Seismic changes in Irish pensions herald new era of hope
PRSAs are also a far more flexible form of pension arrangement than traditional OPS and they provide potentially markedly better benefits.
The enactment of Finance Act 2022 has been much anticipated by pension practitioners and the industry as a whole.
It follows the proposals contained in the Finance Bill, introducing very significant changes to the tax treatment of a pension contract known as a Personal Retirement Savings Account (PRSA).
Section 22 of the Act, enacted by the President on 15 December 2022, provides for the removal of a benefit in kind (BIK) income tax charge in respect of employer contributions to an employee’s PRSA pension after 1 January 2023.
Prior to this, employer contributions paid to an employee’s PRSA pension were treated as a BIK for that employee, but:
- The BIK was limited to PAYE income tax (no PRSI or USC), and
- For tax relief purposes, the recipient employee was allowed to treat the employer contribution as if it were a personal contribution. The employee could claim tax relief personally within the age-related percentage limits and the current €115,000 earnings limit.
The effect of this historically was to limit employer contributions to a maximum of the personal tax relief limits.
This new legislation changes that and now allows for uninhibited employer PRSA contributions to an employee PRSA.
But it does more than that!
Traditional levels of pension funding to an occupational pension scheme (OPS) are determined by a number of factors — including the employee’s salary, length of service, proposed normal retirement age, and any existing scheme funding or retained benefits from other employment(s).
PRSAs are not subject to these checks. No prior Revenue approval is required and, following the enactment of the legislation, we are in a whole new world when it comes to funding for retirement.
PRSAs are also a far more flexible form of pension arrangement than traditional OPS and they provide features and potential benefits which are markedly better than was previously the case.
For senior employees/directors and business owners, this represents a major opportunity to review existing pension arrangements and to take advantage of the new provisions. For practitioners like me, new and exciting planning opportunities for clients are emerging as a result.
So why has there been this change?
IORP2 Institutions for Occupational Retirement Provision 2 (IORP2) is an EU directive that was transposed into Irish law by way of amendments to the Pensions Act in April 2021.
The directive, which replaced its predecessor, IORP1, increased dramatically and substantially the requirements placed on trustees/ administrators and investment managers of occupational pension schemes. This includes group defined benefit (DB), defined contribution (DC) and one-member arrangements (OMAs).
The directive restricts investment to ‘predominantly on regulated markets’. This affects property, traditionally a staple in many one-member schemes, because it is an unregulated activity.
It also prohibits ‘borrowing’ in one-member schemes.
The directive also places more onerous requirements around trusteeship, governance and the provision of information to both active and deferred members. A timetable for implementation followed the enactment of the directive, but the impact was immediate.
A new term, master trust, entered the pensions lexicon and it has been held out as the way forward, in particular for group schemes.
The Pensions Authority (PA), the regulator of occupational pension schemes, has also had a lot to say.
In its Statement of Strategy 2022-2024, the Pensions Authority states: “A key focus will be to determine how many schemes have wound up and transferred members and assets to Multi-Employer Schemes or PRSAs.”
It is a clear message that the PA wishes to see a reduction in existing trust-based schemes and migration to master trusts (disparate multi-employer arrangements all contained within one large ‘scheme/ trust’).
And new one-member schemes were spectacularly suspended in July 2022 following a strongly worded warning to the industry by the Pensions Authority that their existing documentation and procedures were not compliant with its interpretation of IORP2.
The conundrum for the industry unable to provide one-member arrangements has been:
If setting up a new one-member arrangement like a traditional insured executive pension or self-administered scheme is either too onerous, restrictive, costly or runs contrary to the strategy and objectives of the Pensions Authority (the Regulator), in a post-IORP2 world, how do you replicate the very attractive funding capability of these types of schemes?
Master trusts can cater for one-member arrangements alongside multi-employer ones.
However, the recent changes introduced in Finance Act 2022 in relation to PRSAs that I’ve set out above have gazumped everything and provided a non-IORP structure which is more flexible and now provides scope for uninhibited funding and planning opportunities.
Whoever said pensions were dull!
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