“Bad process invariably leads to bad policy”
The deadline for national implementation of the EU Institutions for Occupational Retirement Provision (IORP II) directive passed this January. Each EU member state had been given a period of two years to bring in laws and administrative provisions to apply this legislation at a national level.
With the governments of most EU countries spending 2017 and much of 2018 consulting with stakeholders that were likely to be affected, conducting impact analysis and giving sufficient notice to pension funds and other entities on how they would roll out IORP II, Ireland’s Department of Social Protection was mute in its communications, deaf in its consultation and inactive in its implementation.
With the deadline having passed and at least 10 other countries having complied with its implementation, including the UK, the minister for employment affairs and social protection, Regina Doherty, has confirmed that the directive will pass into Irish law without primary legislation being required and without a consultation, leaving the entire Irish pension industry in a state of disarray. Furthermore, the minister has confirmed, without any forewarning, that the full force of the directive will apply to previously excluded single person pension schemes.
In Ireland there is over €5bn of assets held in small self-directed pension schemes, with over 60% of these funds investing directly in the Irish economy. These self-directed pensions are one-member pension schemes where the person saving their money for their retirement decides where their fund is invested. Self-directed pensions offer greater transparency over costs and charges while affording a wider scope of investment options and risk management tools. Once the legislation is finally issued, these pensions will cease to be viable. The only option that will remain will be to invest in generic managed fund-type arrangements offered by the multinational life assurance industry.
Before the EU Commission proposes new legislation, it assesses the potential economic, social and environmental consequences it may have. It does this by preparing ‘impact assessments’ which set out the advantages and disadvantages of policy options. The Commission also consults interested parties such as non-governmental organisations, local authorities and representatives of industry and civil society. Groups of experts give advice on technical issues. In this way, the Commission ensures that legislative proposals correspond to the needs of those most impacted and avoid red tape. Once the legislation is agreed, most member states carry out a similar process to ensure it is transposed into national law in a prudent manner. Not so in Ireland: the Department of Social Protection does not appear to have followed this process, or any logical process from what we can see.
During the process for drafting the directive at European level, the Irish government requested that the exemption for small schemes to take into account the diverse and competitive pensions market in Ireland. This request was supported by the UK and the Netherlands for similar reasons and has been included in the EU directive, which confirms that: “Member states may choose not to apply this Directive, in whole or in part, to any IORP registered or authorised in their territories which operates pension schemes which together have less than 100 members in total.”
Despite the Irish government originally being a supporter of consumer choice, the Department of Social Protection has refused to engage with industry bodies or representatives when transposing the legislation into Irish law. What is concerning is the lack of clarity and consultation in relation to implementation.
Good practice would typically involve an open invitation to industry representative bodies and the public to comment on such a significant change in the law, a consultation process. However, this has not happened. Nor does any impact analysis appear to have been undertaken.
In the UK, following a comprehensive impact assessment, the Department for Work and Pensions established that IORP II applies to a total of 6,718 schemes across the country. The UK has logically considered one-member schemes exempt from IORP I & II, not because of the derogation available, but because individual decision-making was never deemed within the scope of either IORP directive, which are directed towards multi-member schemes. In Denmark, IORP II will apply to only 2% of the pensions market. Germany also exempts certain pension arrangements from the provisions, specifically small pension funds similar to those in operation in Ireland.
“In Ireland there is over €5bn of assets held in small self-directed pension schemes”
The EU believes there are too many Irish pension schemes and is determined to reduce the numbers. Despite the industry working with government officials and the Pensions Authority to devise a workable solution to the numbers issue, the department appears to have decided to use this directive to reduce scheme numbers at whatever cost to private pension savers or the broader economy. A simpler method would be to follow the UK’s example and correctly record one-person pension arrangements as individual pension contracts and not as pension schemes. The term ‘scheme’ infers a collection of individuals saving together.
The implementation of the full directive against single-person pension arrangements
flies in the face of the directive itself while also contradicting our government’s original position with the EU.
Jobs will be lost directly in an Irish-owned industry, consumers will have no choice left in relation to their pensions, costs will rise for all pension schemes and the domestic economy will lose over €3bn in funding. But at least the number of schemes will reduce, which will aid pension regulation but do nothing for pension participation or consumer choice.
David Kavanagh is spokesperson for the Association of Pension Trustees of Ireland and director at QuestCapital Trustees