IORP II in Ireland: Are master trusts the solution?

It’s sometimes easy to forget that our neighbours in the Republic of Ireland (Ireland) remain a member state of the European Union. As such, certain types of EU legislation apply to Ireland. And whilst we in the UK have not had to worry about the latest Pensions Directive (IORP II), it looks likely to bring about the biggest change in occupational pension provision in Ireland in a generation. This article looks at whether master trusts could be the solution to the increasing governance burden caused by IORP II. It also touches upon what employers and trustees should consider if thinking about moving to a master trust.

IORP II to drive DC pensions consolidation ~ be on the front foot

Ireland implemented IORP II with no carve outs from the originating EU legislation. It is understood that this decision was made to drive consolidation in the Defined Contribution (DC) pensions market. A move echoing what we see in the UK. Not surprising given that Ireland record the largest number of DC schemes in Europe (around 80,000. Although 60,000 are one- or two-person schemes).

Pensions professionals in Ireland all agree that this will drive consolidation. We can expect the biggest change in the Irish pensions landscape ever seen. We might not be seeing that just yet. But we expect the Pensions Authority to start checking in with schemes for progress updates around July. At that point schemes will have to take action if they have not already started to make moves to comply.

So now is a great time to get on the front foot with your planning.

IORP II requirements

IORP requirements significantly increase the governance burden on trustees – and will significantly increase the cost of running pension schemes.

You can read about the application of the  IORP II Directive for Ireland on the Pensions Authority’s website here. Our summary diagram helps provide a quick overview.

The appointment of Key Function Holders (risk managers, internal auditors) alone will add between €20k and €50k to the running costs of a typical scheme. Together with the requirement for trustees to be appropriately qualified, it’s perhaps not surprising that some trustees in Ireland may be feeling a bit overwhelmed.

Is a move to a master trust the solution?

There are three main options that trustees and employers could consider:

  • Maintain the status quo and ensure compliance with IORP,
  • Appoint a professional trustee (individual professional trustee or sole Corporate Trustee), or
  • Outsource to Master Trust.

All three are means of dealing with the IORP requirements to a greater or lesser extent. The first two carry significant additional cost, and are ways to manage the governance burden. A master trust is a means of outsourcing the governance burden.

Pitfalls to avoid when selecting a master trust

Our previous insight article looked at some of the pitfalls to avoid when choosing a master trust in the UK context.

With a much less mature master trust market in Ireland, Trustees and employers will have different concerns about making the move. We have some insights from our experience in the UK market. From our conversations with Irish Trustees and employers, key concerns arise which can often be addressed during the master trust selection process.

Will our members suffer additional charges?

Master Trusts in Ireland often offer flexibility to pass some of the scheme costs to the employer via a ‘policy fee’. This cost is often the same or lower than the current administration costs being met by the employer.

You should of course always consider costs and charges in the context of improved ‘value’ and often improved member outcomes from a master trust.

Will the scheme lose its individuality?

It is true that you will achieve the greatest cost benefits of moving to a master trust by adopting their standard models.

However, sometimes the employer can have some influence in the default investment strategy – but this brings additional governance requirements and additional costs. The employer may also be able to influence the range of self-select options available.

But even with adopting the standard investment options, schemes can often maintain their existing branding and employers can have a say in communications strategy.

Should we be concerned about master trust longevity?

We can expect to see acquisition and consolidation of master trust providers in Ireland. We have seen this in the UK as the market has developed. Not all master trusts will be around forever.

Employers and ceding trustees should satisfy themselves that their chosen master trust has the scale to invest and compete into the future. Moving master trusts is possible. Acquisitions in the UK market have so far been pretty seamless. However, considering some future-proofing measures could be beneficial and help to avoid unsettling members.

Are master trusts sufficiently agile?

Master trusts tend to be able to act more quickly than standalone schemes. Their trustees are usually empowered to act and act quickly.

Master trusts are closely connected to their asset managers / investment platform providers – they stay ahead of investment concerns and take action quickly.

The employer / ceding trustees can get comfort of how quickly a master trust can act during face to face presentations with providers.

Which master trust is the most suitable?

Not all master trusts are the same. Not all are suitable for all employers. Take the time to set your requirements to get the best fit.

Some master trusts will offer complex investment options which financial-savvy workforces seek. But some of us just need a smaller range of simple investment options and a quality default investment strategy. Certain employers are happy to be more “hands-off” whereas others prefer more of an “in-house” approach. Do you know what you and your employees want for the long term? Thinking about his and other poignant questions will help identify the nuances and support the decision process.

In a developing market, be ahead of the game

Moving to a master trust is a significant decision. Seeking some expert advice from an independent third-party evaluator with experience of the master trust market will help you tease out your requirements and help to ask the right questions of the providers.

Go Pensions has carried out extensive research of the master trust providers in the Republic of Ireland. If you’d like more information, or just a chat about what your options might be, please contact Tina for a chat on +44 (0) 20 8213 5860 or insight@go-group.co.uk

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