Improving results in Ireland’s pension market
Just as with transformational change in the Irish pensions market, Andy Farrell, head coach of the Ireland rugby team, knows the benefits that come from strategic planning. P
2019 proved to be a milestone year for the world of pensions and rugby. The Rugby World Cup in 2019 was a disappointing campaign for Ireland with some poor group stage performances followed by a heavy quarter-final defeat.
Andy Farrell took over the team knowing a journey of change and transformation was required to be competitive in France this year. Some parts of the team were working well but others were badly exposed.
Outside the sporting world, 2019 also saw new pension regulations known as the EU’s IORP II Directive (Institutions for Occupational Retirement Provision) coming into force across Europe.
The new regulations fundamentally changed how pension schemes are governed, how they manage risk and above all how the Pensions Authority supervises pension schemes across Ireland. With the introduction of IORP II, the number of schemes is likely to reduce from thousands to less than 500 over time.
Up until recent years, Ireland had tens of thousands more pension schemes than any other country in Europe. These were dominated by single-person pension schemes. Our medium and large company schemes were also much smaller and more numerous than the average of our European peers.
“So what?” says the average pension saver. Unfortunately, the large number of small pension schemes leads to poor oversight, higher charges, less innovation and ultimately worse pension outcomes for people at retirement age. In short, pensions in Ireland needed transforming and the IORP II Directive helped to put in place a new management system.
Over the last number of years, despite the COVID-19 pandemic and numerous economic and logistical challenges, positive changes have taken place that enhance the resilience of Ireland’s pension system. The transformation for company pension schemes has been in two areas:
- (i) Large schemes increasing oversight and governance (normally funded by employers).
- (ii) Many schemes transitioning to Master Trusts as ready-made solutions.
Most Irish employers, outside the very largest companies, will have been busy engaging with their advisors to complete the transition to master trusts.
A master trust is simply a pension scheme catering for more than one employer. Historically employers set up one scheme which their employees were members of with the costs being funded by employers. Now regulations have encouraged employers to pool their resources together with pensions companies managing administration, investment strategy and governance standards. This enables one pension structure — The Master Trust — to do all the heavy lifting in complying with regulatory requirements while employers and members can focus on making the right decisions.
Just as Andy Farrell team’s transformation was not done simply to change the faces on the team, IORP II was not written for the sake of a change in pension governance. Both Andy Farrell and the EU Commission were focused on changes which will result in better outcomes. For Farrell, some new players and changes in style, combined with the best of what went before, could hopefully result in success at the World Cup in France. For the EU Commission, forcing a change in the average size of pension scheme would lead to better outcomes. But how?
Sporting results are easier to measure. Did you score more than the other team? The scoreboard doesn’t lie. Pension scoreboards are harder to design. What we want to measure is member outcomes — did pension scheme members achieve their objectives in pension saving. Did they even have the right objectives?
Some of these answers won’t be known for many years. But like a rugby coach might examine some in game statistics – territory, possession, missed tackles — which give a clue to the outcomes, employers and trustees can measure key metrics to give them clues about future outcomes for pension savers. What would these metrics be?
Members have only two key decisions to make while saving for retirement. The first is how much should I save and the second is how should I invest. A positive scoreboard for pension schemes should give us clues about how members are answering these questions:
- (i) Are they engaged in finding out about their pension and its future — do they open their benefit statement? Do they log into their pension?
- (ii) Do members understand the benefits of saving for a pension to make additional voluntary contributions? The minimum contributions are unlikely to provide enough retirement income.
- (iii) What are members investing their pension savings in? Are they constantly changing investment funds? Are the core investment funds meeting their benchmarks. Are investment charges value for money?
IORP II is enabling meaningful movement on these key metrics.
Large master trusts, including the Aon Ireland Master Trust, are using their scale to win on these scoreboards. New engagement tools enabled by technology like personalised video benefit statements and better-designed web and mobile tools are facilitating a big increase in member engagement. Targeted campaigns and personalised information about future outcomes are increasing contribution levels. Investment solutions are evolving with scale and delivering better results.
As 2023 comes to a close, it is clear that Ireland’s pension landscape is transforming for the better. And not before time. At Aon Ireland, our team of expert advisors are committed to helping pension schemes achieve better results for their members and ensuring that employers and trustees deliver better outcomes for their people.
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