What may happen to my pension this year – and should I be worried?

If you're one of the hundreds of thousands of Irish pension-savers in a defined contribution (DC) scheme, you may be in line for a fright over the coming weeks, as pension funds across the State write to members telling them of a major change on the way.

As part of this change, many pension fund members may be told that their scheme is going to be wound up. It’s important to note that this is due to regulatory reasons and has nothing whatsoever to do with the solvency of a scheme.

What is happening?

The change is coming due to the introduction of new European Union legislation in Ireland. Iorps II (Institutions for occupational retirement provision) was transposed, after some delay, into Irish law last year.

While focus turned to the impact of the regulations on self-administered pensions in the aftermath of the transposition, it has now turned to larger schemes, and employers around the State are now considering the changes it will bring.

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And these changes are significant.

According to pension advisers Mercer, the legislation "heralds the biggest change in the occupational pensions regulatory landscape in this country for a generation". The good news for pension-savers, however, is that they just need to be aware of what's happening and why – it's up to employers to manage and make decisions based on the regulations.

The changes

In short, Iorps II is bringing in another level of corporate governance and regulatory requirements.

“The aim of it overall is to provide better protection for savers,” says Caitriona MacGuinness, a partner with Mercer. “It’s focused on enhanced governance, stronger risk management and looking after and focusing on members in terms of governance.”

However, while Iorps II might benefit members with stronger levels of governance, it’s going to cause some challenges for employers. This is because the regulations will mean meeting requirements that will simply be too expensive or not feasible for smaller schemes to manage.

"It's an extremely high bar," says Shane O'Farrell, director of products with Irish Life Corporate Business, of the regulatory burden, noting that each single scheme will be expected to have a ream of documentation, with up to 50 different policies on everything from remuneration to conflict of interest.

Schemes will also be expected to have a risk manager in place which could cost up to €25,000 a year – not very practical perhaps in a 10-member scheme.

The move to larger master trust-type structures is something the Pensions Authority has wanted for some time now

As a result, many of these smaller or mid-sized DC schemes may look to become part of a so-called "master trust", operated by the likes of Irish Life, Zurich Life and Mercer.

“It’s an individual decision for each employer,” says MacGuinness.

As a spokeswoman for the Pensions Authority notes, "more and more employers are considering master trusts as a means of providing pension benefits for their employees".

Indeed O’Farrell expects about 250,000 pension savers in DC schemes will see a significant change in their pension scheme over the coming year, as their employer looks to transfer their pension funds to such structures.

“Small-medium schemes will head towards life raft of master trust,” he says.

Larger pension schemes, on the other hand, may find that they can fulfil the regulatory obligations of Iorps II themselves, and thus will not need to move a master trust. But not all.

“Even for a large pension fund that’s well governed, it will be expensive and costly,” says O’Farrell of the regulatory burden, noting that the next 12-18 months will prove “critical” for employers in deciding what to do.

Master trusts

In essence, where currently most employers run their own schemes, a master trust will manage the pension schemes of multiple employers. Within a master trust each employer typically has their own section, of which they have full control.

This means that contribution levels, investments, etc, are determined by individual employers.

As noted in the Pensions Authority’s recent briefing document for employers on the topic, with such a trust, while the employer decides what benefits the pension scheme should provide for their employees, a third party, or master trust provider, oversees the trusteeship and management of the scheme.

A master trust in and of itself is not new. “We have a large amount of clients already in a master trust,” says MacGuinness, noting that it can offer a solution for different types of schemes.

In terms of new schemes being set up, MacGuinness says they are nearly all now going down the master trust route.

The move to larger master trust-type structures is something the Pensions Authority has wanted for some time now. Ireland is unusual in a European context, given that it has about 150,000 pension schemes for a population of just about five million. Consolidating these into a smaller number of larger schemes is seen as a way of boosting supervision and governance standards.

There is also the potential for greater economies of scale – and potentially lower costs – in the larger master trust structure. As these structures grow, there is the possibility that members may see management costs fall.

“Over time, as they gain scale, they will be able to offer better cost advantages,” says O’Farrell, while MacGuinness adds that, in most cases, fees in master trust structures should be “ very competitive”, offering strong value for money.

Making the move

For O’Farrell, the move to a master trust “is not a negative thing”, as pension funds will be moving to a superior type of higher-regulated advanced pension arrangement. However, he notes that there is scope for confusion among pension fund members, as pensions will be “legally and technically” wound up.

The fund will be reconstituted in a different structure but if the transfer is handled poorly, people may mistakenly believe that their scheme is being wound up altogether.

While the change means a lot from a regulatory and governance perspective, from a pension-saver's perspective, it won't actually lead to any obvious changes

“This could lead to unnecessary concern,” says O’Farrell, adding that if and when people are informed that their pension fund is changing, they should take the opportunity to engage with their pension by considering what they’re invested in and the adequacy of their contributions.

For the majority of pension-savers who find their savings are being transferred to a master trust, they will most likely find that their existing funds will be replicated in the new structure.

“For most members there won’t be a change,” says O’Farrell, adding that there may be changes in older-type schemes, where the legacy fund types are no longer considered “best in class”. These will then be upgraded to newer flagship funds.

The changes

So, while the change means a lot from a regulatory and governance perspective, from a pension-saver’s perspective, it won’t actually lead to any obvious changes. What’s happening is that the pension fund is simply being transferred to a different legal entity.

However, where there will be change is when it comes to trustees. Trustees, often employees, look after the pension fund for the benefit of the scheme’s members. But with the move to master trusts, many of these trustees will find themselves being replaced by professional trustees.

“It won’t be a job for amateurs anymore,” says O’Farrell. However, there may still be a role for ordinary members in terms of a potential pensions communication committee to inform members of issues and changes.

Pension funds going it alone

While there may be savings – or at least not extra costs – in a master trust structure, for the pension funds looking to go it alone, there's no getting away from the fact that more regulation will mean more costs and someone will have to pay for these.

As O’Farrell notes, this could have an effect on members, as the extra costs have to be borne by someone. This could potentially affect employer contribution rates, if the costs for complying with Iorps II prove significant.