the transition.
“If they are thinking about moving to a Master Trust, they should do so sooner rather than later to avoid any last-minute rush to get everything done before the year-end and any potential capacity crunch. You cannot simply flick the switch and move instantaneously. There needs to be communication with trustees and members and, potentially, a transfer of assets under regulation with provision for members and authorised trade unions to make observations. All of that takes time.”
New paradigm
Clark says the critical imperative for any company with a DC scheme is to make a vital decision.
“They have to ask themselves: do I stay ‘own trust’ and accept that there will be additional costs and time commitments, as well as the potential upskilling of trustees or appointment of a professional trustee, or do I consider a Master Trust? Some of the costs associated with remaining ‘own trust’ will be upfront, but there will also be costs that will run into the future, such as employing risk management and internal audit key function holders. They need to be comfortable with this fact if they stay ‘own trust’. For those companies that are not happy staying ‘own trust’, it really is decision time because if they delay now, they may get to the stage where there are no guarantees that any transition to a Master Trust will be completed by the year-end.”
For those companies that elect to remain ‘own trust’, Clark says Aon uses its ‘Discover, Develop, Deliver and Review’ methodology to assist clients in fulfilling their IORP II obligations.
“We articulated this approach to clients in March 2021, and we are systematically addressing compliance with IORP II in four parts. The first part is about policies and procedures, the second element embraces Risk Management and Internal Audit Key Function Holder appointments, and the third element addresses the new disclosure requirements. Last but not least, the fourth element covers the Own Risk Assessment requirement.”
Trustees of ‘own trust’ plans should already have a Remuneration Policy and completed an Annual Compliance Statement, due by 31 December 2021 and 31 January 2022, respectively. Trustees now need to ensure that their boards meet the fit and proper requirements and that they have a robust plan in place to ensure compliance with IORP II by the end of the year, says Clark.
Companies need to embrace this new paradigm, he says.
“Ultimately, IORP II is about improving governance standards, which is something to be welcomed, as it is geared towards the protection of members’ interests and rights. Many of the practices covered in detail in IORP II already prevail. Trustees are very aware of the risk, they acknowledge the need for good governance, but IORP II requires a greater degree of rigour and process around the operation of schemes. It will no longer be sufficient just to do the right thing; it will be necessary to document the fact that you have done the right thing.”
So what advice is Aon offering to companies and trustees facing the challenges of the new pension environment?
“They need to really embrace IORP II and not see it as a box-ticking exercise. IORP II should be used to improve standards for the benefit of members”, says Clark.
The member journey
In conclusion, Clark says that companies that decide to stay ‘own trust’ have to ensure that their trustees have a robust plan they will execute in a timely matter. If they choose to go down the Master Trust path, they need to think about communicating with their trustees and, in turn, their members now.
“If you are still undecided, really the time to make the decision is now because one way or the other you are going to have to be IORP II compliant, whether you do it via your ‘own trust’ or you use a Master Trust to get there. As the year goes on, I expect there will be much jostling for position, and you don’t want to be at the back of the compliance queue.
“One of the main advantages of Master Trusts is that all of the compliance requirements are dealt with centrally by the Master Trust’s trustee board, which should help free up time and save costs for participants. From there, it’s all about the member journey and improving outcomes for members as, when you are not spending time and money on things like compliance, you can focus your resources on engaging members and assisting them in taking advantage of all that the scheme offers for their own ends.”
This article is sponsored by Aon.
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