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With the retirement and investment market facing a period of significant change, Aon’s Betty O’Reilly assesses the shift towards impact investing and what it means for investment managers and pension fund trustees. Responsible investment, the strategy and practice of incorporating environmental, social and governance (ESG) factors in investment decisions, has come to the fore in recent years. But it is by no means an entirely new development. “It’s been there for a long time,” says Betty O’Reilly, Senior Investment Consultant at Aon. “It started out as ethical investment many years ago. This involves the exclusion of companies that engage in the sale of tobacco, alcohol, controversial weapons and so on from investment choices.” Climate change has brought new energy to these issues, and the conversation and approach have moved on from beliefs-based investing, of the old ethical style, to one of risk management. The EU has also put its weight behind it and has taken several steps to encourage investors and other financial markets participants, including pension funds, to act responsibly. Of course, investment managers and pension fund trustees have a duty to seek the best returns possible for investors and members, and questions have been raised regarding the efficacy of responsible investment. “There have been a number of studies looking at the return on responsible investment funds versus the traditional approach,” says O’Reilly. “The data from those studies certainly show that the approach doesn’t do any harm. The funds are not just investing in companies doing good things in relation to climate change and other factors, but in good, well-managed companies that are carrying out their activities in a responsible way.” According to O’Reilly, three particular pieces of European regulation are driving ESG factors to the top of the investment agenda. “The key one for pension funds is the IORP II directive,” she says. The EU adopted the second directive on the activities and supervision of Institutions for Occupational Retirement Provision (IORP II) in 2016. It introduces several new requirements for Irish occupational pension schemes covering governance and risk management, member communication requirements, and other areas. “Ireland is the last country in the EU to convert the Directive into local regulation,” says O’Reilly. “We are now quite late, but the Pensions Authority says it will be done soon. The Directive requires pension schemes to disclose how they take ESG factors into account in their investment strategy and to consider ESG risk when making investments.” The second regulatory requirement is the EU Shareholders Rights Directive II (SRD II), which sets out to strengthen the position of shareholders and ensure that decisions are made for the long-term stability of a company. It requires institutional investors and asset managers to be transparent about how they invest and how they engage with the investee companies. The aim is to encourage investors to adopt a more long-term focus in their investment strategies and consider social and environmental issues. The directive adopts a ‘comply or explain’ approach. If an investor decides not to comply with the rules, they need to explain why not. “It’s already enacted and requires investing entities to state publicly how they are making their decisions regarding climate and other factors,” she adds. Then there is the EU Sustainable Finance Disclosure Regulation, which came into force on 10 March 2021. This introduces new disclosure obligations on financial market participants and financial advisers to integrate ESG factors into their investment and risk management processes. The Disclosure Regulation is aligned with other parts of the legislative package, including the Taxonomy Regulation, which establishes an EU-wide classification system to provide businesses and investors with a common language to identify to what degree economic activities can be considered environmentally sustainable. Draft guidelines on the Disclosure Regulation have been produced, but it is not clear how rapidly it will be implemented. “Pension schemes and investment managers are affected by this regulation. It will be supervised by the Central Bank, which will require statements on sustainability in relation to investment products and strategies. It will make sure that investors are not just paying lip service to ESG. If you’re not actually doing something, you will have to say why not.” The regulations apply to investment firms, investment products and financial advisers as well as to pension schemes. They will have to declare reasons for investing the way they do publicly, and there can be a reputational issue if they are not seen to engage in responsible investing. Regulation isn’t the only driver. “There is also pressure coming from pension scheme members,” she notes. “Defined contribution pension scheme members may request particular funds. Our global research shows an increased focus on responsible investing on the part of pension scheme members.”  