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“What is IORPS and will it have an impact on my pension?”

Senior Financial Consultant Eoin McKeagney offers some insight into the new EU Regulation, IORPS II, which is set to disrupt employer sponsored pension schemes in Ireland

If you have been reading the business section of the newspaper or, more unlikely, have been searching through the websites of Ireland’s insurance companies and pension advisory practices, you might have come across the above acronym and wondered what this is all about and the note of urgency surrounding it, telling business owners that they must ACT NOW! To deal with this very onerous situation.  So, what’s it all about?

EU Regulation implementation

Simply put, IORPS II is an EU Regulation that has been transposed into Irish law and it will affect every Employer-Sponsored pension scheme in Ireland.  The objectives of the IORP II regulations are clear. They aim to improve the governance, risk management, transparency and communication of Irish pension schemes. Seems straightforward enough.  So why all the fuss?

As is usual with any legislation, the devil lies in the detail and, here’s the rub: achieving compliance with the new IORP II regulations will require significant resources – and inevitably, could lead to a substantial increase in cost.

Impact on Pensions Ireland

As of 2021, there are 74,866 Defined Contribution (DC) and 597 Defined Benefit (DB) active Schemes in the Irish pension fund sector (Source Central Bank of Ireland) and each of these over 75,000 schemes must take active steps to conform to the stringent rules that apply under the Regulation with stiff penalties for ignoring these necessary changes.  Whilst existing schemes have been given five years (from April 2021) to make the necessary changes this still leaves very little time to address this and no doubt, many will be tardy in addressing the matter leading up to a ‘traffic jam’ in a few years’ time as people rush to be compliant. Hence, the conversation is being pushed along now to encourage a more prompt response from schemes.

The fact of the matter is that continuing with the status quo will not be feasible for the vast majority of DC schemes as the duties and tasks required to comply with the regulation, in terms of governance, risk management and communication will be so onerous and, more particularly, expensive as to make it impossible for all but the largest schemes to remain operating under the existing arrangements and still fulfil the obligations under IORPS II.

Expectation v. reality

I have seen estimates from anywhere between €30,000 and over €100,000 as the estimates of the annual cost of implementing the Regulations for a Defined Contribution Scheme.  These are eye-watering amounts and make running with the current pension arrangements financially unworkable for the vast majority of schemes. So, is there an alternative?

An alternative solution

There is an alternative solution called a Master Trust arrangement which involves removing the existing structure that is in place and replacing it with a Master Trust.  A master trust allows for many individual pension schemes to be included within its structure, whereas the current arrangement only allows for one company (or a group of associated companies) to exist under the trust.  Whilst master trusts must still comply with all the provisions of the Regulations, the overall cost of compliance will be spread amongst the many companies governed by the trust thereby reducing the cost substantially for each individual company.

In time, after the necessary changes have been implemented, it is envisaged that there will only be a very small number of pension trusts in place, all complying with the regulations and this can only be a good thing.  However, there is much work to be done before we have reached that point.

Financial advice

Above is a very brief bulletin about the upcoming changes that will change the pension landscape in Ireland.  Needless to say, there is a lot of detail to be considered and acted upon to conform to the IORPII Regulation and my advice to companies with a pension scheme is to act now to understand the changes brought about by the regulation and take action to be ahead of the pack to avoid falling to the back of the queue and making ill-informed or rushed decisions as the deadline approaches.

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