If you are a business owner with a one-person pension scheme (typically an Executive Pension Plan or a Self-Administered Scheme), you may not be fully aware of the impact that recent legislation from Europe has on your pension planning. However, the changes are important and need to be considered by you.
A European Directive called IORP II came into Irish Law in April 2021. While that was over a year ago, it is only recently that the impact of this legislation on one-person pension schemes has been confirmed in Ireland. This has caused huge uncertainty for the retirement planning and wealth extraction strategies of business owners, and company directors, many of whom have such schemes in place through their companies.
So, what is IIORP II?
Firstly, to give the IORP II Directive its full title, it is the EU Directive on the activities and supervision of Institutions for Occupational Retirement Provision – quite a mouthful. IORP II is an updated version of the previous IORP I directive that was implemented in 2003.
In summary, the directive sets out common standards for ensuring the soundness of occupational (company) pension schemes, to better protect pension scheme members and beneficiaries by setting out a relatively rigorous level of enhanced governance and risk control that pension schemes need to have (or put) in place.
When IORP I was introduced, the Irish government availed of an option not to apply all of its rules to smaller schemes (those with less than 100 members). As a result, beneficiaries of one-person pension schemes most likely were not aware of any changes at that time. However, with IORP II, the Department of Employment Affairs and Social Protection decided not to allow any exemptions for smaller schemes, so all schemes are now held to the same regulatory standard, irrespective of their size.
What is the impact on one-person pension schemes?
The increased regulatory requirements from IORP II have created a significant headache for providers and administrators of one-person pension schemes, making them no longer feasible due to the increased regulatory burden and the cost of administering the changes that would be required to ensure compliance with the new regulation. As a result, providers of one-person pension schemes (mainly insurance companies) have decided to immediately stop selling these products to new customers.
What does this mean for my existing one-person pension scheme?
If you have established your scheme prior to the introduction of the legislation in April 2021, you can continue to take advantage of maximum funding and the associated tax benefits of making company and personal contributions, subject to Revenue and legislative limits. That position is likely to remain for the next 4 years, so it is important to build this window into your retirement strategy for now. However, you will need to take action before the end of this period.
Planning ahead – what to do
If you are a business owner or company director using your pension scheme to extract wealth from your company as part of your business succession plan, you should get advice from a retirement planning and investment specialist for the following reasons:
- Alternative pension arrangements for one-person pension schemes are likely to come onto the market over the next few years. It would be prudent to get advice on your options and the timing of your decision to move to one of these “IORP II friendly” pension arrangements.
- The PRSA is the only current alternative to the one-person scheme on the market, but may not be the best fit for you due to the funding limits and higher charges. Taking a wait and see approach might be best for now. This applies also to business owners who were about to commence a company funded pension scheme. Getting professional advice is crucial.
- If you are planning on making a large pension contribution from your company to your one-person scheme, you should seek professional investment advice. When investing a lump-sum, it is important to have a suitable investment plan to ensure you are investing with confidence.
Aengus Moran is an Investment Advisor and Certified Financial Planner (CFP®) with Acuvest. He has over ten years experience in the financial services industry, specialising in pensions and retirement planning as well as investment planning.