And ESG doesn’t begin and end with climate change. “ESG is about the environment, social and governance,” O’Reilly emphasises. “The environmental factor encompasses climate risks, biodiversity, resource scarcity, and that’s what’s exercising most people’s attention at the moment. The social dimension covers business relationships, labour practices, communities, and overall social impact. Governance factors include how boards are structured, how companies meet the needs of shareholders, business ethics and so on. Investment managers and consultants like Aon now take all of these factors into account.” Aon prides itself on leading the way in this regard and is the first global professional services firm to sign up to the Principles for Responsible Investment network. It is a United Nations-supported international network of investors that works to implement a voluntary and aspirational set of investment principles and actions to incorporate ESG issues into investment practice. Aon is also a member of The Investment Leaders Group (ILG), a global network of pension funds, insurers and asset managers committed to advancing the practice of responsible investment. Facilitated by the University of Cambridge Institute for Sustainability Leadership (CISL) and supported by academics at the University of Cambridge and elsewhere, the ILG holds a unique position at the intersection between academic research and cutting-edge corporate leadership. Aon’s clients benefit from the work of the ILG. “We have developed a methodology to help clients understand responsible investing and develop their own policies in relation to it. We also advise clients on how to incorporate ESG factors into their investment strategies. For our fiduciary clients, we have incorporated ESG factors into the Aon funds. For example, the default investment strategy for participants in the Aon Ireland MasterTrust includes climate change and social responsibility factors in the equity allocation. We are also about to bring an impact investing fund to the Irish market. This takes a gold star approach to ESG investment, which aligns with the UN Sustainable Development Goals by selecting managers who invest only in companies that achieve positive, measurable social and environmental outcomes alongside competitive financial returns.” ESG and responsible investing will continue to grow in importance, O’Reilly believes. “The climate change issue will intensify, so it’s important for pension schemes to become compliant with the new regulations. But many will rightly go further and embrace these issues more holistically in their investment decisions. We are helping clients work their way through that. Also, some studies show that the best ESG performers have outperformed the best non-ESG. There is now a range of low-cost passive ESG equity funds investors can select, for example. It has been interesting to see how impact investing has become more and more popular, and we expect this will continue to be the case.” Betty O’Reilly is Senior Investment Consultant at Aon.

  In this week’s Public Policy news, read about developments on the future of the Irish State pension, a consultation process on Ireland’s National Recovery and Resilience Plan, and the UK government’s plans to fund businesses across the UK to improve the efficiency of their industrial processes and reduce energy demand. Public consultation launched on future of State pension Pensions were in the news this week, with the Commission on Pensions in Ireland launching a four-week public consultation process on the future of State pensions to ensure that the national pension system can be funded in the future on a fiscally and socially sustainable basis. The Irish Government announced this week that it will delay until at least 2023 the introduction of auto-enrolment, the scheme intended to address the sole reliance by almost 40 percent of workers in the private sector on the state pension to fund their retirement. This announcement was made despite figures released by the CSO showing once again the scale of the pensions challenge facing Ireland. These figures, which show estimate of pension liabilities from 2018, are summarised below: Irish pension schemes had liabilities of €607.9 billion at the end of 2018 State pension schemes account for 59% (€360bn) of the total liability Private pension schemes equated to 21% of the total liability (€99.1bn) The liabilities equate to 186% cent of Irish GDP at that time, compared to 167% when figures were last released for 2015. Commenting for Chartered Accountants Ireland's Public Policy Lead, Cróna Clohisey said: “The lack of private pension provision has been on the agenda of various governments in Ireland over the past 20 years and the only solution the State has given serious consideration is to make people work longer. This approach is simply unsustainable.” Commenting further, Clohisey said that it was not surprising that auto-enrolment has been put on hold, but that the lack of private pension funding isn’t going to be solved without significant action by the Government. The Institute plans to respond to the public consultation on State Pensions and would welcome any comments from members.  These can be emailed to publicpolicy@charteredaccountants.ie. We will continue to monitor developments and bring updates to members. Consultation process opens for Ireland’s National Recovery and Resilience Plan The Minister for Public Expenditure and Reform, Michael McGrath TD has announced a consultation process, which will run until the 22 February, on the development of the National Recovery and Resilience Plan (NRRP) for approval by the EU. This plan will enable Ireland to access funding under the EU’s Recovery and Resilience Facility (RRF), under which Ireland is expected to receive €853 million in grants in 2021, 2022 and, potentially, 2023. The plan is to include reforms and investments to be supported by the RRF that seek to address challenges identified in the relevant Country Specific Recommendations (CSRs) received by Ireland in 2019 and 2020, which arise as part of the European Semester process.  