IORP II has impacted the entire Irish pensions industry, in many ways, Self-Administered Pension Schemes (SSAPs) are where clients and advisors have seen the most significant changes, particularly relating to permissible investments.
As always, changes within the legislative environment give rise to planning opportunities with clients transferring from Self-Administered Pensions schemes to Personal Retirement Bonds (PRB), PRSAs or Approved Retirement Funds; clients with two pension funds running alongside each other (one regulated and the other in a Self-Administered PRB), and various other areas have been discussed in recent times.
Leaving these aside, where does the SSAP itself now sit in the retirement planning landscape?
Firstly, for all the additional complexity (and cost) the changes will bring to the Self-Administered market, the new regulations aren’t all bad!
For example, the investment restrictions relating to unregulated assets (a maximum of 50% of the fund, in practice, most pensioneer trustee firms are applying much more restrictive limits to allow for growth) enforce discipline on investors.
A high proportion of client enquiries tend to revolve around using most or all of a pension fund to
purchase a single residential property. Clearly this would give rise to an illiquid portfolio invested in one asset, let alone one asset class.
This is a consistent theme – clients interested in Self-Administered pension funds are often focused on a particular investment opportunity, rather than the inherent flexibility and control associated with these types of structures. A client can choose to invest in a broad mix of assets classes including off-market assets such as property, loan notes or Private Equity, subject to certain Revenue rules. There is therefore a great degree of optionality within a Self-Administered pension structure, but this does not mean that the basic investment principles of diversification and risk management should not apply.
Although IORP II will mean that clients’ portfolios will consist primarily of regulated investments, there is still plenty of scope to offer bespoke portfolios, constructed using fully liquid, on-market assets.
For example, an investor’s preference for a particular asset class such as property may be accommodated using funds or REITS, and the conversation lends itself to the construction of a portfolio that offers this exposure whilst ensuring it does so within the framework of a well-diversified portfolio.
Secondly, conversations about diversified, regulated portfolios (even if they are bespoke to that particular client) are easier to link back to a client’s retirement planning requirements. A Self-Administered pension exists to perform the same function that an Executive Pension plan fulfils – that is, to provide a client with private retirement income to supplement any State Pension entitlements they might have.
A regulated, bespoke portfolio can be constructed to target a specified investment return over time, in line with their required rate of return reflecting any financial planning or cashflow modelling carried out. Again, this moves the conversation away from specific short-term investment opportunities and towards a focus on the fundamental purpose of the pension fund itself.
All this is obviously not intended to downplay the significant impact of IORP II on Self-Administered pension funds. There are new obligations on Trustees across the board, in terms of investment selection, monitoring and the overall ongoing scheme governance.
Historically, SSAP arrangements were typically established under trust, with the member themselves acting as a co-trustee. The new ongoing obligations on trustees to meet ‘fit and proper’ standards for the role has brought to fore the capability (or indeed the lack of desire) for the member to act as a co-trustee of a Self-Administered pension going forwards.
The requirement to use the services of a professional trustee with the appropriate qualifications and experience, together with the key function holder appointments in risk and internal audit will provide members with assurance that their scheme will meet the new regulatory requirements, albeit at additional cost.
IORP II will mean that in addition to this, more members of Self-Administered schemes will have an investment portfolio appropriate to their retirement planning requirements.
Andy Dixon – Head of Business Development and Marketing
Original Article Published in FM Report in May 2022.
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