The Pensions Authority’s (Authority) FAQs on Investment & Borrowing for One-Member Arrangements (FAQs) attempt to answer the principal queries raised by trustees on the new investment rules inserted into the Pensions Act 1990 by the EU (Occupational Pension Schemes) Regulations 2021 (Regulations). While the FAQs are likely to give rise to additional queries from trustees, they also provide some much needed clarity.
The FAQs confirm that the derogation included in the Regulations applies only to OMAs that were established before 22 April 2021 (Applicable Date). Specifically, the FAQs confirm that a derogation relates to:
- The requirements in the Regulations that deal with the new governance obligations on schemes, including written policies, key functions, outsourcing and investment management. These requirements will not apply until 21 April 2026 for OMAs established before the Applicable Date, and
- Any investments made or borrowing arrangements entered into before the Applicable Date.
Any OMA established on or after the Applicable Date will not be entitled to benefit from any of these derogations.
Investments and the derogation
Any investments made before the Applicable Date will be ring-fenced from investments made after that date. Unsurprisingly, the FAQs confirm that when investments made prior to the Applicable Date are sold and the proceeds reinvested, the derogation will no longer apply to those new assets. The new investment rules apply in full to any investments made after the Applicable Date.
The meaning of “regulated market”
The new rules require that investments made by OMAs on or after the Applicable Date must be made “predominantly in regulated markets”. The definition of “regulated market” is narrow and is provided in the MiFID II Directive 2014/65/EU (MiFID II). In Ireland, for instance, the only market operated by the Irish Stock Exchange that qualifies as a regulated market is the main market. This is also known as Euronext Dublin.
The FAQs note that the website of the European Securities and Markets Authority (ESMA) may be checked to confirm whether or not a market is a regulated market for the purposes of MiFID II.
The FAQs confirm that the word “predominantly” means more than 50% (50%+ Requirement). When considering investments, trustees must also take the liquidity requirements of the OMA into account. The FAQs note that liquidity requirements include fees, anticipated death or disability benefits and retirement.
Market movements and the investment rules
Where market movements occur and an OMA’s investment portfolio has breached the 50% + Requirement, the trustees of the OMA must make it compliant with the investment rules. This must be done within a “reasonable period of time”.
The FAQs state that such a reasonable period is “within one year or such time as any of the necessary investments…can be encashed without significant penalties being incurred”. Presumably, this is to allow for a situation where an unregulated investment is illiquid and where certain steps need to be taken before an investor can divest from it.
Where a member directs the trustees of an OMA to make an investment that would cause the scheme’s assets to breach the 50%+ Requirement, the trustees “must refuse” to make the investment. However, the trustees may proceed to partially implement the member’s direction to the extent that the investment does not breach the rule.
Pooled vehicles and insurance policies
The rules relating to investment in collective investment undertakings (CIU) caused some confusion amongst trustees and providers when the Regulations were published. A concern was expressed at the time that while a CIU may itself be admitted to trading on a regulated market, the assets held by it may be unregulated, like a property. The FAQs have now seemingly confirmed that any investment in a CIU shall only be treated as being an investment in a regulated market where the CIU is itself invested predominantly in regulated markets.
The FAQs note that a CIU includes:
- unit trusts
- common contractual funds
- alternative investment funds, or AIFs, and undertakings for collective investment in transferable securities, or
- UCITs, situated in an EU Member State.
The same “look-through” approach for CIUs is applicable for unit linked insurance policies. This means that an investment in a unit-linked policy will only be treated as an investment made on a regulated market where the policy is itself invested predominantly on regulated markets.
OMA borrowing arrangements put in place before the Applicable Date are covered by the derogation as well. The FAQs confirm that this includes money borrowed on or before the Applicable Date or where the trustees were entitled to drawdown loan proceeds before that date. When it comes to restructuring or moving a loan arrangement to another lender, this may only be done where the new capital value of the loan does not exceed the value of the loan before the restructure, or the move, took place. Interest roll-up is not permitted either, so the message from the Authority here is that borrowings that existed before the Applicable Date may benefit from the derogation, but the level of borrowing incurred by an OMA cannot increase.
For trustees of OMAs the FAQs are likely to provide a useful starting point. However, there is no question that some uncertainty remains in respect of certain assets like Real Estate Investment Trusts, which are both admitted to trading on a regulated market as well as being a CIU. While the new investment rules take a number of options off the table for small, self-administered schemes, pension investors can still find investment flexibility in the form of the Non-Standard PRSA and the Buy-Out-Bond.
For more information, please 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.