An EU Directive on Company Pension Schemes, called IORP II was implemented into Irish Law on the 22nd of April, 2021. The aim of this law is that all schemes should be subject to sound protections for Pensions and Consumers. Money saved for pension purposes should be properly protected to ensure that savers have adequate resources for retirement years. Unfortunately for many company directors, the days of adventurous investing are over, and a more conservative approach will only be allowed now.
Before IORP II came into force, one member schemes were exempt from most Investment regulations applying to all other Pension Schemes. In particular one member pension schemes could borrow to invest and could have 100% invested in property with or without gearing. One member schemes were not required to diversify their investments. In many ways One Member schemes could invest in Stocks and Shares, Irish Property, Loan Notes etc, with little or no restrictions.
IORP II is aimed at protecting consumers against the lack of diversification
INVESTMENT RESTRICTIONS NEW SCHEMES
New Investments made by one member schemes will have to abide by the Investment principles of the IORP II directive which are:
- No new borrowings will be allowed
- Assets must be invested in such a manner as to ensure the security, quality, liquidity, and profitability of the portfolio as a whole
- Assets must be predominantly invested in regulated markets. Investments in assets which are not admitted to trading on a regulated financial market must, in any event be kept at prudent levels
- Assets must be properly diversified in such a way as to avoid excessive reliance on a particular asset
- No more than 50% can be be invested in property or unlisted securities, such as loan notes. At least 50% of the fund at all times has to be invested in shares and bonds
INVESTMENT RESTRICTIONS FOR EXISTING SCHEMES
For existing schemes, the department has suggested that existing investments can be held even if they don’t comply with prudent investment rules. However, any new investments made after April 2021, will have to comply with the 50% rule (50% of assets would have to be invested in listed shares, collective funds, and no new borrowings can be taken on)
RESTRICTION ON UNIT FUND CHOICES
One Member schemes will likely find that after IORP II, Insurance companies will restrict unit fund choices (Investment in unit linked property funds and other funds invested in illiquid assets will be limited to a maximum of 50%
In conclusion restrictions on one member schemes will provide less investment options for company directors. These protection mechanisms are good if they protect the investor from making the wrong choices, such as investing in unregulated investments which are high risk. However I don’t believe that restricting investing in bricks and mortar is a positive move. Restricting Investment choices for Company directors will provide a more plain vanilla offering, and it may have a negative effect on pension take-up in the future.
* Please note this blog does not constitute financial advice. This represents the personal views of Eoin Wilson. Pure Finance Ltd is regulated by the Central Bank of Ireland. Pure Finance Ltd will not be held liable for any errors or omissions.