Exciting transformation for pension schemes in 2022

Shane Horgan, Head of Market Development, Aon, outlines a promising new investment option creating a buzz in Irish pensions

If you were asked to associate terms with pensions, words like “exciting” and “transformation” wouldn’t immediately spring to mind. But that is all about to change!

Ireland’s pension landscape is set to be transformed over the next 12 to 18 months, as employers and trustees grapple with the most significant change to the way pensions are regulated in over 30 years. For many employers, the additional governance burden imposed by recently enacted legislation called IORP II is likely to drive many to consider alternative solutions. This is likely to lead to a large-scale migration of Defined Contribution (DC) schemes to master trust arrangements.

The way in which private sector pension schemes in Ireland are governed and managed has been slowly evolving for decades. Own trust occupational pension schemes, with everything done in-house – administration, scheme secretarial, trusteeship, investment strategy – are fairly rare these days. Employers and trustees have increasingly looked to outsource some or all of these functions. Over the past 5 to 10 years for instance, many trustees have chosen to outsource their investments to delegated investment providers – particularly in DC schemes.

With the arrival of IORP II legislation, the DC market is now very quickly migrating to master trusts and they are set to become the most common way in which employers in Ireland provide pension benefits for their employees. This move reflects similar trends globally – in the UK and Australia, which have broadly similar systems of pension provision to Ireland, market consolidation and master trusts are rapidly replacing traditional approaches to DC pension provision.

What is a master trust?

A master trust is a single pension trust in which multiple, non-associated employers participate – each with their own ring-fenced section. The master trust is managed on behalf of its members by a single, professional trustee body which is independent of each employer and which has the fiduciary responsibility for running the scheme. It is responsible for all governance and compliance, investment strategy, manager selection and monitoring, the administration of the scheme and the member communications.

Importantly, however, each employer retains control of the strategic benefit design of its section – including who is eligible to join the scheme, the contribution rates and the level of death in service benefits provided. Employers can also work with the master trust provider to create bespoke communication and engagement strategies for their employees.

What is driving the move to master trusts?

Ireland is uniquely placed to benefit from moves to consolidate the pension landscape. We have the highest number of pension schemes of any country in Europe – in excess of 82,000 DC schemes alone. The pensions regulator – the Pensions Authority – cannot actively supervise that number of schemes and has stated that it wants to see a reduction in this number to between 100 and 150 in the medium term. DC master trusts offer an efficient solution to this drive for consolidation.

The Pensions Authority recognises “the important part master trusts are likely to play in the future of Irish pension provision” and as a result has extensively engaged with the master trust providers (of which there are currently 9 in the market) throughout 2020 and 2021. The Pensions Authority is demanding understandably high standards from master trust providers.

At Aon, we believe that any employer considering adopting a master trust approach for their future DC pension provision should assess the various providers against these standards. The Pensions Authority recently published an employer guide to master trusts which should help employers in selecting a preferred provider.

What makes master trusts so attractive?

Master trusts are not just a solution to the increasing costs associated with IORP II. They are also an extremely attractive option for employers who quite simply want a better value pension arrangement for all stakeholders.

Through our work with some of Ireland’s leading employers, we understand that employers are looking for a high-quality pension arrangement that offers great member engagement and communication, leading edge investment solutions, improved efficiency and cost management, while future proofing for further regulatory change and innovation. Master trusts can deliver on all of these areas.

In a master trust, each employer has a ring-fenced section for its employees which benefits from a shared governance, administration and investment solution. As a shared solution, master trusts offer a number of advantages including:

• Access to economies of scale, which will reduce investment and operational costs for members and employers;
• Greater investment sophistication, including access to specialist asset classes and investment managers which enables members to more accurately reflect their risk preferences;
• Access to high quality member communications, using a range of media, with relevant, targeted content designed to support members throughout their lifetimes and make informed decisions for their financial future;
• Master trusts free up employer time to focus on the strategic decisions around employee benefits;
• A high quality and cost-effective solution assists with workforce planning – attracting and retaining staff and enabling employees to retire earlier due to improved outcomes;
• Professional governance to protect members’ interests, and
• Future proofing to facilitate the introduction of auto-enrolment, in-scheme drawdown of retirement benefits and other future trends.

Making better decisions for the future

The IORP II EU Directive is a tipping point for the Irish pensions landscape. The Directive was signed into law in April 2021 and pension schemes have until the end of 2022 to achieve full compliance. The IORP II regulations will fundamentally alter how pension schemes are governed, how they manage risk and how the Pensions Authority will supervise the market.

This will result in significant additional costs associated with operating a pension scheme, both in terms of time and money, as well as additional risk. For many employers the burden will be too great, and they are already looking for ways to manage costs and mitigate the risks. In this regard, master trusts are the obvious solution.

With Ireland’s pension landscape set to undergo the most significant change in over 30 years, it is critical that employers and trustees make better decisions today to enhance the resilience of their company pension schemes. Master trusts will be at the heart of this exciting transformation.

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