There are signs that a significant movement towards pensions reform in Ireland could take place this year.
- Despite the pandemic, last year was positive in many respects, with pensions continuing to be paid, contributions collected and funds invested
- Pensions became a heated topic in the February election
- The impact of the pandemic was most severe on those areas of the economy with lowest pensions coverage, including hospitality and retail
- This year should see significant movement along the path to pensions reform
At the beginning of 2020, we looked back at 2019 with a lot of disappointment at the lack of progress in Ireland on the implementation of the IORP II Directive and the government’s Roadmap for Pensions Reform. Little did we know that 2020 would also pass with no further tangible progress, although the circumstances were different this time. Indeed, there was little we knew at the beginning of 2020 about the year that was ahead of us all.
From a pensions perspective, it was a positive year in many respects. Despite the upheaval in how work was done, pensions continued to be paid, contributions collected and funds invested. That was testament to the determination of trustees and the resilience of administrators and investment managers. Lawyers were kept busy advising trustees on how to hold valid meetings in a non-physical format and other services were provided remotely. Contingency plans kicked into place as everyone moved to working in a completely different way, largely from home. And, generally, it all worked seamlessly, even gaining recognition from the regulator.
Before COVID-19 became a problem, a general election was called in Ireland, with voting taking place on 8 February. Unusually, pensions become a hotly debated topic at the outset of the campaign with focus on the increase in the state pension age from 66 to 67 which was due to take place in January 2021. It had increased from 65 to 66 in 2014.
Political parties objected to the increase going ahead, to the lack of an early retirement option (which meant people often had to claim unemployment benefit between 65 and 66) and some parties called for a reversion to age 65. An exit poll showed that the pension age was the third most important factor for voters in the election, albeit some way behind health and housing.
The result of the election was not decisive, and it took until June for a government to be formed which was a coalition of three parties. The negotiated Programme for Government deferred the increase in state pension age to 66. It committed to setting up a Commission for Pensions to examine the issue of state pension age, which would report back to the government by June 2021. The commission has been established with a broad-ranging remit and will have a lot or work to do to report by the deadline.
The Programme for Government also committed to the introduction of auto-enrolment. This had originally been planned for 2022 in the previous government’s Roadmap but that date had looked optimistic, as many key aspects of the system have yet to be finalised.
In any case, as COVID has had its most severe economic impact on those areas of the economy that have lowest pensions coverage, such as hospitality and retail, it is unlikely that 2022 would be politically feasible now. As the contributions rates from employers and employees are due to be phased in over 10 years, before reaching the maximum of 6% from each (plus 2% from the state), it is still planned to proceed, but with a later start date which has yet to be determined.
Other aspects of the roadmap have also been slow to develop. The report of the Interdepartmental Pensions Reform and Taxation Group published in November provided several welcome recommendations to simplify the pensions system, although there is no indication when these will be implemented.
One complicating factor in achieving reform is that the IORP II Directive still remains to be transposed into Irish law. This is expected early in 2021 and will provide much of the regulatory impetus for change and reform.
The government has been clear that the provisions of the directive will apply to all schemes and that they will not avail of the derogation available to small schemes. This is consistent with the regulator’s stated desire to reduce the number of pension schemes in Ireland, with smaller schemes becoming part of multi-employer master trusts or individual contract arrangements. Adding many more regulatory requirements to such schemes will mean it will no longer be feasible for those schemes to continue to operate on a stand-alone basis.
However, it will be important that there is a clear and straightforward path for those schemes to consolidate. The current options are cumbersome and costly. The regulator also plans a new regulatory regime for master trusts that will entail them being authorised, having business plans and sufficient capital to operate. The sequencing of all this will be crucial as it is important that, if schemes are effectively being regulated out of existence, there is a simple alternative available. Otherwise, there is a danger that employers will just cease pension provision. Until auto-enrolment is in place, this will be possible and, arguably, more likely in the economic aftermath of COVID.
In November, the Pensions Authority issued a report on master trusts that was critical of certain aspects of their operation. While it is important that all schemes are fit for purpose and operate in the interests of their members, it is also important that they can operate effectively, and the trustees of master trusts do not necessarily have the power the regulator assumes. Getting the right balance will be crucial to ensuring that the various reforms succeed in achieving their main aim, which is to increase pensions coverage in Ireland.
This year should see significant movement along the path towards pensions reform in Ireland. After several years when this has been stalled it is crucial that we make significant progress.
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