At Zurich, we’ve learned a lot about the impact of the Institutions for Occupational Retirement Provision (IORP) II on pensions over the past 24 months.
Tight compliance deadlines were initially imposed by the Pensions Authority but thankfully these were extended to give everyone more time to adjust to the changes. However, we are now rapidly approaching the revised deadlines and there is a real risk of many Defined Contribution (DC) schemes not meeting them. As we’re not anticipating any further deadline extensions, action really needs to take place now.
One member arrangements – progressing well
IORP II was transposed into Irish law on 22 April 2021. While many in the pensions industry lobbied for an exemption for small schemes and particularly One Member Arrangements (OMAs) – unfortunately this was not to be. Whilst a derogation was given to OMAs established prior to 21 April 2021 (they have until April 2026 to comply), the 30 June 2023 compliance deadline for post 21 April 2021 OMAs is nearly upon us. We have seen great interaction with this cohort of business, employers have completed participation agreements in their droves thereby smoothing the path into Master Trust (MT) arrangements.
Group DC Schemes – more work needed
However, we can’t take our focus off the Group DC Pension Schemes. While their original compliance deadline was 1 January 2023, the Pensions Authority gave an extension to 31 December 2023 for schemes that made a formal commitment to wind-up and move to a Master Trust or PRSA in 2023. This commitment had to be made by end of last year with the wind-up being completed this year.
The alternative option was to remain stand-alone and to put the formal governance structures in place to ensure compliance with the IORP II directive. At first, it was thought schemes using professional trustees were ‘safe’ but we soon saw over 80% of employers and/or trustees of Group DC Schemes* making the commitment to wind-up and choose the MT route.
In hindsight this was not surprising given the additional requirement on all schemes to appoint Audit and Risk Key Function Holders per scheme and the requirement to produce a full audited account each year (regardless of scheme size). These additional costs would be borne by the employer which for many small to medium schemes is not sustainable.
How do you encourage people to engage in the process?
Winding-up a Group Pension Scheme is complex. If we want non-industry people to engage properly and meet deadlines, we need to make the process seamless, efficient, and cost effective.
Pension providers such as Zurich moved quickly to formulate plans to support the implementation of IORP II. This resulted in the development of ‘bulk solutions’ to manage scheme wind-ups involving significant additional resources from Legal, IT and Administration teams. The extra time afforded by the deadline extension to facilitate wind-ups and transitions to MT was hugely welcomed by the pensions industry.
These new bulk solutions enable a large number of group scheme wind-ups/transitions to be migrated to the MT every month. Known within the industry as ‘drag & drop’ or ‘lift & drop’, they aim to sign employers up to their existing provider’s MT while winding-up and transferring pension assets to the new plan at the exact same time.
This would be a mammoth (dare I say insurmountable) task if we had to work off the ‘old’ wind-up process (members receive 12 weeks’ notice, the process only starts when the new scheme was in place and Revenue approved).
However, MTs are already Revenue approved so are “willing & able” to accept transfers; the member notice period was reduced to one month under bulk transfer regulations; and IT capabilities have improved significantly over the years. All these contribute to a more efficient solution.
If everything is in place, why aren’t employers moving?
So, the real question is - if there is an easy, cost-effective solution available for employers, why have less than 20% of relevant schemes* commenced the transition process year-to-date? We need to stress to the 80% of schemes that this isn’t like the end of tax-year deadline for backdating tax relief and sending in cheques on the deadline day.
Even with the new efficient wind-up solutions, schemes need to consider the steps involved in what is a complex process. There are timelines under pensions legislation that must be followed and if you wait until December to join the queue it will be far too late.
At a high level the process involves:
Employers’ complete documentation to sign up to their MT provider.
Employers and transferring Trustees sign the necessary paperwork to trigger the wind-up and pension asset transfer.
Members must receive one months’ notice before making the transfer.
Finally, the scheme can’t formally wind-up until the final Trustee Annual Report (TAR) is completed. The TAR preparation doesn’t happen until after the wind-up date and asset transfer.
In addition to these steps, we have learned from experience that some employers must satisfy their own due diligence and have sought to engage independent legal advice before signing documentation. Some Trustees have also required legal input or want tailored solutions. This needs to be factored into the timeline.
So where does it leave us?
If you want your Group DC pension schemes to meet the compliance deadline of 31 December 2023, you need to engage employers in the transition process now. If you wait until the final hour, final week, even final month, notwithstanding IT solutions etc, the provider will not have capacity to transition your scheme and the employer/trustee will be in breach of regulatory deadlines.
Ask your provider what solution they are offering for ALL of your group pension schemes and secure your MT transition date as soon as possible.
At Zurich our transitions are well underway. Please contact your Zurich Broker Consultant or the Master Trust transition team directly for more information.
*Source: Zurich, May 2023
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