2022 - The year in pensions

When we think of Pensions in 2022, most of us will probably focus on the sudden closure of Executive Pension Plans in early July. This was a challenging time for Financial Brokers and for the pensions industry as a whole – all pension providers pulled their EPP plans over the course of a day or so. Fortunately, we have worked through this and last month’s launch of the Zurich Master Trust – Executive Pension has provided new opportunities for customers and Financial Brokers alike.

But it would be wrong to just focus on EPPs in 2022 – there was a huge amount of Pension change over the course of the year and we thought that as we near the end of the year, it would be a good time to do a recap on it before we move into 2023 (which is surely going to be another year of change!).

The end of the road for AMRFs (January 2022)

The year started with the changes announced in the 2021 Finance Bill coming into effect. The requirement to create an Approved Minimum Retirement Fund (AMRF) of €63,500 was abolished with all existing AMRFs to be treated as Approved Retirement Funds (ARFs) going forward. This was welcomed as it allowed greater flexibility for those in retirement in terms of how much of their fund they could access. However, it did bring potentially greater risk for clients as they could now have access to much of their fund in the early years of retirement which could leave a shortfall in later years. If anything, these changes further outlined the need for continuing advice throughout retirement.

Another change was the removal of the “15-year rule” for PRSA Transfers, a restriction that meant occupational pension scheme members with long scheme service (15 years or more) could not transfer to a PRSA. Again, this was welcomed as it was seen as a progressive change to reduce complexity for clients.

The other major change was an amendment to death in service rules whereby trustees facilitating a death in service claim were now given an additional option to allow for the purchase of an ARF for a member’s spouse or dependents. This was very positively received as in many cases the trustees will have a residual fund left over after paying the maximum allowable lump sum (4 X Final Remuneration) and can now use that fund to buy an ARF or Annuity for the spouse or dependents of the member.

Auto-enrolment

In March the government provided more details on their plans for Auto-enrolment which is still targeted for launch in 2024. The scheme is expected to provide a pension benefit for up to 750,000 workers who are currently not included in a pension arrangement. Contributions are to be made by employers, employees and the State to a defined contribution arrangement which will be administered by a state-run Central Processing Agency.

Members will have four different investment options to choose from which include a default option, a conservative option, a moderate risk option and a higher risk option. Those funds will be provided by four separate providers, however actual returns achieved for members in their chosen fund will be pooled based on the returns achieved by the four providers for that fund type. Contributions will start off small (1.5% employee, 1.5% employer and 0.5% from the State) and will increase over a ten-year period to a total of 14% of salary (6% employee, 6% employer and 2% from the State).

Access to the auto enrolment scheme will be linked to the age for state pension access which is currently age 66. Although we welcome the fact that more people in Ireland will now have a pension in retirement, we do have concerns that members will not enjoy the same benefits currently available in existing pension arrangements. In particular we would be concerned that Members would: 

• Not be entitled to marginal rate tax relief (40% where applicable).
• Not receive financial advice (no advisor linked to the scheme).
• Have less flexibility in terms of investment choice.
• Not be able to make AVCs as this is not possible under current guidelines.
• Not be able to access funds until state pension age which is in stark contrast to rules in occupational pension schemes which can allow access from as early as age 50.

Pensions Authority activity and IORP II

The Pensions Authority now have a wider range of powers because of IORP II and have demonstrated this in the last year. As expected, they have been more active in their supervision of pension schemes and in their communication to trustees and registered administrators of those schemes.

IORP II has increased the governance required for occupational pension schemes and this has caused issues for group schemes and one member schemes set up on or after 22 April 2021 as they must now comply with this legislation. The increasing demands of IORP II resulted in all providers in the market closing their Executive Pension or one member arrangements for new business during the summer. This caused an advice gap for SME type clients who were looking to set up a new scheme to fund for their retirement. The solution has been to allow for these SME type clients under the Master Trust model which allows the same opportunities to fund for retirement with the governance criteria from IORP II satisfied.

We launched our Executive Pension under the Master Trust for SME clients in November, and it has been very positively received to date. We are now seeing group schemes and one member schemes set up on or after 22 April 2021 committing to wind up their scheme and transition to either the Zurich Master Trust or another suitable arrangement in 2023. It is important that those wishing to do so, formally commit to wind up their scheme before the end of this year and finalise that wind up and transfer next year as the Pensions Authority require that is done to avoid potential sanctions for IORP II non compliance. One member schemes set up on or before 21 April 2021 have a 5-year derogation to the main criteria of IORP II which ends in April 2026 and so can continue to operate as normal for the time being.

State Pensions

As part of this year’s Budget, the maximum rate of state pension was increased by €12 per week for those on the top rate of payment with those on lower rates to receive increases on a pro rata basis. Further changes to state pensions are also expected in the coming years. We understand that the current basis for determining the pension payable known as the Yearly Averaging approach will continue to be phased out and replaced with the Total Contributions Approach. The Total Contributions Approach requires 40 years worth of PRSI to qualify for the maximum rate of state pension with lower rates payable for those with between 10 – 39 years of contributions calculated on a pro rata basis. The government has also committed to offering alternative options for retirees including to defer the state pension (currently payable at age 66) to a later date to receive a higher payment and to introduce legislation to allow all employees to continue to work until state pension age.

Finance Bill 2022 – a new beginning for PRSAs?

In this year’s Finance Bill, we were provided with details of the further changes to be implemented for pensions in Ireland. This includes a change to how foreign pension lump sums are to be treated - from 1 January 2023, any pension lump sum received by someone in this state from an overseas scheme will now form part of their lifetime limits here for pension lump sums. As a reminder, these allow a person to receive up to €200,000 of pension lump sums tax free and require that excess lump sums between €200,000 and €500,000 are taxed at 20%.

However, the main talking point of the Finance Bill is the removal of the Benefit in Kind which is currently triggered by an employer contribution to a PRSA. This is a positive change for PRSA members who will now be given the same tax treatment as occupational pension scheme members when their employer contributes to the pension scheme. This has led to much discussion as to what it means for employer contributions to a PRSA in terms of how they are controlled.

Currently the proposed legislation does not seem to place any upper limit on an employer contribution to a PRSA as would exist in occupational pension schemes under the Revenue guidance for Ordinary Annual and Special Contributions. This may mean that the PRSA becomes an attractive option for SME type clients however we await sight of the final version of the legislation which will be enacted and are also conscious that further Revenue guidance could be provided in this regard.

2023 – will it be another year of change?

We will keep a close eye on communications from the government on their plans for auto-enrolment. We expect 2023 to be a busy year with many schemes transitioning to the master trust. We await confirmation of the legislation to be enacted as part of the 2023 Finance Act and expect further changes throughout the year in terms of how private pensions will operate based on the recommendations of the interdepartmental group who are looking at pensions reform in Ireland.

Pensions legislation is by its very nature complex, and at a time when people look for certainty when planning for retirement, the need for professional advice has never been greater. Reviewing the year gone by has more than ably demonstrated that – and we have no reason to doubt that the coming year will be any different.

The information contained herein is based on Zurich Life’s understanding of current Revenue practice as at December 2022 and may change in the future.