The Minister for Public Expenditure and Reform, Michael McGrath TD has announced a consultation process, which will run until the 22 February, on the development of the National Recovery and Resilience Plan (NRRP) for approval by the EU. This plan will enable Ireland to access funding under the EU’s Recovery and Resilience Facility (RRF), under which Ireland is expected to receive €853 million in grants in 2021, 2022 and, potentially, 2023. The plan is to include reforms and investments to be supported by the RRF that seek to address challenges identified in the relevant Country Specific Recommendations (CSRs) received by Ireland in 2019 and 2020, which arise as part of the European Semester process.  Ireland’s National Reform Programme in 2021 will be integrated into our National Recovery and Resilience Plan and will have a particular focus on green and digital transition, as well as supporting economic recovery and job creation. UK governments to fund heavy industries’ reduction of carbon emissions and energy bills The UK government has this week announced that a total of £289 million will be made available in funding until 2024 to support the government’s mission to ‘build back greener’ from the COVID-19 pandemic impact and support heavy industry as the UK transitions to a low-carbon economy. The grants will be available across England, Wales and Northern Ireland to enable businesses to use new technology to improve the efficiency of industrial processes and reduce energy demand. Grants  will be made available to businesses in energy-intensive sectors, including pharmaceuticals, steel, paper and food and drink through the government’s Industrial Energy Transformation Fund (IETF). The new minimum grant amount of £100,000 for deployment projects is to allow more flexibility for small businesses to receive funding. Applications may be made from Monday 8 March until Wednesday 14 July. Find out more about funding here.   Read all our updates on our Public Policy web centre

A renewed commitment must be made by government to the long-awaited reform of Ireland’s pension system in 2021, according to Chartered Accountants Ireland. The Institute’s comments come as legislation was debated in the Dáil last night, halting the increase in the State pension age to 67.   This legislation ensures that the State pension age remains at 66 until the work of the Pensions Commission concludes, which is expected by the end of June 2021. This comes a week after the Irish Fiscal Advisory Council (IFAC) estimated that the additional cost of providing for new pensioners (public sector and social welfare recipients), will be €370m a year between 2021 and 2025.   Commenting, Cróna Clohisey, Public Policy Lead, Chartered Accountants Ireland said  “Understandably, pension reform slipped off the agenda in 2020. A global pandemic and the conclusion of the Brexit transition period have dominated the minds of policymakers and preoccupied businesses simply trying to stay afloat.  “The need for pension reform has not dissipated though, and as we move into 2021, and economic forecasts start to look slightly brighter, attention must return to it. Political minds today are focused on the state pension age, but the reality is that the state pension in its current form may not even be sustainable in the decades to come.   “A long-term, consistent approach is needed from government, one that will be adhered to and from which we will start to see a sustainable system of retirement planning emerge in Ireland.  The work of the Pensions Commission must result in a clear policy on the State pension age. Workers planning or approaching their retirement need reassurance and greater certainty on this issue so that they can plan adequately and responsibly.  “The figures are already failing to add up, in that the numbers of workers to support those retired is on a downward trajectory, and this needs to be addressed in a sustainable way in 2021.”  Chartered Accountants Ireland made this call to action today as it launched a new publication on retirement planning, A Practical Guide to Pensions and Life Insurance. The publication provides accountants, tax advisors and other financial advisors who provide financial planning advice with a practical resource to help individuals and businesses plan for retirement.   Commenting, the publication’s author, chartered accountant Simon Shirley said  “Pensions exist so we can afford to stop working one day and should be one of our most important financial assets at retirement. They are also without doubt the most tax-efficient and effective way of saving in a sustained low-interest rate environment.  “Although the basic concept of pension planning makes sense, terms like ‘investment risk’, ‘volatility profile’ and ‘cash and cash equivalents’ often induce the ‘glaze’ that all pension advisors recognise.   “We have to tackle a deep-rooted lack of understanding and demonstrate the importance of prioritising long-term provision over often important short and medium-term needs. Over 50% of the Irish workforce do not have a personal or employer offered pension plan, so the task is considerable. The more you know, however, the better positioned you will be to take advantage of pensions for your personal benefit and, in the case of advisors, for the benefit of your clients.”   ENDS     Publication details:  A Practical Guide to Pensions and Life Insurance  Publisher: Chartered Accountants Ireland  Publication date: 10 December 2010  ISBN: 978-1-912350-95-7  184 pages   Price: €25.00 / £22.50     The Author  Simon Shirley is a Fellow of Chartered Accountants Ireland, a Revenue-approved pensioneer trustee and the founder of the financial advisory firm Simon Shirley Advisors. 

