It was not entirely unexpected that the EU (Occupational Pension Schemes) Regulations 2021 (Regulations) would bring to an end the freedoms enjoyed by one member arrangements such as the Small Self-Administered Schemes (SSAS). For many savers, the SSAS was the perfect recovery vehicle to put their retirement back on track in the wake of the financial devastation caused by the last recession. Opening a SSAS meant that the member could be a trustee of their own scheme and relatively unfettered when it came to making investments, as long as the Revenue Rules contained in the Pensions Manual were adhered to.
However, both existing and new one-member arrangements will now need to abide by the Regulations and the new provisions inserted by them in the Pensions Act 1990 (Act). For schemes such as SSASs, it means greater investment and borrowing restrictions and compliance with a range of governance, policy and fitness and probity requirements that were previously the preserve of group schemes only. With this in mind, it is worth asking: where to now for the saver seeking a low cost pension vehicle that allows them a good deal of freedom when it comes to investing, including the utilisation of gearing?
One member arrangements: old and new
The Regulation distinguishes between those one-member arrangements established before 22 April 2021 (Relevant Date) and those established after that date. If a one-member arrangement is established before the Relevant Date:
A derogation from most of the requirements of the Regulations exists until 22 April 2026
All investment and borrowing restrictions in the Regulations will not apply to investments or borrowing obtained before the Relevant Date
However, there is no derogation for investments made and borrowing obtained after the Relevant Date. Take a scenario where a member of a SSAS and their financial advisor were in the early stages of arranging the purchase of a property for the scheme. This may no longer be possible where the borrowing arrangement was not in place by the Relevant Date or where the acquisition of the property would breach the requirement in the Regulations that states that all schemes must be “predominantly invested” in regulated markets. The Pensions Authority has confirmed that, in an Irish context, being predominantly invested in regulated markets means a minimum of 50% of the scheme’s assets.
All one-member arrangements established after the Relevant Date will be subject to the full requirements of the Regulations, meaning that there is no five year transitional period for these schemes. The Pensions Authority confirmed in its recent information note that it will pay particular attention to the establishment date of one-member arrangements when it comes to compliance with the investment and borrowing requirements in the Regulations.
The trustee question
Providers of one-member arrangements such as the SSAS and Executive Pension Plans (EPP) will need to consider the trustee fitness and probity aspects of the Regulations as well. It is difficult to see the “member trustee” model continuing, given the qualification and knowledge requirements that the Regulations place upon trustees. While the regulations confirm that the level of trustee qualifications and knowledge need to be “collectively adequate” to ensure sound and prudent management of a scheme, further guidance from the Pensions Authority will be required to establish what is meant by that phrase. For now, providers are likely to err on the side of caution and appoint a professional trustee to act as the sole corporate trustee of their one-member arrangements. This is likely to work for larger pensioneer trustees that have significant trustee qualifications, knowledge and experience on their boards as well as being MiFID regulated firms. However, it is likely to cause significant issues for smaller pension providers.
Key function holders
Similarly, the requirement for one-member arrangement to appoint internal auditors and risk managers will be very difficult and costly for pension providers that do not have the necessary resources internally or existing arrangements with external service providers.
Savers looking to invest freely without having to consider the new investment restrictions at every turn still have options. The Buy-Out-Bond (BOB) and the PRSA have not been impacted by the Regulations. Though a Standard PRSA is very limited in terms of investment options, the Non-Standard PRSA is not restricted in the same way when it comes to the investment options available to it. BOBs are approved by Revenue as a specialist pension vehicle and receive transfer payments from occupational pension schemes where a member leaves service, where a scheme is wound-up or in relation to a Pension Adjustment Order.
While the Revenue Rules continue to apply to any investments contemplated by holders of these pension vehicles, there are no restrictions on a BOB or Non-Standard PRSA when it comes to investing in unregulated markets or investing in entities such as exempt unit trusts that can, in turn, acquire gearing. On that basis a member of a one-member arrangement might choose to transfer their benefits to a Non-Standard PRSA or a BOB and then proceed with their chosen investment in property or private company loan notes, for example.
It is also worth noting that as the BOB and PRSA are not impacted by the Regulations, they are unlikely to see an increase in annual charges. This outcome is inevitable for members of SSASs and other one-member arrangements.
The Regulations have changed the game for one-member arrangements. For new schemes in particular, the Regulations mean less control for members, higher annual costs and fewer investment options. The Pensions Authority’s draft code of practice and consultation process will hopefully provide additional clarity for providers and savers, but we can say with certainty that the previous freedoms enjoyed by SSASs and EPPs are at an end. Providers of one-member arrangements should seek legal advice on the Regulations and consider the steps that need to be taken to ensure compliance. It may be the case that many providers will also need to take a hard look at the commercial viability of providing products such as the SSAS. Savers who are looking for greater investing flexibility than that which is now offered by a SSAS or EPP should consult with their financial advisor.
For more information on the impact of the guidance on trustees, contact a member of our Pensions team.
The content of this article is provided for information purposes only and does not constitute legal or other advice.