Pension reform throws harsh light on Irish retirement savings
Ireland has too many small pension funds with high costs, run by amateur trustees
Change is coming for the Irish pensions landscape – and further reform. Photograph: iStock
It was fitting somehow that the biggest regulatory reform of Irish pensions was announced with no fanfare. Just a press release issued without notice at the end of the working day – after 5:30pm.
Pensions are a difficult sell and, at first sight, this latest landmark reform is an indicator of why. Called IORP II, the acronym is even more impenetrable than its actual title – the EU directive on the activities and supervision of institutions for occupational retirement provision. Essentially, it is designed to improve governance of pension schemes and communications with pension scheme members.
Few people would argue they are not sensible ambitions, but they will cause turmoil in the Irish market.
Ireland accounts for close to 50 per cent of all pension schemes in the EU even while we have just 1 per cent of its population. Thousands of employers have small schemes for small numbers of employees overseen by trustees who are often enthusiastic amateurs.
The people who lose if anything goes wrong are the members relying on the funds for their retirement income. And even if there are no issues, the higher cost base eats into their returns.
IORP II will increase those costs further. For many, likely most, schemes, it will simply make no sense to continue to run standalone schemes. The likelihood is that the new directive – finally transposed into Irish law after every other EU state and over two years after a final deadline – will drive the growth of master trusts.
Run by professional managers and trustees, and ideally covering tens of thousands of workers across different companies, these outsourced pensions are designed to benefit from economies of scale and provide more professional management of what is, for most people, their most valuable assets.
Whether that is how is pans out remains to be seen. But, either way, change is coming for the Irish pensions landscape – and further reform. A higher State retirement age and autoenrolment seem almost certain to feature.
And, as the first defined contribution pension scheme members approach retirement, some home truths are likely to emerge about the amount people actually need to save for retirement and the performance of the industry in delivering a reasonable return on those funds.