The late Fianna Fáil minister Séamus Brennan’s quip to his new ministerial colleagues in the Green Party, following their entry into Government for the first time back in 2007, has at this stage become a rather tired cliché, often parroted around General Election time; but the expression popped into my mind more than once during the recent round of year-end trustee meetings.
The introduction of IORP II means that pension scheme trustees must carefully examine every aspect of their governance and risk management operations. For many trustees, this certainly represents a promotion to “senior hurling”, with the Pensions Authority expecting trustees to seek out higher standards, far beyond minimum compliance. The Authority’s goal of achieving better outcomes for all pension members is clearly to be welcomed, but the regulator’s stance that there will be no relaxation of the IORP II requirements for smaller plans is likely to be a cause for concern for a lot of employers. Furthermore, feedback from trustees suggests some uneasiness regarding the expectations that will now be placed on them, including the possibility of having to pursue a formal trusteeship qualification.
The largest schemes and employers should be able to cope with the additional training, expertise and cost associated with playing under the new rules. However, many smaller schemes are realistically going to struggle under the increased governance burden, which could be acutely felt amid the fallout from a global pandemic.
Companies may wish to consider ways of easing that burden, such as consolidating their existing pension arrangements. This is also likely to expedite the closure of more defined benefit plans.
Adding the potential introduction of an auto-enrolment scheme by the Government to the mix – together with a generation of savers that have known nothing other than defined contribution starting to approach retirement age – and you have a recipe that is sure to intensify the ever-brightening spotlight surrounding the adequacy of DC arrangements.
The need to review their pension plans for IORP II readiness presents an opportunity for employers to re-evaluate where pensions sit within their overall remuneration strategy. Companies will be keen to ensure that they continue to attract and retain the best talent and, crucially, that those employees can afford to retire when the time comes to make way for the next wave of talent. Research shows that the more a member engages with their pension plan, the more they save.
Our latest Global Benefits Attitudes Survey (GBAS), released in February 2020, gathered responses from more than 40,000 employees in 27 countries, including Ireland. One of the insights garnered, and one that resonates with many modern employers, is the need for companies to address their employees’ overall physical and mental wellbeing. Helping employees to achieve financial security is central to this.
With IORP II as the backdrop, the Pensions Authority’s focus is on adopting a forward-looking, risk-based approach to scheme governance, and it isn’t too much of a stretch to see how such an approach could be married to a progressive reward package that centres on employees’ general wellness.
User-friendly investment options, regular engagement and targeted communications – including encouragement to take financial advice at key stages – are essential to improving member outcomes and empowering pension savers to take ownership of their benefits. It is important that employees understand that pensions need not be as complex as they may seem and are a powerful way to build real wealth.
A pension plan that meets the standards expected under IORP II should automatically be able to tick these boxes.
If it sounds prohibitively expensive, it doesn’t have to be. Employers may just need to look outside the more traditional pension scheme structure to find the right fit for their organisation.
IORP II will accelerate the already-shifting paradigm towards delegated DC solutions. These are bundled packages that bring together pension administration, governance, investment management and consulting services.
Outsourcing trusteeship is a further option. Professional trustees are normally an excellent addition to a trustee board – adding value, saving management time and generally bringing a wealth of specialist experience. However, companies need to weigh that up against the fact that the loss of ‘lay trustees’ entirely would sever an often-invaluable link between the trustees, the membership and the employer.
The Pensions Authority’s view is that large schemes are better placed to protect the interests of pension savers. Indeed, the Authority’s stated objective is that there should be no more than 150 DC schemes in Ireland. This means that multi-employer pension schemes (master trusts) will become a big feature of the DC marketplace here. A well-structured master trust can offer significant value in terms of governance, communication and cost-effectiveness. Going forward, we expect many employers to see this as the most viable solution to fulfill their pension needs.
Clearly, the new directive brings with it a considerable amount of detail to be addressed. A structured review of your plan is naturally a sensible first step. In any event, trustees are expected to carry out self-assessments of their schemes in advance of the introduction of IORP II. From our experience, including the employer in the discussion from the outset should result in a more meaningful evaluation and ultimately help to identify that perfect fit.
There is no doubting the benefits of a strong governance culture – get it right and a well-run pension scheme will cost less to operate and take up less management time – but it needs to be smart governance, tailored to an individual scheme’s particular set of circumstances. At the end of the day, it should be about trying to give people the best chance to afford a comfortable retirement.
The Green Party completely collapsed in the subsequent General Election – after all, not everybody can breathe in the rarefied air of senior hurling. But the goal here needn’t be to win the championship; it’s to figure out the best tactics to ensure you remain competitive. We can help you do that.