Transposition of IORP II Directive: Discussion

We are now in public session. I would like to welcome our guests from Irish Life, Mr. David Harney, group CEO, Mr. Shane O'Farrell, head of product and pricing, and Ms Teresa Kelly Oroz, head of public policy and governance. In a moment, I will invite them to make an opening statement and members might have a number of questions for them.

Before that, I wish to draw our guests' attention to the fact that by virtue of section 17(2)(l) of the Defamation Act 2009, witnesses are protected by absolute privilege in respect of their evidence to this committee. However, if they are directed by the committee to cease giving evidence on a particular matter and you continue to so do, they are entitled thereafter only to a qualified privilege in respect of your evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable. Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official either by name or in such a way as to make him or her identifiable.

If our guests have mobile phones, they might switch them to flight mode or turn them off completely. Mr. Harney will now make his opening statement.

Mr. David Harney

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.

I thank Mr. Harney. Before I call Deputy O'Dea I note Mr. Harney's concerns around small single-member schemes. Has Irish Life put those concerns to the Minister and to the Pensions Authority? If so, has there been a response?

Mr. David Harney

We have put our concerns to the Minister but we have not had a response.

What about the Pensions Authority?

Mr. David Harney

We have not formally written to the Pensions Authority, but it is aware of the industry's position on this.

This committee would obviously like to hear the view of the Pensions Authority at some stage.

I thank the witnesses for coming in and for the excellent presentation. I can answer the question the Chairman put to Mr. Harney. I raised this with the Minister in the Dáil and I found her to be particularly unyielding. She was very insistent that implementation should go ahead without reference to the exemption. There is obviously a case to be made for a difference in treatment between smaller schemes and larger ones. If there was not, the EU would not have included that escape clause in the first place. Mr. Harney has pointed out that in the UK schemes with between one and 15 members are exempt and separate arrangements are made for those with between 15 and 99 members. Does the directive allow for that? I thought it specifically set a limit of 15 members. Does it allow exemptions for schemes with more than 15 members?

Mr. David Harney

Certain requirements must be implemented. Ms Kelly Oroz can elaborate.

Ms Teresa Kelly Oroz

The directive certainly allows for schemes with fewer than 100 members to be exempted from parts of its provisions. It is quite explicit in providing general proportionality exemption at the very beginning. Most of the articles make reference to taking account of the size, complexity and nature of the schemes before the article in question is applied.

The very last paragraph of the submission states "The Irish Government approach is out of step with other EU Member States". Is any other EU member state apart from the UK doing anything different?

Mr. David Harney

It is hard to give a precise answer to that because pension arrangements are so different in different countries. The three countries within Europe with a lot of these types of schemes are Ireland, the UK and the Netherlands. Things are quite different in Portugal, Spain and Germany. The most similar country against which to benchmark ourselves is the UK because of the nature of individual arrangements and the protections currently in place.

Mr. Harney says the UK has carried out a cost-benefit analysis and Irish Life has itself carried out a study.

Mr. David Harney

Yes.

In a sentence, what was the outcome of those?

Mr. David Harney

The cost-benefit analysis carried out in the UK found that the additional costs are not justified by the benefits to schemes, largely because schemes are already getting this information. The additional information will not provide enough value to support the costs.

I see. The witnesses want us to suggest to the Minister that a cost-benefit analysis should be carried out here.

Mr. David Harney

Yes. I think a cost-benefit analysis will ultimately show that this should not be applied to smaller schemes. If an analysis is carried out and shows that the provisions should be implemented, that is fine. However bypassing the cost-benefit analysis seems to be a mistake. That is not that controversial. People can debate the findings of a cost-benefit analysis. Our view is that it will find that one-man arrangements are not collective schemes and should be fully exempt. An analysis may go further than the UK analysis. IORP II is to be implemented across Europe. An analysis may conclude that in light of the protections and information requirements already in place, Ireland is pretty well positioned on schemes with between 1 and 100 members and there is no need to implement a lot of these provisions anyway.

I would like to pick up on one point before coming to Deputy Brady. One of Mr. Harney's slides shows the average scheme membership profile. It indicates that the average salary for a member is €39,000-----

Mr. David Harney

That is correct, yes.

-----and the average pension pot size is €75,000. I will stick with the one-member model to keep it within reason. At what stage is the average pension pot size €75,000? Is that at maturity?

Mr. David Harney

No, they are current values. These are people on their journey to saving for retirement. Mr. O'Farrell might know the average age of those members.

Mr. Shane O'Farrell

The average age of such a person on our book would be 44 or 45.

The average pot would have 20 more years to grow.

Mr. Shane O'Farrell

Yes.

Our guests are saying that the average contribution is €500 per month, which amounts to €6,000 per year.

Mr. David Harney

That is correct.

Irish Life has also indicated that if the directive were to be implemented in its entirety, a full audit could cost up to €3,000. Is that correct?

Mr. David Harney

Yes.

Why in God's name would anybody spend €6,000 if €3,000 was going to go towards that audit? It seems extremely disproportionate. The question I really want to put to our guests is whether the figure of €3,000 is based in reality. It seems excessive for that level of contribution.

