Another probable reason for the delay in transposition was the pre-emptive judicial review action initiated by the Association of Pension Trustees of Ireland (APTI).
APTI sought various reliefs against the Minister for Employment Affairs and Social Protection concerning transposition of the directive, including a declaration by the High Court confirming that the directive should not be applied to one-member arrangements. Though the matter was adjourned in late 2019, it is not expected to recommence.
The European Union (Occupational Pension Schemes) Regulations 2021 transposed the requirements of the directive into Irish law and, for many trustees and pension providers, nothing will be the same again. The regulations make a number of sweeping changes to the Pensions Act 1990 that cannot be ignored by the trustees of any scheme – no matter the size or complexity.
The overall purpose of the directive is to improve the governance, risk management, and transparency of pension schemes. It is hoped that the provisions of the directive, when fully transposed across the EU, will lead to an increase in cross-border pension activity, as well as a strengthened internal market.
Impact on trustee action
Trustees of all scheme types will need to immediately consider and understand the requirements of the regulations for their schemes. Depending on a scheme’s existing level of preparedness, trustees will have to cover some core requirements. They will need to:
- Consider whether their trustee board meets the regulations’ collective knowledge and qualification requirements. This new requirement will undoubtedly create difficulties for many lay trustees.
- Ensure that that their scheme has the required number of trustees. A scheme or trust retirement annuity contract (RAC) must have at least two trustees. Where a sole corporate trustee is acting as a scheme or trust RAC trustee, it must have at least two directors on its board.
- Ensure that each trustee on the board satisfies the fitness and probity requirement in the regulations, which states that each trustee must be of “good repute and integrity”. The regulations insert a new section 64AE into into the Pensions Act that sets out a detailed list of offences and insolvency events. It confirms that if any trustee (person or corporate) is guilty of any such offences, or has entered into such insolvency arrangement, they shall fail to satisfy the new fitness and probity requirements.
- Understand the role and responsibility of each of the ‘key function holders’ and make the necessary appointments for their schemes. The key function holders are the internal auditor, risk manager and actuary (where applicable).
- Ensure that existing written policies are in place for their scheme’s risk-management function, internal audit function, the actuarial function (where required), scheme administration, outsourcing activities and remuneration.
Pensions Authority
The Pensions Authority has been very active over the past number of years in preparation for the transposition of the directive. Under the regulations, it has significantly increased powers of intervention and new obligations.
It stated in its press release after the regulations were published that “IORP II also requires the Pensions Authority to adopt a forward-looking and risk-based approach to supervising pension schemes and to intervene where the interests of members are believed to be under threat”.
Given its increased powers and obligation to take a “forward-looking and risk-based approach”, we can expect a level of oversight and intervention from the authority that we have not seen before.
Chapter 3 of the regulations provides the Pensions Authority with new obligations under a ‘supervisory review process’. This provision requires the authority to review scheme and trust RAC strategies, processes, and reporting procedures.
In carrying out such oversight functions, the authority has noted that it will take into account “the size, scale and complexity of the activities of the scheme or trust RAC”.
Under the regulations, the authority is also obliged to collaborate with the EU Commission on supervision of schemes and trust RACs and to cooperate with the European Insurance and Occupational Pensions Authority (EIOPA) for specified purposes.
As well as placing additional obligations on the Pensions Authority, the regulations provide it with additional powers. The authority can now issue schemes and trust RACs with ‘advisory notices’, which will require trustees to provide an external report on their scheme’s activities.
The authority can exercise this power where it has concerns about information provided to it under a supervisory review of a scheme or trust RAC. As well as that, the authority can direct trustees to complete a stress test to help with identifying a scheme’s deteriorating financial conditions.
One-member arrangements
It did not come as a surprise to many that the regulations do not extend the existing derogation for one-member arrangements, such as small, self-administered schemes and executive pension plans.
In its press release, which coincided with publication of the regulations, the Government noted that the application of the directive to all schemes is in keeping with its Roadmap for Pensions Reform.
