The transposition into Irish law of the IORP II Directive¹ (IORP II) has resulted in a period of significant change for the Irish occupational pension schemes landscape.

IORP II is a wide-ranging suite of legal requirements that seek to enhance pension scheme governance and strengthen management standards of pension schemes. IORP II introduced a number of new requirements for Irish occupational pension plans, in particular in relation to governance and risk management, plan management and member communications.

The task, and associated costs, of complying with increased obligations and responsibilities as a result of the transposition of IORP II new regime is leading many employers to examine master trusts as an alternative vehicle for providing pension benefits to employees.

What is a master trust?

A Master Trust is essentially a type of trust based occupational pension scheme in which multiple employers (who do not have to be related) can participate. Typically, each participating employer has its own ring-fenced section within the Master Trust which is then managed by a single corporate trustee who is independent of each of the participating employers. The administration, governance, investment and communications will all be controlled by the Master Trust provider.

Similar to other occupational pension schemes, Master Trusts require Revenue approval in order to obtain exempt approved status and they must be registered with the Pensions Authority. Currently, Master Trusts are subject to the general occupational pensions regulatory framework, including IORP II. However, it is expected that, over time, the regulatory framework applicable to Master Trusts will expand and become more specific to Master Trusts.

What are the key benefits employers should consider?

Outsourcing Regulatory Requirements

The regulation of pension scheme has increased significantly in recent years, particularly with the transposition of IORP II. As Master Trusts are provided by established pension providers or financial institutions, they often have significant in-house pension scheme expertise as well as an accomplished and professional corporate trustee. Moving to a Master Trust essentially removes the substantial regulatory responsibility from the employer’s shoulders, to be managed and overseen by the Master Trust and its trustee(s).

Potential Cost Savings/Economies of Scale

Larger Master Trusts should be able to exploit economies of scale and thereby reducing financial and regulatory costs and enhancing their efficiency and effectiveness. For example, by utilising the scale of multiple companies’ pensions, Master Trusts may be able to negotiate better terms and fees in the marketplace from investment managers.

Engagement Advantages for Members

All functions of a pension scheme including member communication will be dealt with by the Master Trust provider. Master Trusts can potentially enable members to have access to resources which may not be available or affordable in other pension vehicles including interactive tools and apps, online platforms and other innovative communication methods.

What are the key issues that employers should consider?

Pensions Authority Guidance for Employers

The Pensions Authority has published guidance (Guidance) for employers when considering a Master Trust for pension provision. The Guidance recommends that employers consider the following:

• Confirm whether the Master Trust trustees are qualified to carry out their trustee duties and obligation and that they meet the Pensions Authority’s Code of Practise for Trustees. Ensure you are aware of and understand the Master Trust charges and consider how the charges compare to other Master Trust providers.
• Review the investment and default investment options that are offered to members and ensure that such options are appropriate and that such investment options are clearly explained to members.
• Review example of members communications and ensure that such communications are clear and easy to understand and confirm how member enquiries will be dealt with.
• Confirm that the Master Trust provider meets the capitalisation expectations of the Pensions Authority.
• Confirm that the Master Trust trustees have an adequate conflicts of interest policies in place which meets the Pensions Authority’s Code of Practise for Trustees.

Indemnities in favour of Master Trust trustees

Under the terms of the governing documentation of the Master Trust, participating employers will generally be required to provide extensive and broad indemnities in favour of the Master Trust provider and the trustees. Employers should be aware of such indemnities and consider whether this level of legal risk is acceptable.

Issues with changing Master Trust providers in the future

Employers should be aware of the complexity involved with changing Master Trust providers in the future. An employer’s right to cease to participate in the Master Trust may be subject to a notice period and the ability to transfer members’ benefits to new Master Trust may be subject to the consent of the existing Master Trust provider or trustee.

Conclusion

It is imperative that employers considering the move to a Master Trust take their time to fully understand the advantages and disadvantages associated with Master Trusts. While Master Trusts will address some of the task, and associated costs, of complying with IORP II, employers should take the time to consider whether a move to a Master Trust is the right choice for their business.

Further, employers should be aware that not all Master Trusts are created equal, and the terms offered by each Master Trust will vary from provider to provider. The Pensions Authority’s Guidance will assist employers when it comes to assessing providers. It is also crucial that a legal review of the Master Trust documentation is completed so that employers are aware of the legal risks before moving to a Master Trust.