Mr. David Harney

It depends on how the directive is implemented. With regard to the higher figure of €3,000, I mentioned figures that were done in the UK that were £500 to provide additional information and just to set up costs in the first year, and £370 per year thereafter. There is a higher cost if schemes are required to provide full audited accounts where one would have to hire an auditor and so on.

Is that the expectation from the directive?

Mr. David Harney

It depends on how it is implemented. That is not known yet. It has not been transposed into law. In fairness, that part may not be transposed into law. If that were the case, it would not apply. With general disclosures, there is a cost to those and the-----

But the €3,000 cost may not be.

Mr. David Harney

It may not but it could be either. We do not know that. Again, that should all be considered in the cost-benefit analysis.

Will there be other extra costs for implementing the directive for these schemes?

Mr. David Harney

Yes, absolutely, if they have to be audited. It is not for Irish Life to audit these arrangements. We are not auditors.

What of the other costs? If one did not have to have an audit the other costs would be fairly small in comparison to that. I refer to the extra costs.

Mr. David Harney

They are small relative to the audit costs. There are annual costs of perhaps up to €400. They are still significant for the size of schemes involved. The investment return-----

A sum of €3,000 is a lot. It is a large percentage of €6,000.

Ms Teresa Kelly Oroz

These are all the costs relating to communication and the audits. A large part of IORPs is the need to put in place governance structures such as internal audit functions and risk functions, which makes total sense for the very large pension schemes. We are working on the assumption that for smaller schemes they will not be applied. Again, if they do apply, how they will be applied to the smaller schemes could also have a huge cost with regard to what is going on. Part of the problem is that we have no visibility regarding what the Minister or the Department are thinking on the communication and the Government structures they will require for these very small schemes.

I have just a couple of queries as most of the questions have been answered. Our guests stated that Irish Life has been in touch with the Minister and that, unfortunately, nothing had been forthcoming in terms of a response. I assume that the request to the Minister was for a cost-benefit analysis to be carried out.

Mr. David Harney

Yes.

I am aware that this committee will also discuss the matter. The Chairman has suggested bringing in the Pensions Authority, which would be a good step, and perhaps a request from the committee for a cost-benefit analysis to be carried out would be the logical thing to do.

On the cost-benefit analysis that was carried out in the UK, the figures are quite stark. Are the figures estimated to be of similar magnitude here in Ireland as a result of the imposition of this directive?

Mr. David Harney

There are some differences but the regimes are quite close, so I expect similar type figures. This would come out in the review. I would be surprised if they were much different.

IORPs is not suggesting that this needs to be in place in Ireland because of deficiencies. The IORPs view is that it is trying to harmonise across the EU and certain countries are already better placed than others. IORPs is saying that for smaller arrangements it is up to each country to assess against what they currently have in place. This is what the cost-benefit analysis should do.

The number involved - over 110,000 - is quite large

Mr. David Harney

We have an unusual thing in that these one-man arrangements are set up under trust. We disagree that these one-man trust arrangements should be considered as institutions. These are individuals saving for retirement, they are not IORPs.

If Deputy Brady is proposing that the committee requests the Minister to provide a cost-benefit analysis, then I am happy to second that.

Yes. I am agreeing that we will request the Minister to conduct a cost-benefit analysis. Have our guests any idea as to how long it took to carry out the UK cost-benefit analysis? Do they know the mechanics of what was involved?

Ms Teresa Kelly Oroz

I do not know. They published the paper, which is quite detailed. We can forward this to the committee, so members can look at the exercise they went through. That was carried out by the Department, which considered the current regulation it has in place for those schemes and how much more it will cost to put on the IORPs regulation. We do not know, however, how quickly that was done. We would certainly be happy - and I am sure Insurance Ireland would also be happy - to assist the Minister in providing any information she might need to carry out that cost-benefit analysis.

Given that we have 110,000 of 150,000 in such schemes, which is the bulk of them, are our guests aware of any obvious practical impediment to carrying out that cost-benefit analysis?

Ms Teresa Kelly Oroz

I do not think so. The Minister is currently subject to a judicial review regarding the transposition of the directive as it stands. This does not preclude the Department carrying out the cost-benefit analysis in the background to assess what should or should not occur on the transposition.

Who is taking that case?

Ms Teresa Kelly Oroz

That case is being taken by the Association of Pension Trustees of Ireland. These trustees deal mainly with the one-member schemes. The association has launched the judicial review specifically because it does not believe the one-member schemes should be included within the provisions of IORPs II. That case was heard before the High Court in October and is currently adjourned. Irish Life would support that case as far as the one-member schemes are concerned.

Are there any further questions from members? Does Mr. Harney have any concluding remarks?

Mr. David Harney

No. I would just like to thank the committee members for their time.

The committee will pursue with the Minister the issue of the cost-benefit analysis. Obviously, there will also be further follow-up with comments and observations from the Pensions Authority.

Mr. David Harney

That is great. I thank the Chairman.

The joint committee adjourned at 11.10 a.m until 10 a.m. on Thursday, 21 November 2019.