We have recently seen the introduction of transformative legislation in both the UK and Ireland. In Ireland, we now have transposing regulations for the IORP II Directive (Directive). This event brings significant changes to the areas of pension scheme governance, trustee responsibility and qualifications and investment rules. In the UK, the Pension Schemes Act 2021 is aimed mainly at defined benefit (DB) schemes and provides The Pensions Regulator (TPR) with significantly enhanced powers. We compare the state pension and group scheme landscape in both countries and look briefly at what might be in store for Irish pensions over the next few years.
The State Pension
The State Pension age in the UK is currently 66 and is set to increase to 67 by 2028. The current rate is £170.60 per week but the amount actually received could depend on an individual’s National Insurance contributions record. A further increase in the State Pension age is planned, with 68 to be introduced between 2044 and 2046. There are also plans to bring this increase forward to 2037, though this has yet to be approved by parliament. The UK Pensions Act 2014 provides for a regular review of the State Pension age at least once every five years.
The Social Welfare Act 2020 deleted relevant legislation which would have increased the State Pension age to 67 from 2021 and to 68 from 2028. The State Pension age will remain at 66 for now; though the newly established Commission on Pensions is examining the issue in more detail and is due to provide its report to Government in June of this year. There is presently no legislation which will trigger a future increase in the State Pension age. New legislation will be required if any proposed increase is to take effect in the future. For a person aged 66 and older, the State Pension (contributory) in Ireland is currently €248.30 per week and is paid to those who have made the required social insurance contributions. It is not means-tested, though it is taxable. However, an individual is very unlikely to pay tax where the State Pension is their only source of income.
Occupational pension schemes
DB schemes – UK
Members of DB schemes in the UK have a number of safety nets that are not available to their Irish counterparts.
Under section 75 of the Pensions Act 1995, as subsequently amended, participating employers become liable for what is known as a section 75 employer debt when they withdraw from a DB scheme. The debt owing by the employer is calculated on a buy-out basis. This calculation tests whether there are sufficient assets in a scheme at the time that the employer leaves to secure member benefits by purchasing annuity contracts from an insurance company.
In the UK, there is also a statutory fund called the Pension Protection Fund (PPF) which will pay compensation to members of eligible DB schemes where an employer has a qualifying insolvency event. The PPF was established in 2005 and over the years it has brought a number of DB schemes, linked to high profile corporate insolvencies, into its protection. Chief amongst these were the British Steel and BHS pension schemes.
DB schemes - Ireland
There is no such safety net for DB schemes in Ireland and it remains to be seen whether anything similar will be required. As of 2019, there were still over 570 DB schemes subject to the funding standard with total assets of €65.3 billion. While the total number of DB schemes and their assets under management in the UK will always be much greater, Ireland has not been without its share of DB scheme controversies. As a result, the cost of maintaining DB schemes remains a significant concern for employers, especially during recessions.
Group schemes generally – UK
The UK implemented automatic enrolment (AE) in 2012. Since then, over 10 million workers have been automatically enrolled with over 1.6 million employers meeting their statutory duties. AE is thought to be well understood and has contributed to a higher level of awareness amongst workers of the importance of saving for retirement.
The introduction of AE in the UK also led to significant growth in its master trust industry. The UK master trust market grew to £16 billion assets under management by 2018. There are currently 90 providers providing master trust schemes to over 10 million members. TPR introduced a master trust Code of Practice in 2018 and all new master trusts must now be authorised with TPR.
Group schemes generally - Ireland
There are currently close to 9,000 stand-alone defined contribution (DC) schemes in Ireland with over 337,000 members. However, with the introduction of the European Union (Occupational Pension Schemes) Regulations 2021 (Regulations), the costs of maintaining small DC schemes are likely to increase significantly. Many expect that this, together with the introduction of AE, will see a significant growth in the master trusts industry in Ireland.
AE implementation is expected in Ireland over the next few years. Due to the pandemic, however, few expect it to be rolled out in 2022 as originally suggested in the Roadmap for Pensions. Some of its features have been confirmed in principle, meaning they are still subject to change. The default contribution rate is expected to be 1.5% of qualifying earnings. This rate is set to increase by 1.5% every three years, leaving a maximum contribution rate of 6% at the end of the first ten years of enrolment. Employers will match that contribution rate within an overall qualifying earnings limit of €75,000. The State contribution is expected to be €1 for every €3 contributed by the employee. However, many of these features may have changed by the time AE is finally implemented.
There are presently only a small number of master trust providers in Ireland and some commentators have expressed concerns about the possible development of a monopoly in the industry. In its master trusts engagement programme, carried out during 2020, the Pensions Authority also identified several concerns that related primarily to governance and conflicts of interest issues. However, as the Directive has (belatedly) been transposed by the Regulations, we are likely to see a spike in the popularity of the master trust in Ireland as a cost effective alternative to the stand-alone DC scheme.
The UK's decision to leave the EU will continue to affect its pension industry. As Ireland continues to implement EU regulations aimed at harmonising pensions across the internal market, we are likely to see significant divergence in how pensions are regulated in the two jurisdictions in the years to come. However, the vast majority of pensions in Ireland and the UK will remain trust-based for the foreseeable future, meaning that it will always be possible to find similarities and learn from shared experiences.
For more information on the evolving pensions landscape in Ireland and how changes in provision might affect your organisation, 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.