PENSION DEVELOPMENTS – WHAT'S ON THE HORIZON IN 2021?
We look ahead at the developments we may see across the Irish pensions sector later this year.
1. Culture Change Coming? The Pensions Authority's Expectations of Trustees
We now understand that we will see legislation transposing IORP II in the first half of 2021, and possibly during Q1. In anticipation of this legislation, the Pensions Authority (Authority) made a number of announcements late last year highlighting what it expects of trustees once IORP II is implemented, how it will supervise trustees, and what can be done now by trustees to prepare for IORP II.
On 7 October 2020, the Authority published new information for trustees of defined benefit schemes and on 23 November 2020 the Pensions Regulator, Brendan Kennedy, spoke at the IAPF's Annual Governance Conference. In both instances the same message was conveyed; the culture of trustee boards will, from now on, be central to the Authority's oversight of pension schemes.
The Authority, in line with what is required of it under IORP II, is moving to a risk-based and forward-looking approach to supervision. Trustees will therefore be expected to change the way they approach their work. This approach means that the Authority won't simply limit its supervision to assessing whether there have been any past breaches of technical aspects of the Pensions Act. Instead, supervision will be more overarching and will assess the management and governance of schemes by trustees to ascertain whether the culture itself is a risk to beneficiaries' interests.
Many trustee boards may be wondering what is meant by culture in this context. Brendan Kennedy has stated that he means it to be "the set of attitudes, values, expectations, and practices that determine the activity of the trustees". Trustees are being encouraged to be proactive, to identify what decisions they need to make, to make those decisions and to monitor actions. They are also being reminded that trustee responsibility cannot be outsourced; trustees must regularly monitor the activities of their service providers. The Regulator believes this will require a fundamental change in the mindset of many trustees who view trusteeship as a mechanical box-ticking exercise.
There will be no official guidance from the Authority before the transposition of IORP II, so what can trustees do now to prepare for IORP II?
The Regulator has suggested that a good place for trustees to start is to carry out a self-assessment of their own boards to ensure that they have the right mix of experience and knowledge. He also encouraged trustees to assess their financial controls, ensure they have a conflicts policy, and that appropriate contractual arrangements supported by service level agreements and key performance indicators are in place with service providers.
There is understandable frustration within the pension industry regarding the delay with transposition of IORP II and how that delay impacts the ability of trustees to fully prepare for IORP II. However, the Authority has made it clear that IORP II will bring with it an increase in what is expected of trustees in terms of the governance and management of schemes and a shift in the Authority's own approach to supervision. The combination of both these factors is likely to result in significant changes to the operation of pension schemes in the post-IORP II landscape.
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