A Special Report is content that is edited and produced by the Special Reports unit within The Irish Times Content Studio. It is supported by advertisers who may contribute to the report, but who do not have editorial control.

Beware any curtailment on choice

Pensions Authority proposals for reform: why the best pension vehicle isn’t always the cheapest one

People should be allowed to buy a Porsche if they want and shouldn’t be forced to buy a Lada

People should be allowed to buy a Porsche if they want and shouldn’t be forced to buy a Lada

 

In July 2016, the Pensions Authority issued a consultation document which set out a package of proposals aimed at reforming and simplifying supplementary private pension provision in Ireland. The Authority proposed a revised regulatory framework that included higher standards for trustees of occupational schemes; an authorisation process for new occupational pension schemes; closer supervision of pension scheme management; better information for members and more transparent charges; and a rationalisation of the number of pension savings vehicles.

Consultation has been continuing since then but while the general thrust of the proposals has received a broad welcome from the industry, there have been some concerns expressed, most particularly in relation to the rationalisation of the number of pensions vehicles and the focus on lowering costs.

Munro O’Dwyer, of PwC, explains that the concentration on reducing costs could actually be counter-productive. Indeed, cost reduction measures could end up effectively punishing successful schemes. “People need to get the best possible return on their investment and get the best possible standards of risk management,”he says. “And no one would like them to experience significant losses in value. But when you look at grown-up systems like the Australian one which does perform well, they are not necessarily the cheapest.

“If you make it all about cost you will reduce the capacity of the industry to innovate and create better solutions,”he adds.

Investec head of personal financial services Joe Hanrahan fears that some of the proposals that could emerge may have the effect of restricting choice for pension investors. “Some of the proposals in relation to increased degrees of portability and mobility would certainly be welcome,” he says. “But we will have to see how that pans out. But there has been some talk of making the PRSA the only vehicle for individual pension plans and that would be a concern. Are we now curtailing the choice for individuals when it comes to investing in a pension?”

He points out that in the majority of cases the people affected will be those who have demonstrated the maturity and financial foresight to take the responsibility for investing in a pension. “What is wrong with someone being involved in a pension arrangement where they can manage their own investment portfolio?” he asks.

“Lots of people like the idea of having a choice. In a defined contribution world, we are talking about individuals who have engaged in pension planning and have a degree of sophistication when it comes to making these decisions. People should be allowed to buy a Porsche if they want and shouldn’t be forced to buy a Lada. They shouldn’t be compelled to buy the cheapest option available. There certainly needs to be some provisions for individuals to set up their own schemes.”

Mercer DC partner Mairead O’Mahony welcomes the broad thrust of the proposals. “We have an opportunity to streamline the system,” she says. “There are lots of different pension contracts all doing pretty much the same thing and there is an opportunity to do something there.”

Another area of opportunity is in addressing the inordinately large number of pension schemes that exist in Ireland – more than 160,000 at the last count. O’Mahony points out that the Irish system is based on the trust model and each trust has to have its own trustees and so on and are expensive to run and manage at a smaller scale. “We have way too many small trusts here and the master trust proposal is a good one.”

The proposal she is referring to would effectively allow small trusts to become sub-trusts of one major trust and benefit from the savings and economies of scale that come with the sharing of services and overheads associated with such a structure.

“The six-person hairdresser in a small Irish town would never set up its own trust but I would still advocate that they should be able to get the benefits of the stronger governance inherent in a trust and the master trust system would allow for that.”

Peter Feighan, of Davy, notes that the Netherlands has fewer than 20 pensions schemes in comparison to Ireland’s tens of thousands. “Statistically, Ireland has the largest number of pension schemes of any country in Europe,” he says. “The Dutch system is effectively a master trust system. Instead of each individual employer setting up their own pension scheme, they go into a master trust. It’s a bit like the Construction Industry Federation scheme with multiple employers and schemes in one scheme. Part of what the Pensions Authority envisages is that there would be fewer schemes to supervise. There would be a bit of an advantage in that.”

Overall, the reform proposals have been welcomed but as more than one industry source stated, the devil will be in the detail.

Trusting the trustees

The Pensions Authority proposals could also have far-reaching consequences for trustees of pension schemes. The authority is seeking higher standards of training and qualifications, and minimum experience requirements for trustees of occupational schemes

While the authority is not seeking to professionalise pension scheme trusteeship and accepts that lay and worker trustees have a contribution to make to scheme administration, it is seeking to introduce mandatory requirements for continuing professional development and other pieces of training for trustees.

Also sought is an enhanced supervisory role for the authority. The authority wants to create legally binding codes of practice for certain areas of trustee responsibility. The stated aim here is to allow the authority to monitor trustees’ management of a scheme more effectively.

While not entirely in agreement with the need to place the existing code of practice on a statutory footing, Peter Feighan welcomes the proposals in relation to trustee training and qualifications. “We do need professional trustees for schemes,” he says. “Experience and knowledge are important aspects of trusteeship. In many cases, trustees are lay people who have significant responsibilities placed on them. The Pensions Authority wants to ensure that they have sufficient knowledge to be able to fulfil those responsibilities.”