Simon Hoffman reacts to the latest proposals by the Pensions Authority to simplify the pensions landscape.
We’re at this again. Another very laudable attempt is being made to simplify the pensions landscape. This time by the Pensions Authority, who recently published its consultation paper the ‘Reform and simplification of supplementary funded private pensions’.
The Authority is looking for feedback on its proposals at this stage, however, I can’t help but feel that this latest initiative is only firing on one cylinder.
The Pensions Authority is rightly only looking at issues within its remit – mainly oversight and structure, but there is little reference to tax or benefit rules which are the real drivers of complexity.
Where are the Revenue Commissioners in this? Without their participation there is the danger that the well-intentioned simplification process could end up with unfortunate consequences.
Two main themes are coming through the proposals – governance and rationalisation of individual pension savings vehicles.
I would concur with the Authorities’ view that Trustees are looking after other people’s money so should have the required skills to do so. So yes, the bar should be raised and Trustees Boards should know what they are doing.
When you consider there are 66,921 active occupational pension schemes in Ireland, it is reasonable to conclude that the Trustees of all of these cannot be up to scratch and concur with the Pensions Authority view that this is an unwieldy number of schemes to oversee.
The Pensions Authority is rightly only looking at issues within its remit – mainly oversight and structure, but there is little reference to tax or benefit rules which are the real drivers of complexity
But do they really have to look after so many schemes? 55,607 of these are single member schemes where the Trustee and the Member are usually indistinguishable. In my view, these fail the ‘looking after other people’s money’ test. We all know these are set up to take advantage of particular tax and benefit rules and not to benefit from the protection a trust structure gives members.
Increasing the oversight and professionalism of trustees is the right thing to do, but it will add to complexity and cost. Before you do this is it not reasonable to re-evaluate where it makes sense to employ a Trustee and where it does not?
If the Revenue were engaged and the tax and benefit rules of trust-based and contract pensions were harmonised, I guarantee the vast majority of those 55,607 one-member schemes would no longer opt for a Trust structure, not to avoid oversight, but because the beneficial owner of the funds don’t believe they need the protection nor the additional costs. Benefit harmonisation would also likely be cost neutral to the exchequer.
The Authority propose doing away with buy-out bonds (BOB) and retirement annuity contracts (RAC) and just allow personal retirement savings accounts (PRSAs) instead. The rationale for this seems to be that offering one contract must be simpler than three. That has some logic until you look at the benefits offered by each.
Increasing the oversight and professionalism of trustees is the right thing to do, but it will add to complexity and cost
The self-employed can save through a RAC or a PRSA and there is very little confusion in the market as both contracts have more or less the same benefits. There is also very little confusion around buy-out bonds.
These must reflect the benefits of the originating scheme so other than a transfer of ownership there are no benefit implications.
However, transferring into a PRSA results in restricted retirement options and it is at this point that complexity is introduced unless PRSAs were changed to also mirror the scheme benefits.
Benefits aside the choice between RAC, BOB and PRSA comes down to consumer protection. All products are approved by the Revenue and all product providers are regulated by the Central Bank. However, PRSAs have an additional layer of Consumer Protection where products are also approved by the Pensions Authority.
… when looking at pensions savings vehicles, don’t be blind to the fact that consumers are drawn in by the benefit rules
Again the fact of the matter is that this adds a layer of regulation costs and the Authority currently has a view that putting restrictions on the type of funds a PRSA can offer is a good thing. Will removing lower cost regulated products which offer greater investment choice really improve consumer confidence?
My feedback to the Authority – yes, let’s make sure Trustees are qualified to do their job. Yes. it makes sense to have less pension savings vehicles. But let’s not be blinkered about it, first re-assess where the work of a Trustee is needed and fix the rules which are driving pension savers into inappropriate structures.
Similarly, when looking at pensions savings vehicles, don’t be blind to the fact that consumers are drawn in by the benefit rules. Get them right first and then assess whether removing regulated products which offer more choice, at lower charges, is good for consumer protection.