The Institutions for Occupational Retirement Provision (IORP) was established in 2016 with the objective of enhancing the governance, risk management, and transparency of pension schemes in Ireland. It prescribed standards for the supervision and management of these schemes.
Through the IORP, two major reforms were introduced that have significant implications for more than 9,000 employer-sponsored pension schemes. These schemes were legally obligated to either strengthen their governance, incurring additional costs, or transfer their schemes to master trusts before the end of last year.
A master trust refers to a defined contribution (DC) pension scheme established under trust for multiple employers. It offers benefits such as economies of scale, low charges, online tools, apps, newsletters, a wide range of funds including ESG considerations (environmental, social, and governance) guidance, and access to retirement options.
Currently, there are only nine master trusts in Ireland managing assets worth €1.5bn-€2bn. The implications of this development vary depending on whose pension is involved.
The use of a different price structure is being proposed for current employees compared to former employees when it comes to the cost of maintaining their pensions within master trusts. Under this model, costs will be higher for ex-staff members.
Former employees who may be working elsewhere now will receive advice on transferring their pensions but will not have the option to choose the structure, fees, investment direction, or support services.
However, these ex-employees do have alternatives. They can transfer their pensions to a personal retirement bond, also known as a “buy-out bond.” This option grants them full control over investment decisions and provides transparency regarding all associated costs.
Opting for a personal retirement bond empowers ex-employees and eliminates the need for approval from a former employer’s trustee when accessing the pension funds upon reaching normal retirement age (NRA). This removes the risk of encountering issues if the former employer is bankrupt or has closed down without their knowledge.
Greater control over their pensions also enables ex-employees to commute the pension at the age of 50, allowing them to withdraw a 25% tax-free lump sum and invest the remainder in an approved retirement fund (ARF). At age 60, they can then withdraw 4% of the balance monthly or annually, increasing to 5% after turning 71.
While this may seem complicated to the average person, understanding your pension is of utmost importance. As our population ages, we will have significantly more retirees in 25 years’ time and a considerable decline in the number of workers supporting their state pensions. Therefore, relying solely on the State pension to maintain your desired lifestyle after retirement is a risky proposition.
Auto-enrolment, often seen as a potential solution for the pension gap, has been discussed for over two decades. Although it is supposed to be implemented next year, some proposed figures include gradually increasing contributions by the employee (6%), employer (6%), and government (2%) over a 10-year period, totaling 14%.
However, consider that a 23-year-old starting their career can already invest 15% of their income, while a 40-year-old can contribute up to 25% of their income to their pension. It is unrealistic to believe that a 5% pension contribution, matched by the employer’s 5%, will be enough to maintain a luxurious lifestyle in retirement.
Therefore, it is crucial to seek advice and proactively address your pension planning, regardless of your age or stage in life. Assess your retirement options independently and take steps to ensure a secure financial future.
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