Time to prepare for the reality of IORP II (Sponsored)

Aon’s Shane Horgan explains why it’s high time employers future-proof their organisation’s pension scheme arrangements.

Ireland is about to see a wave of consolidation in the defined contribution (DC) pension space, with the number of schemes being reduced dramatically in the next two to three years. “What we see at the moment in Ireland is the beginning of a significant shift in the way pension schemes – and DC schemes in particular – are structured,” says Shane Horgan, Head of Market Development at Aon. “We expect a lot of this activity to occur over the next couple of years. This is primarily due to the implementation of the Institutions for Occupational Retirement Provision II (IORP II) Directive, which will require significantly enhanced levels of governance and compliance for trustees and additional costs for sponsoring employers.

“We expect to see many employers that currently sponsor DC plans transitioning from their ‘own trust’ plans towards master trusts in the coming months,” says Horgan. “A master trust pension scheme provides a workplace pension that can be used by almost any number of unrelated employers and their employees. They are sometimes known as multi-employer schemes. Several push and pull factors are driving the move towards master trust pension arrangements,” he adds. “On the one hand, employers want a better value for money choice for all stakeholders. However, they are also looking for a high-quality solution that offers improved efficiency, governance, cost management, and a commitment to innovation while being future-proofed for further regulatory change. In this context, master trust vehicles are very attractive. On the other hand, the Pensions Authority is looking for consolidation in the number of plans in the Irish market.

Ireland is unique globally in terms of the number of pension schemes in existence, according to Horgan. “The Pensions Authority recently published its annual report for 2020. The number of DC schemes went up by 7,300 during the year,” he says. “There are now over 82,000 schemes in existence, excluding personal retirement savings accounts (PRSAs). There are around 73,800 non-group pension schemes, with the vast bulk of those being individual member plans. That leaves around 8,400 group schemes with multiple members in them.”

And that number is set to be cut quite drastically. “The Pensions Authority wants to consolidate the number of plans down to 100 or 150 schemes. That’s a very significant amount of consolidation to complete, but we believe that master trusts offer a solution.”
In his comments accompanying the report, Pensions Authority chief executive Brendan Kennedy said: “Proper supervision and value for money will not be achieved unless there is a much smaller number of larger, more efficient schemes. Therefore, consolidation of the number of DC schemes is fundamental to improving the Irish pension system and is a goal of the Authority.”

Horgan notes that the Pensions Authority also conducted a review of master trusts in 2020. “That made for difficult reading for some master trust providers,” he adds. “It was less than complimentary about the standard of master trusts generally, with the Pensions Authority going so far as to say that the results were disappointing. What is encouraging is that the Pensions Authority has said that there has been good follow-up activity with providers. The Authority is due to publish the standards it expects of master trusts in December, and that is awaited with interest. At Aon, we have continued to engage with the Pensions Authority throughout 2021 and believe that our master trust is well-placed to meet the standards they expect to see.”

Many employers are now beginning to ask questions about how they will transition their existing DC schemes into master trust arrangements. “They are asking which master trust they should choose and where that arrangement might stand in relation to the Pensions Authority findings,” says Horgan. In the meantime, many providers are awaiting the publication of the Pensions Authority guidelines to see what bar they will have to meet. And most expect that this bar will be higher than the existing one for occupational schemes. “One of the things master trusts have been accused of in the past is that they are unregulated,” Horgan points out. “That is not true. They are regulated in exactly the same way as DC schemes. But we do expect that the Pensions Authority will seek to set a higher bar for master trusts due to their scale.”

The way the Pensions Authority is going to drive the consolidation is worthy of note. “We expect that the IORP II regulation will encourage sponsoring employers to make the change. It will require significantly higher standards of governance and compliance for all schemes. This will add cost for sponsoring employers, and they will naturally look for the most cost-efficient solution to provide best-in-class pension arrangements for their employees.”

And the move has already commenced. “We are seeing an increasing number of employers transitioning schemes to master trusts rather than face significantly increased compliance and cost burdens,” says Horgan. “It is difficult to see how it’s going to make economic sense to continue with an ‘own trust’ solution for both smaller and many larger schemes alike. Master trusts offer access to economies of scale that you may not necessarily have access to in an ‘own trust’ scheme.”

IORP II also requires a level of investment sophistication that many trustees are struggling with. It places new requirements on them in relation to responsible investing, ESG and so on, but this should not present a significant difficulty for master trust trustees.

Member communications and scheme governance are other areas where the bar is being raised. “These are key areas of focus for master trusts,” says Horgan.

The momentum will only gather pace. “Over the next 18 months or so, the pensions landscape will be transformed in terms of the number of schemes moving into master trust arrangements.”

Whether the Pensions Authority target will be met is another question. “At this point, to see a reduction to 100 or 150 schemes in a short timeframe is difficult due to the number of schemes out there. We will, however, certainly see a huge consolidation over the next while. The other item coming down the track is auto-enrolment, and master trusts are also ideal vehicles in this regard. It’s not getting a huge amount of publicity at the moment, but it is still coming.”

Once the guidelines are published, the number of providers in the master trust market will be easier to tell. “We have eight master trust providers at the moment, and a number of others are due to enter. Whether they will remain after the Pensions Authority’s standards for master trusts are published in December remains to be seen.”

The number of providers will be a key determinant of how quickly the consolidation can take place. The consolidation process itself is another question. “In terms of the ability to transfer people and their assets from ‘own trust’ occupational schemes into master trusts, the industry is using the bulk transfer regulations as set out under the Pensions Act at the moment. But that process is quite prescriptive and takes time to complete.” The industry expects some changes to this process in due course to make the transfer process more efficient.

Interest among employers in relation to master trusts is growing. “There has been a noticeable increase in the number of conversations we are having with employers since the start of this year. Many are actively thinking about whether they want to maintain their current ‘own trust’ model or move to a master trust. We are helping them understand the level of additional requirements placed on them by IORP II. If they don’t want to stick with the ‘own trust’ model, the master trust solution is a really viable alternative.”

Horgan’s message to employers who haven’t started considering the transition is to do so now. “They could end up at the back of a very long queue if they wait and could find themselves retaining their ‘own trust’ scheme with its much higher costs for much longer than they had wished.”

For more information, please visit: www.aon.com/ireland