  In this week’s Public Policy news, read about recommendations contained within a report on Ireland’s pension landscape; the European Commission’s economic forecast for Ireland and its proposal to grant Ireland €2.5 billion in financial support; a proposed expansion in Northern Ireland's aerospace sector; and the emergence of the world’s largest trading bloc in Asia. New report recommends simplifying Ireland’s pension landscape The Interdepartmental Pensions Reform & Taxation Group last week released a new report, running to 140 pages, which looks at ways to simplify the supplementary pension landscape, a review of the Approved Retirement Fund (ARF) as well as assessing the cost of the State providing tax relief for pension savings.  The Group which is chaired by the Department of Finance and includes members from Revenue, the Department of Social Protection, the Pensions Authority and the Department of Public Expenditure and Reform have written the report based on responses to the 2018 public consultation exercise. The report recommended several areas of reform to consider including the following: The normal retirement age should increase from70 to 75 years (i.e. the age by which pension funds have to be drawn down). The age at which people can access their pension funds will be standardised at 55. The report says that this is in line with longer working as a result of increasing age. Accurately calculating the total cost of tax relief on pensions is a challenge due to limited availability of data. However, tax relief on pension contributions benefits middle income levels the most with those on higher incomes also benefiting. Automatic enrolment has the potential to address both the coverage and adequacy gaps in Ireland; however care needs to be taken to ensure that any State Benefit is aligned in some way with the current tax relief. Buy out Bonds (BOBs) and Retirement Annuity Contracts (RACs) should cease. Existing BOBs and RACs should be allowed to run-off over time. The PRSA should operate as the sole personal pension product. The Approved Minimum Retirement Fund (AMRF) should be abolished given that the State Pension means the requirement to have an annual guaranteed income of €12,700 is largely redundant. The differential treatment of the PRSA for funding purposes should be abolished, employer contributions to PRSAs should not be subject to BIK. In addition to this, a new Pensions Commission has been set up to examine the possibility of increasing the State Pension Age. Auto-enrolment proposals are still under review. We will keep readers posted of developments. European Commission publishes Autumn Economic Forecast for Ireland  The European Commission this week published its Autumn 2020 Economic Forecast. It projects that Ireland’s economy will contract by 2.25 percent in 2020. The 3 percent growth it anticipates in 2021 will be followed by further growth of 2.5 percent in 2022. A better reflection of the underlying domestic economy, though, is modified domestic demand. This the Commission expects to fall by 6.5 percent in 2020 and grow by 7.25 percent in 2021 and 4.5 percent in 2022.  A summary of the forecast has been reproduced below:   2019  2020   2021 2022  GDP growth (%, yoy)   5.6   -2.3  2.9   2.6   Inflation (%, yoy)                                                                                0.9  -0.5   0.3  1.6 Unemployment (%)  5.0   5.3   8.9   8.7   Public budget balance (% of GDP)   0.5   -6.8   -5.8   -2.5   Gross public debt (% of GDP)   57.4   63.1   66.0   66.0   Current account balance (% of GDP)   -11.3   5.7   0.2   -1.1 Source: Economic and Financial Affairs       European Commission Despite a strong rebound in the third quarter after the severe shock in the first half of the year, the later resurgence of the pandemic means that growth projections over the forecast horizon for the euro area and the EU are subject to an extremely high degree of uncertainty and risks. Output in both is not expected to recover its pre-pandemic level in 2022, In the case of Ireland, the Commission found that Ireland’s domestic economy was hit severely by Covid-19 control measures in the first half of the year. The