Following high profile and significant losses by retirement savers in unregulated loan notes, the Pension Authority is looking to clamp down on pension funds investing in assets like property.
This could mean much tighter rules on what pension savers can put their money into – even those who are directing their own investments.
The last time this was an issue was back in 2021, when the establishment of single member schemes, such as small self administered pension schemes (SSAPS), or executive pensions, largely came to an end.
This was due to the introduction of Iorps II, which required smaller schemes to be treated the same as larger ones. Until then, a derogation had been given to smaller schemes.
Following Iorps II, many self-directed pension savers opted to transfer their assets into a non-standard PRSA. Now however, they may have to make a further change, as the Pensions Authority has turned its attention to just what PRSAs are investing in as part of a new consultation.
Why now?
The possible move has been precipitated by losses on investments in loan notes, an unregulated product.
Last year, Arena Capital Partners, a player in the small to midscale wind market in Europe, ran into difficulties, owing €112 million to 1,600 loan note holders. More than half of the losses by value were suffered by pension investors. It is likely that the loan note holders will get reduced payments under any survival scheme ultimately approved.
Arena wasn’t the only one: Dolphin Trust and Blackbee Investments are just some other names in the space.
Unsurprisingly then, the Pensions Authority is concerned and has turned its attention to PRSAs – or non-standard PRSAs in particular. It argues that such PRSAs should henceforth be invested predominantly “in regulated markets and in a manner that ensures diversification”.
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While a regulatory clampdown at EU level put the boot into self-administered pensions like executive pensions and SSAPS, those saving for their retirement have still been able to take a bespoke approach to their fund, through a non-standard PRSA.
Unlike a standard PRSA, where charges are capped and you only have access to certain pooled funds and cash, the non-standard option offers the ability to invest in a wide range of assets, including equities, bonds, property and alternatives such as loan notes. There is no limit on charges in these funds.
And as the regulator notes, since the transposition of the Iorps II directive: “There has been an increased demand for PRSAs, most notably in the non-standard PRSA market.”
According to its figures, there has been an almost five-fold increase in the number of new non-standard PRSA products – so much so that by the end of the second quarter of last year, non-standard PRSAs accounted for 66 per cent of total PRSA assets of about €20 billion.
This gives rise to an uneven playing field, where one section of the pension market can put all its money into risky products like loan notes, while those in occupational/standard PRSAs are bound by much stricter rules.
“The present investment rules for non-standard PRSAs more closely match the investment freedom available to OMAs [one member arrangements] before IORP II transposition,” the Pensions Authority says.
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As a result, the authority now “believes that these rules should be more closely aligned”, arguing that as smaller schemes were not granted a derogation from Iorps II, “it is difficult to justify not extending such safeguarding measures to PRSA contributors”.
A spokesman for the Pensions Authority says it received 47 submissions to the consultation, which ran late last year, but that it won’t be publishing these.
The next step, he says, is that the authority “will review and consider responses to the consultation, and determine whether or not to make a proposal to the Department of Social Protection for legislative change. Whether legislation is brought forward is a matter for the Department.”
The intention is to bring the proposal to the department by the end of this year – so no change is imminent.
What does the industry think?
It’s unlikely that, having seen many clients transition from SSAPS to PRSAS, the industry will now support further changes.
In its submission to the authority’s consultation, Irish Life says that such a move to harmonise investment rules will “restrict the pension needs and flexibility currently within the market”, and argues that extending the IORP II rules risks creating “unnecessary duplication and complexity”.
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“The proposal would create reduced opportunity for experienced and well-advised pension investors with an appetite for a broader range of investment choices that more closely align with their retirement income needs – ie direct property, private equity and unregulated instruments,” the life assurer says.
It also argues: “The market should not and cannot eliminate all risk. Individual discretion and flexibility needs to remain with the inherent responsibility on the outcome of said choices.”
In its submission, the Society of Actuaries in Ireland argues that the regulatory approach between different pension products should differ due to “multiple contractual, governance, context and market positioning differences” between pension schemes and PRSAs.
However, it does see “merit” in requiring PRSAs to invest predominantly in regulated markets, citing the experience of investors in loan notes, which “have been the main source of such losses and potentially pose the greatest ongoing risk”.
On the issue of diversification, however, it argues that existing arrangements may be well diversified already, as non-standard PRSA contributors “may have other pension arrangements which are largely invested in regulated markets, and they may only hold a small percentage of overall pension assets in a PRSA contract”.
As it stands, a clampdown on unregulated investments would limit investing in property. There is a suggestion, however, that there could be scope for an exemption for property investments.
The Society of Actuaries, for example, says that while property is an unregulated investment, “the risk of material losses on direct property is arguably lower due to the tangible nature of this asset”.
“For this reason, there may be justification for considering specific investment types rather than unregulated investments as a whole,” it argues.
Similarly, Brokers Ireland says that pension savers should still be allowed invest directly in property. Citing current challenges in the housing market, it says that “individual pension investors can help to increase and maintain this stock, and any measure which would lead to a reduction in supply of housing and curtail further investment would be a serious misstep”.
In addition, the association says that people can sell their property “at a timing of their choosing”, and they are not locked into a minimum term. In addition, such liquidations can’t be “gated” – ie where you are blocked from getting your money out – as can happen with funds.
Moreover, property offers the security of a tangible asset.
If introduced, there is a fear that applying a ban on certain investments to all current schemes could impact the performance of such funds, by forcing people to sell out of unregulated assets.
As such, a prospective approach is typically favoured, where such a clampdown would only apply to new investments.
Irish Life, for example, says this would be the “sensible approach”, although it adds that it could mean that existing customers could end up with a very mixed investment portfolio “that may not be in their best interest”.
Why invest in property through a pension fund?
When investing in property, there are some key advantages to doing so through your pension fund. This is because there can be some key tax advantages, provided that the transaction meets the rules of an arm’s length purchase.
For example, you aren’t allowed purchase a property with your pension and let it out to a family member, nor can you buy the property from a connected party. Similarly, you can’t manage the property yourself; that has to be outsourced to a third party.
Once you have found a property, your pension fund purchases it and pays for all associated costs – stamp duty, solicitor fees etc etc. It is possible for your fund to borrow to secure the purchase, at up to 50 per cent of the property value.
All rental income goes straight back to the fund, with no tax liable on it. Similarly, if the property is sold, capital gains tax won’t be paid with the gains simply paid directly to the pension fund.
This is a significant advantage over holding property outside your pension fund, where tax rates on rental profit can be as high as about 52 per cent.