In Part 2 of this series, we examined the effect of IORP II on investments of small self-administered schemes. The investment strategy for a single investor is obviously closely associated with the investor’s attitude to risk. In this blog we will see that IORP II when applied to single member schemes is likely to offer alternative solutions to well-known issues of planning, strategy and governance.
Risk Management Framework
Article 25 of the Directive provides that every IORP must have in place a risk management framework. This means an ongoing system of recording and managing scheme risk.
While pensioneer trustees who are already regulated by the Central Bank under MiFID, Solvency II or similar, already operate a sophisticated risk management framework, this requirement is now going to be extended not just to every IORP as dictated by the Directive, but also to every pension scheme. For the efficient running of one member schemes, such application of the risk management framework will be unwieldy and impractical. It also marks the first departure in financial services from the generally accepted solution in terms of risk management for the individual, which is to apply Appropriateness and Suitability requirements
Again, the generally accepted solution is unlikely to be good enough for pensions. It is therefore very likely that Article 25 in the Irish context will be extended to the individual scheme. Pensioneer trustees need to prepare for the implementation of a system of recording and managing risk for the individual.
Fitness and Probity
As part of the improved governance requirements of pension providers heralded by IORP II, the Directive provides for persons who “effectively run” an IORP to be fit and proper.
While Fitness and Probity requirements already exist across financial services legislation administered by the Central Bank, it is possible that an alternative set of requirements may be applied by the Pensions Authority, similar to its 2019 guidance in respect of master trusts
Even if the Pensions Authority on many occasions has expressed the view that Fitness and Probity does not exclude employee representation on the trustee board of a multi-member scheme, the requirement will prove singularly difficult to implement for one member arrangements. The reason for that is that it is the member of such schemes who retains the investment discretion. As one of the persons who ‘effectively run’ the scheme, the ongoing maintenance of Fitness and Probity standards on the member will be difficult to administer. In practice, it will lead to the exclusion of the member from acting as trustee. At a minimum, the trust deed will have to be changed.
Most pensioneer trustees are corporates and in relation to them Fitness and Probity standards will apply to the Board. Independent Non-Executive Directors (INED) will have to be appointed. In all likelihood, at a minimum the chairman will have to be an INED.
The requirement with regards to Board composition is not going to be an issue for pensioneer trustees who are already regulated under MiFID or Solvency II. However, smaller firms should prepare, both for the necessary change of governance structure and for the additional cost.
Implementation of this area of IORP II is likely to be swift, with no grandfathering arrangements.
The articles in the IORP II Directive concerned with scheme information have under IORP I (and before that) meant that accounts of pension schemes of over 100 members must be audited. With the Government’s statement that IORP II will be implemented with no regard for nature, scale and complexity, it is likely that the audit requirement will be extended to all schemes, also one member schemes. This means that external audits will have to be provided to every single one-member arrangement. The costs will be significant.
The imposition of audit requirements is likely to be swift, with few short-term transition arrangements for existing schemes.
The ultimate solution is to transfer benefits to a PRSA or Buy Out Bond.
In the final blog in this series, we will examine the solvency requirements which are likely to emanate from IORP II and provide some conclusions.
Head of ITC Legal
*Please note this content is the view of the author and not of Independent Trustee Company