fall in real GDP was cushioned by strong exports by multinationals and employment has been shielded by state income support schemes. However, the contraction in the economy, combined with the high fiscal stimulus packages are expected to significantly widen the budget deficit, so, similar to the euro area and EU, risks to Ireland’s outlook remain exceptionally high. The full Irish forecast can be found here. €2.5 billion proposed for Ireland under SURE The European Commission has proposed a decision to grant €2.5 billion in financial support to Ireland under SURE. SURE is the European instrument for temporary financial support to mitigate unemployment risks in an emergency.  It is part of EU's strategy to mitigate the negative consequences of the COVID-19 pandemic by protecting jobs and workers. It covers 18 Member States, including Italy, Spain and Poland. If the proposal is approved by the European Council, Ireland will receive loans on favourable terms to help cover the costs associated with the Temporary Wage Subsidy Scheme. Northern Ireland’s aerospace sector set for expansion   Invest NI has announced it is seeking a contractor to deliver a new ‘Northern Ireland Aerospace Customer Diversification Programme’. Anticipating an ‘inevitable upturn and new world of aerospace’, the scheme reportedly plans to diversify Northern Ireland’s aerospace sector and help it expand to reach new and emerging markets. A further goal is to research and identify areas where the existing manufacturing supply chain can collaborate with “Northern Ireland’s cybersecurity and technology sectors to target emerging opportunities in new sectors and aerospace with a view to the decarbonisation of aviation”, placing emphasis on markets where the Northern Ireland Aerospace supply chain and associated technology supply chain can compete. UK publishes 10-point plan for ‘green industrial revolution’ This week UK Prime Minister Boris Johnson published a 10-point plan for a ‘green industrial revolution’. The plan aims to create and support up to 250,000 jobs. The points of the plan are: Producing enough offshore wind to power every home. Increasing the production of low carbon hydrogen, with the aim of developing the first town heated entirely by hydrogen by 2030. Advancing nuclear as a clean energy source. Accelerating the transition to electric vehicles and transforming the national infrastructure to better support electric vehicles. Making cycling and walking more attractive ways to travel and investing in zero-emission public transport of the future. Supporting industries that are difficult to decarbonise to become greener through research projects for zero-emission planes and ships. Improving energy efficiency of homes, schools and hospitals, and installing 600,000 heat pumps every year by 2028. Becoming a world-leader in carbon-capture technology, with a target to remove 10MT of carbon dioxide by 2030. Protecting and restoring our natural environment, and planting 30,000 hectares of trees every year. Developing relevant cutting-edge technologies and making the City of London the global centre of green finance. Read more about this plan at gov.uk. Agreement reached to create world’s largest trading bloc 15 countries have agreed to set up the world’s largest trading bloc. Called the Regional Comprehensive Economic Partnership, or RCEP, its aim is to reduce barriers in an area covering one-third of the world’s population and economic output. The countries in the bloc include China, Japan, South Korea, Australia and New Zealand, as well as the countries in the 10-nation Association of Southeast Asian Nations (ASEAN). These include Cambodia, Indonesia, Laos, Burma, the Philippines, Thailand, Brunei, Singapore, Malaysia and Vietnam. The deal followed eight years of negotiations, which culminated at the annual summit of the 10-nation Association of Southeast Asian Nations (ASEAN), hosted by Vietnam. Although the deal is not expected to integrate member economies as the EU does, it does build on existing free trade arrangements, and will further reduce already low tariffs on trade between member countries. Read all our updates on our Public Policy web centre.  

