INVESTMENT IMPLICATIONS OF IORP II

Oliver Kelly

Head of Investment Consulting Ireland

What are the investment implications of the transposition of IORP II in Ireland?

There are 3 main investment implications that trustees and scheme sponsors need to be aware of. These can be summarised as follows:

Investment regulations will apply to all occupational pension schemes.

No exemptions for one-member arrangements.

No exemptions for smaller occupational pension schemes from producing a statement of investment policy principles (“SIPP”).

Some additional elements also required.

New formal responsibilities in relation to considering the area of Environment, Social and Governance (“ESG”) investment management.

Specific focus on these particular investment risks and trustees will need to document their views on same.

For larger occupational pension schemes these additional requirements will generally not require extensive changes. They may need to formally consider and document the responsible investment views of the Trustee board, but this should not be an overly onerous task.

However, proactivity and regular monitoring will be needed from an investment perspective in order to manage a DB or DC scheme using a forward-looking, risk-based approach that aligns with its agreed objectives. Trustees will need to be able to demonstrate a clear ongoing focus on delivering the objective, and managing the potential implications for the underlying asset allocation.

Action:

Trustees should be very clear on their scheme’s objective(s) and have in place a proactive process to ensure achievement of the objective(s). Ask your LCP contact for more detail on how we are supporting Trustee boards in formalising and delivering their investment objective(s).

Removal of derogation from investment regulations

Traditionally, one-member arrangements in Ireland have enjoyed a considerable amount of investment freedom. As the new regulations apply to a scheme or trust RAC within the meaning of the Pensions Act, 1990, as amended, this will remove some of these investment freedoms as they are brought in line with the full investment regulations applying to occupational pension schemes.

For one-member arrangements established before 22 April 2021:

  • A derogation from the new requirements applies until 22 April 2026
  • An open-ended derogation from the investment rules and borrowing restrictions applies in respect of investments made or borrowings entered into before the coming into operation of the Regulations.
  • There is no derogation for investments made or borrowings entered into by one-member arrangements after the coming into operation of the Regulations.
  • Any one-member arrangement established on or after 22 April 2021 will be subject to all requirements from the date of their establishment.

This may be frustrating for members who wish to conduct their pension savings via one-member arrangements. However there are other pension savings vehicles, such as PRSAs and Buy Out Bonds, which are not impacted by IORP II, which are likely to experience some growth.

SIPP requirements

The exemption from producing a SIPP for schemes with less than 100 members has been removed.

In addition, reporting on insurance policy investments and a greater sharing of the ongoing approach to the management of investment/liability risks will need to be included. More detailed guidelines from the Pensions Authority are expected in this area.

ESG responsibilities

In accordance with the prudent person rule, trustees may take into account the potential long-term impact of investment decisions on environmental, social and governance factors. In addition, the risk management system is required to cover environmental, social and governance risks relating to the investment portfolio and the management thereof.

There are also additional reporting requirements in relation to this area under the Shareholders' Rights Directive and the Sustainable Finance Disclosure Requirements.

Action:

Whilst we await explicit guidance from the various regulatory bodies, we feel trustees should be undertaking investment training, and developing and documenting their responsible investment policy. This policy can then be shared in a SIPP or standalone document as appropriate.

Investment oversight and risk management

Whilst the explicit investment implications under IORP II are relatively modest, the real impact will arise under the role of the risk management of a pension scheme.

The risk management system is required to cover at least the following areas (where applicable):

  • underwriting and reserving;
  • asset-liability management;
  • investment, in particular derivatives, securitisations, and similar commitments;
  • liquidity and concentration risk management;
  • operational risk management;
  • insurance and other risk mitigation techniques; and
  • environmental, social and governance risks relating to the investment portfolio and the management thereof.

These areas will clearly require explicit ongoing monitoring as part of the risk management process. These are not new concepts for those trustees who are proactively managing their schemes’ investments but may require an improved investment oversight infrastructure and a clear articulation of the policy and procedures in these areas. These matters will probably act as a further accelerant of the de-risking and risk management plans most DB schemes already have in place.

Action:

Trustees should be clear on their schemes investment objective(s) and ensure they have the appropriate level of specialist support and technology to manage their investment risks in a proactive fashion.

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