Articles - Evolution of the Irish DC pensions market

 By Mark Futcher, Partner and Head of DC and Jeni Flanagan, Principal and Senior DC Consultant from Barnett Waddingham

 With AE looming on the horizon in Ireland, we explore below learnings from the UK over the last decade, and the differences/similarities between the Defined Contribution (DC) pensions landscape with a call to action for employers and trustee bodies in Ireland to consider how their existing arrangements may evolve with the changes.

 Independent research
 We have been on several trips to Ireland and have met with industry leaders there, as well as conducting our own independent research of the DC pensions market. Our key findings are as follows:

 The master trust market has grown considerably (with over €20bn assets under management), however there are still a considerable amount of DC assets (approx. €45bn) still held in standalone own-trust arrangements, personal retirement savings accounts (PRSAs) and executive pension schemes.

 The introduction of IORPs II with the impending Digital Operational Resilience Act (DORA) will likely see a further drive into master trusts from own trust schemes in order to extinguish the more onerous governance duties. There are likely to be large movements in the DC space over the next few years (including in the master trust space).

 The AE system (as set out further below) is completely separate and work will be required by employers to consider the impact of non-pensioned employees.

 It is largely a broker led market (with commission trail) and many of the large consultancies operate their own master trust highlighting the importance of independent consultancy support when selecting a provider.

 There is a continued focus on digitalisation and member engagement enhancements across the board, including how employers’ access MI more effectively.

 A familiar story
 While AE has been in place in the UK for over a decade the DC pensions industry overall faces similar challenges to the UK in many respects, including:

 Lack of employee / member engagement.
 Concerns around adequacy of pension savings.
 A stark gender pensions gap.
 An ageing population with increased life expectancy/decline in birth rates.
 Economic factors, such as cost-of-living crisis impacting savings rates.
 Workplace pensions apathy.
 Challenges with product innovation in the at-retirement phase.
 Recruitment/retention issues with employees looking at total benefit packages.

 The differences
 While the Irish AE system may look familiar, under the surface there are some significant differences.

 Under the Irish AE system, employees will be enrolled if they are aged between 23 to 60 and earning over €20,000 p.a. across all employments. Compared to the UK where the equivalent eligibility is age 22 (intended to reduce to age 18) to State Pension Age (currently age 66) and earning over £10,000 p.a.

 When AE commences, contributions will phase in from 1.5% matching up to 6% matching within 10 years (on gross earnings between €20,000 - €80,000). The State will also add a further €1 for every €3 saved by the employee up to €80,000.

 However, there will be no option for employees to pay additional voluntary contributions (AVCs) beyond this.

 There will be an opportunity for members to opt out of the Irish AE system in a similar way to the UK, although the period in which to do so is much longer – after six months, instead of within one month under the UK AE regulations.

 Under the centralised AE system (the Central Processing Authority) in Ireland contributions will be paid to the same account, rather than building up multiple pots – as per the UK. The administration contract for the system has recently been awarded to Tata Consultancy Services (TCS), which also operates the administration of Nest Pensions in the UK (as established by the government).

 As set out above, the State ‘tops up’ contributions under the AE system as opposed to applying tax relief to pension contributions at marginal rates akin to the UK. Making it a complex task to work out which pension arrangement members may be better off in!

 There are a number of details still to be confirmed and while fund managers await appointment the intention is to operate three funds on a risk graded approach (conservative, moderate and higher risk) and one default option operating on a lifestyle basis. There is an intended annual management charge of 0.5%. Members will be able to take their benefits at State Pension Age with access limited to cash, annuity or an approved retirement fund.

 Due to the fact that existing arrangements cannot be used on a ‘qualifying’ basis employers will need to operate these in parallel and consider the payroll implications of doing so.

 Aside from scale, due in part from the use of existing arrangements for AE, there has been a significant increase in scale in the master trust market in the UK, particularly since the authorisation regime in 2018. With over £140bn invested in master trusts. This is expected to triple by the end of the decade. Providers are investing heavily in their master trust propositions to keep pace with the market and we do expect there to be continuing contraction in this space.

 Our learnings
 As set out above, there are significant differences between the intended AE system in Ireland and the AE regulations introduced in the UK in 2012, not least due to the complexities of the UK's AE regulations. This created initial burdens on employers (particularly payroll) to get ready for AE but also with the continuing compliance with AE.

 Many employers, often unintentionally, don’t fully comply with all the rules here with common errors including oversight with contributions, processes, maternity leave discrepancies, tax relief applied incorrectly and much more. So, rectification support and costs are often required to mitigate these issues.

 Beyond the processes of AE there has been a swathe of regulations introduced in the UK over the last few years driving consolidation away from own trust arrangements which are not offering good value for members, hence there has been a significant shift into the master trust market (and contract based too).

 Call to action
 Prior to the AE regulations coming through in Ireland employers will need to consider the potential impact by assessing their non-pensioned workforce. Ultimately compliance with the system will be required, however adequacy levels of base rates without AVCs may form part of the employer’s decision on how to treat this cohort of workers.

 It may well be that offering access to a current workplace pension scheme, either contractually, or via a robust engagement programme, be considered as alternatives to the AE system sitting alongside (noting the payroll implications of operating dual pensions). Differing contribution designs may also form part of impact analysis, with review of existing scheme rules to ensure this is possible.

 If currently running a standalone own trust arrangement consideration of continuing compliance with IORP II and operational readiness for DORA, noting the triennial risk review cycle, or the potential outsourcing of this to a master trust may be considered. Many employers report significant costs and risks in continuing to run their own trust scheme.

 The Pensions Authority has advised employers that they will need to undertake due diligence when considering a move to master trust, including areas such as:

 trustee qualifications;
 fund charges and choices;
 member communications;
 conflicts of interests matters;
 scale and experience; and
 quality of technology.

 This is not an exhaustive list, and it is worth considering their propositional development as well as how they may be preparing for the proposed master trust regulatory regime.

 Although the 2025 AE target may appear ambitious this presents an opportunity to review existing compliance, overarching value provided to members and for employers – ultimate readiness for AE!