GOVERNANCE

IORP II, the new EU Pensions Directive was finally transposed to Irish regulations on 22 April 2021. The regulations are broad ranging and require immediate action for many Irish pension schemes. Now, all pension scheme trustees are required to demonstrate an effective system of governance as well as deliver regular communications to all pension scheme members.

Roma Burke

LCP Partner

What do trustees need to do?

From a governance perspective, trustees must first demonstrate that they are fit and proper. “Fit” means that as a group, the trustees have sufficient skills, experience and qualifications to perform the role of trustees, while “proper” means that each individual must be honest, diligent and independent minded.

Fit

The Pensions Act now requires trustees to have the qualifications, knowledge and experience, which enable them to “ensure the sound and prudent management of that scheme”. Luckily, this is at a board level as opposed to applying to individual trustees. At least one trustee has to have at least two years of trustee experience in the last three years.

In respect of skills/knowledge, one way to achieve this is to carry out a skills assessment to understand the skillset on the trustee board. This exercise will identify any gaps and these gaps can be filled by training or by seeking new trustees that have the requisite requirements.

While a skills assessment is a very easy exercise to carry out (it can be done online by trustees in under 10-15 minutes), it is extremely useful for understanding what the trustee board is good at and what areas could benefit from further training and development

Action

Carry out a trustee skills assessment and develop a training plan for existing trustees. Have a discussion with the Employer on the skillset required for any new trustees.

Proper

Under the Pensions Act, some people are prohibited from being a trustee. This list includes anyone who is an undischarged bankrupt; has undischarged obligations with creditors; has been convicted of an offence involving fraud or dishonesty; or someone who is not allowed to be a director of a company.

From April 2021, this list has been expanded to include anyone who has been convicted of money laundering as well as anyone who has been convicted of money laundering or fraud and dishonesty in another state. There are similar restrictions for any organisations delivering corporate trustee services. Key to the fit and proper requirements will be for trustees to demonstrate fit and proper adherence.

Action

Establish a Fit & Proper policy, get the trustees to sign up to it and maintain a record of any due diligence carried out

Policies, policies, give me more policies!

It will be important to demonstrate a robust governance framework. The Pensions Act now requires trustees to have written policies on:

  • Risk Management;
  • Internal Audit;
  • Actuarial;
  • Outsourced Activities; and
  • Remuneration.

This is at a minimum. The Pensions Authority will also likely expect trustees to have policies on other important topics, such as Conflicts of Interest and administration.

Action

Understand what policies are in place and if they need to be updated or new policies developed. Monitor Pensions Authority guidance to understand what the Regulator is expecting of trustees.

A new support structure for trustees

Trustees of defined benefit schemes are familiar with the support of the Scheme Actuary who helps them understand the funding position of their pension scheme. Under the new regulations, two further key support roles have been introduced: Internal Audit and Risk.

In a similar manner to the Actuary, the Risk Function Holder will help the trustees understand the risk profile of the scheme and develop a framework to manage those risks, while the Internal Auditor will help the trustees understand the adequacy and effectiveness of the internal control system (administration procedures, accounting procedures and reporting). Fit and proper requirements will apply to the three role holders, in a similar manner to the trustee requirements.

Action

Specify the role and reporting required for each function, carry out an exercise to identify suitable candidates, carry out due diligence, notify the Pensions Authority of the new role holders and confirm the appointments.

Member communications

A Pensions Benefit Statement, with new, additional disclosures is required to be prepared once annually for all active and deferred members with the first such statement to be issued in 2022.

For some schemes, the requirement to communicate with all members may be a big challenge, particularly for schemes with large numbers of deferred members.

Action

Review the new disclosure requirements and ask your administrator if it is in a position to make compliant Pension Benefit Statements available to all active and deferred members with in the statutory timescales. Are there any GDPR issues the trustees need to be aware of? Can this be made available online?

Whistleblowing obligations

Trustees should be aware that the provisions in relation to whistleblowing have been considerably expanded. The responsibility to whistle blow now extends beyond material misappropriation and fraud to any material breach of the Pensions Act that could have a significant impact on the interests of the members (and have not been remedied within 21 days).

Key Function Holders have been added to the list of relevant persons with whistleblowing responsibilities. Did you know that in 2020 the Pensions Authority secured four criminal convictions for breaches of the Pensions Act?

Action

Consider a short training session for trustees on their whistleblowing obligations. Put a standing question to your advisers and service providers at each meeting: “Are there any Pensions Act Breaches that you are aware of?” and record the outcome in a log.

How will all of this be supervised?

The Pensions Act has been amended to enable the Pensions Authority to supervise pension schemes using a forward-looking and risk-based approach, and in a manner that comprises an appropriate combination of off-site activities and on-site inspections. This is likely to result in a move away from a reliance on backward looking snapshots of solvency to an oversight that includes a much higher risk focus.

The Pensions Authority may also require trustees to carry out stress tests or an external report with the scope and timetable set by the regulator. A new Advisory Notice process has also been put in place to enable the Pensions Authority to formally notify pension scheme trustees of any areas of concern.

An annual compliance statement will be required to be completed, the first of which will be due no later than 31 January 2022, in respect of the calendar year 2021.

Action

Review the template compliance statement in preparation for signing in January.

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