Originally posted on Business Post 6 September 2020. One of the many unpleasant side-effects of the coronavirus pandemic is that it has pushed pre-existing problems which still need to be solved into the background. Key issues in the February general election campaign have been dwarfed by the scale of the Covid-19 crisis. The pensions conundrum, specifically whether the retirement age should remain at 66, is a key example. Last week, the government promoted the reduction in the standard rate of Vat from 23 per cent to 21 per cent. The cost to the exchequer will be some €450 million. Coincidentally, this is the same amount that it would cost to retain the retirement age at 66 rather than increase it to 67 next year. In February, some politicians baulked at that kind of money being spent. Now, as can be seen from the August exchequer returns, €450 million is a relatively minor component of the cost of the national coronavirus response. Should we now also be spending this kind of money on managing future pensions provision? The pensions challenge is fundamentally one of demographics. At present, broadly speaking, for every retiree there are five people in the workforce, earning and paying taxes to support their pensions and welfare. That proportion will drop over the coming years. Low birth rates in a shifting demographic prejudice our capacity to pay state pensions in the future. State pensions are managed on a pay-as-you-go method, rather than out of an accumulated pension fund. The state pension is provided out of the social insurance fund which in turn is funded by PRSI contributions. It is topped up from general taxation from time to time whenever there is a shortfall. In 2018, more than 70 per cent of the social insurance fund went in pension payments. The state contributory pension is particularly good value for the lower paid, because the benefits are not tied to how much PRSI has been paid in cash terms, but to how many times PRSI was paid over the working career. The state contributory old age pension is worth just over €1,000 a month irrespective of how much PRSI was paid in over the years. This, of course, is only possible because of support from the exchequer. Over the last two decades, the state pension has increased substantially and is now a vital component of any retirement planning, as only about one in three workers in the private sector makes contributions to pension schemes. There is currently a proposal to improve the level of private pension savings by introducing a process called auto-enrolment. The idea behind this is that all employees will be put into a contributing pension scheme whenever they start a new job with an opportunity to opt out, rather than relying on people’s prudence by opting in as is currently the case. Even for those who have opted in, and even allowing for the tax relief on pension contributions, private sector workers have a retirement savings mountain to climb. As a rule of thumb, it costs about €30 of pension savings to buy €1 worth of an annuity on retirement in the current market. This means that a person who spent their career in the private sector literally has to retire as a millionaire to secure an annual private pension on retirement which could compare with the average wage. It is no longer obligatory to spend all of a pension pot on an annuity, but as we all are living longer, more money is needed to ensure a comfortable retirement. Auto enrolment, if it is ever implemented, will be helpful for many people, but other techniques to help individuals provide for retirement are necessary. It is already possible for people to choose to make voluntary PRSI contributions to avail of contributory old age pension benefits. Perhaps we should now consider extending these choices. Rather than establish a whole new auto-enrolment system, there may be merit instead in offering enhanced state pension entitlements to workers who choose to make additional PRSI contributions over the course of their working lives. The social insurance fund, which is already under threat from the current economic crisis, could use higher contributions now. There will be a payback for what in effect would be a different form of government borrowing, but that payback would go directly to the benefit of Irish workers in their future retirement. Pandemics don’t come cheap. The costs of providing education, healthcare and senior care will remain higher than before the coronavirus happened, and long after a vaccine against this scourge has been delivered. A higher PRSI contribution option, rewarded by a better future state pension, would be a step in the painful process to which we must likely become accustomed in the future – paying more taxes. There will be life after the pandemic. We need to look at ways to ensure that there is also life after retirement. Dr Brian Keegan is Director of Public Policy at Chartered Accountants Ireland.  

The Irish Fiscal Advisory Council (IFAC) on 15 July published its first Long-Term Sustainability Report , which assesses the sustainability of the State’s public finances for the period 2025-2050. The projections reflect population ageing and expected future economic growth. The report warns that failure to increase the pension age as planned in 2021 would cost €575 million annually, with that figure rising over time, leaving the public finances on a vulnerable and unsustainable footing. The report advises that pension age should be pushed out to reflect increasing levels of life expectancy, and argues that ageing pressures mean the cost of maintaining existing services levels each year would “exceed the available fiscal space” by an average of €1.7 billion per year by the early 2030s. “Given the scale of the challenges, a combination of measures is likely to be needed,” the report said, and suggested reducing benefits through indexing to prices (rather than wages), raising the retirement age, raising PRSI contributions, developing a second contributory pillar or encouraging more private pension saving. Read the full report here.