I thank the committee for giving us the opportunity to attend. We are here to talk about IORP II, which is a European directive to try to harmonise governance around pension arrangements in Europe. IORP stands for institutions for occupational retirement provision and the primary objective of the directive is to try to harmonise governance and arrangements for institutions or collective schemes which provide retirement provisions.
By way of background, Ireland is a little bit unusual in what it considers to be an institutions for retirement provision or a collective scheme. Ours is the only country in Europe where one-person arrangements are considered to be a collective scheme or institution.
More than 110,000 of those institutions are in Ireland. That is because of the unusual position we take in counting one-man arrangement schemes as institutions.
The directive on institutions for occupational retirement provision, IORP II, recognises that there are many differences in pension arrangements throughout the various European countries. The directive advises member states to tailor the provisions for smaller arrangements if they see fit to do so. The UK availed of one of the clauses within the directive allowing a cost-benefit analysis to be carried out for smaller arrangements. The UK concluded that the IORP II directive should not apply to any collective scheme with fewer than 15 members. The administrators of arrangements with between 15 and 99 members were required to make themselves aware of what was set out in the directive but they did not have to apply it to their own schemes. To our minds that is a very sensible approach.
The schemes in Ireland which have fewer than 100 members and will be affected if this is applied in full cover about 150,000 people. These are typically small businesses, self-employed people or traders who are trying to make provision for retirement. Their pension pots are modest. Typically the salaries of people paying into these schemes are just above the industrial average wage. The average pension pot size for one-man arrangements in Ireland is just over €75,000. UK cost analyses estimated that the base level cost of implementing this for smaller schemes would be €500 in the first year of implementation and €370 per annum thereafter. If schemes were required to produce full audited accounts, another requirement outlined in the directive, that cost would be substantially higher, perhaps as high as €3,000 per annum. This is a disproportionate measure given the population at which it is directed. The costs of introducing this could wipe out these scheme's investment returns. That will have a significant impact on pot sizes at retirement.
When a country considers whether the directive should apply to smaller arrangements, it must consider the existing arrangements around the governance and protection of schemes. We contend that these schemes already get very good information from the regulations that apply in Ireland. Members of these schemes get annual benefit statements and projections of what they will get at retirement. We do not really see what additional information people will get if the provisions are applied. Regarding governance, I note that live company pension providers are overseen by both the Pensions Authority and the Central Bank. Oversight is already very good, which should be taken into account in any cost-benefit analysis.
Our fear is that if IORP II is applied in full and the right to assess the benefits for smaller arrangements is not exercised, it could act as a barrier. There will be more work involved for individuals in setting up and using schemes and for small companies in setting up arrangements for their employees. The additional cost of putting it in place will reduce the size of the pension at retirement of those covered by existing arrangements. There is also a danger that existing arrangements may simply cease to exist because of the administrative burden and overheads. It would be strange to do this when there is general consensus around auto-enrolment and trying to encourage future pension provision.
We have three asks for the committee. The first is for a cost-benefit review of the implementation of IORP II to be carried out by the Department for all schemes with fewer than 100 members. We do not agree that one-member schemes should be considered as collective arrangements or institutions where retirement provisions are concerned. They should be fully exempt and should not be affected in any way by IORP II. A proportional approach should be taken for arrangements that have between one and 100 members.