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Special Report

ESG: The metrics jigsaw

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Ireland: Desire for progress, lack of action

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Ireland is on the verge of radical pension reform, with the government and regulator laying the groundwork for a defined contribution future

Regulation in summary

• The new government is to draft proposals for a supplementary pension savings system by the end of the year
• The Pensions Authority has released a consultation document on simplification of the pensions sector, including consolidation of defined contribution (DC) funds.
• Trustees are to be subject to stricter education requirements.
• The regulator has also published new DC codes of conduct, setting out minimum standards.

With Ireland’s three main parties broadly agreeing on the direction of future pension reform, February’s election – which saw taoiseach Enda Kenny return to head a minority administration – was never going to see the election of a government opposed to auto-enrolment. 

But the long-promised reform has yet to materialise, despite repeated high-level reports from the government and the OECD. The launch of the Universal Retirement Savings Group (URSG) in early 2015 was meant to signal an end to political inaction, and all indications are that the new minister for social protection, Leo Varadkar, intends to stand by his party’s pledge for the URSG to publish a report within the first six months of government. 

Varadkar has already been outlining his desire to see supplementary pension savings rates boosted, continuing his predecessor’s work. Varadkar was given a roadmap to pension reform in July, after the Pensions Authority published a draft reform package meant to prepare the Irish market for future auto-enrolment reforms. His party, Fine Gael, is also championing the introduction of a European pension-tracking service, which has been developed by an international group called the TTYPE Consortium. 

The authority’s paper outlines new powers for the regulator, and proposals to bring about consolidation in Ireland’s comparatively large defined contribution (DC) sector. 

Ireland retirement assets

The regulator has taken a more proactive stance over the past year, now that the reinstated funding standard for defined benefit (DB) schemes has settled in. Building on an earlier consultation on DC governance, trustees have been issued with nine codes of conduct to review when considering best practice. 

These codes outline how trustees should compile a governance plan of action – comprising all regulatory and statutory deadlines, capturing information on which individual is responsible for which area of a scheme’s activities, and spelling out that a risk-management plan should be put in place. 

They also detail how trustee meetings should be conducted; how conflicts of interest should be addressed; and address matters of record-keeping, data protection, benefit payment and the collection of member contributions – all in line with what many trustees are already doing as a matter of course. 

Ireland Country facts

Importantly for aspects of the scheme’s investment, the code for scheme assets also spells out how often trustees would be expected to review investment approaches and default fund options of DC funds; how often an investment manager should be scrutinised in person; and how often members should be supplied with a statement of reasonable projection, showing the eventual pension pot size a member could expect on retirement. 

The new codes likely reflect a concern by the Authority that a minority of trustees were already failing to meet minimum standards, and a need to prepare the market for the professionalisation required should an auto-enrolment reform ever make it onto the statute books. 

Similar codes, on the financial management of DB schemes, were drafted and released in early 2015.

The other big area for concern were the changes to DB funding, following the introduction of the 10% funding reserve – mandated by the Social Welfare and Pensions Act 2012, which reinstated the minimum funding standard (MFS) for DB funds suspended in the wake of the 2008-09 financial crisis. 

“The picture painted is of a pensions market in much better health than in the aftermath of the Irish bailout but one still far from being solvent or completely reformed”

The previous Fine Gael-Labour coalition initially legislated for DB funds to hold 15% of liabilities in reserve, minus any cash or investment-grade sovereign debt it might hold on the balance sheet. Intended, on the one hand, as a buffer and, on the other, as a way to coax a reluctant DB sector to de-risk, the reserve was later lowered to 10% but was still a matter of concern for the sector when it came into force in January this year. 

However, in addition to a vastly improved funding situation for the sector – the 50 largest schemes reported assets of €42.6bn compared with liabilities of €42.1bn at the end of December 2015 – the sector has also heeded calls from its regulator to de-risk, allocating less to listed equities. 

While the largest funds reported a solid funding position, the overall picture for the DB sector is less healthy. A steady decline in the number of DB funds – down year on year from 703 to 666 in December – reflects the regulator’s desire to wind up the funds it deems beyond repair in a regulatory system that cannot force sponsors to make additional contributions to address the deficit. 

The sector’s overall deficit has improved notably in recent years, with the 666 funds subject to the funding standard reporting an overall surplus of nearly €2bn, and 70% of schemes meeting the MFS. This compares with a situation where, only a few years ago, eight out of 10 funds were reporting a deficit. 

The picture painted is of a pensions market in much better health than in the aftermath of the Irish bailout but one still far from being solvent or completely reformed.

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