The stated rationale for this decision is to “ensure that all members and beneficiaries are afforded equal protection”, no matter the size of the scheme.
As well as increased costs, the biggest concern for the providers and members of one-member arrangements are the investment restrictions in the regulations. The origin of these restrictions can be found in article 19 of the directive.
Much of the discussion around article 19 has focused on its references to responsible investing and the long-term impact of investment decisions on environmental, social, and corporate governance factors.
However, the regulations also transpose an article 19 requirement, which states that all schemes must invest “predominantly in regulated markets”. It should be noted that the regulations also take borrowing off the table for all scheme types.
In the past, one of the main attractions of one-member arrangements was their flexibility when it came to investing in unregulated markets, such as property and private-company loan notes. The word ‘predominantly’, in the context of the directive, is generally considered to mean at least 51% of the assets of the scheme.
This new requirement, together with the inability to borrow to finance the purchase of assets, such as real property, will undoubtedly affect the popularity of one-member arrangements in the future.
However, there are some concessions in the regulations for one-member arrangements. The investment and borrowing rules will only apply to new investments and borrowings – that is, the regulations will not be retroactive and do not affect scheme assets or borrowings that were in place before 22 April 2021.
More broadly, the regulations do provide some breathing room for providers of one-member arrangements.
The requirements of the directive, other than the investment and borrowing rules, will not apply to existing one-member arrangements until the end of a five-year transitional period, which began on 22 April 2021.
Trustees and employers cannot afford to ignore the regulations or wait for the outcome of the Pensions Authority’s consultation, which is due to take place later this year. Ensuring compliance with the regulations will impact on every aspect of the day-to-day operation of all pension schemes.
Now that the regulations are upon us, trustees and employees should ensure that legal advice is sought as a first step to ensuring that compliance is achieved.
The eagle has landed
There is no question that many trustees will welcome the fact that transposition of the directive has now occurred, and that they can at last get on with the necessary work. However, for some, the regulations will be entirely new territory, and there will be a considerable amount of work to be done to ensure that their schemes are compliant.
There are nine parts to the regulations, and there’s a lot to unpack. If we were pushed to focus on what we consider to be some of the stand-out provisions, we might mention:
- The regulations insert a range of new definitions into the Pensions Act, including a new definition of ‘one-member arrangement’, which will apply to all single-member schemes and trust retirement annuity contracts (RACs) that are established for one person.
- Part 3 of the regulations removes the old exemptions that were in place for one-member arrangements and small trust RACs, and provide for transitional periods. The transitional period for small trust RACs extends to 31 December 2021, and the transitional period for existing one-member arrangements ends on 21 April 2026. Part 3 also confirms that existing borrowing arrangements entered into by the trustees of one-member arrangements are exempt from the regulations.
- Part 4 of the regulations contains the investment rules. It requires the trustees of all schemes and trust RACs to invest in accordance with the prudent person rule. It also confirms that the resources of all schemes and trust RACs must be predominantly invested in regulated markets, while investment in unregulated assets must be kept to ‘prudent levels’.
- Part 5 of the regulations contains the governance provisions. It amends the Pensions Act with the inclusion of a number of experience and qualification requirements for trustees. It also deals with the appointment by trustees of the key function holders for their schemes. Part 5 also contains the fitness-and-probity provisions that relate to trustees, key function holders, and the outsourced providers of key functions.
- Part 6 of the regulations makes the preparation of a member’s key information document – which must be referred to as a ‘pension benefit statement’ – a requirement for trustees. Trustees must make a pension benefit statement available to each scheme member, free of charge, at least annually. While this can be provided to members by electronic means, it must be provided on paper where the member requests it.
Look it up
Legislation:
- Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) (recast)
- Pensions Act 1990
- SI 128/2021 (European Union (Occupational Pension Schemes) Regulations 2021)
LITERATURE:
Read and print a PDF of this article here.
Stephen Gillick is partner and head of pensions in Mason Hayes & Curran LLP. Patrick O’Connor is a senior associate on the pensions team