New Investment Restrictions on One-Member Schemes

Tony Gilhawley FSAI

Director, Technical Guidance Ltd.

The implementation of the IORPS II Directive into law in 2019 will see the current wide investment freedoms of one-member schemes curtailed.

Current investment choices

One-member schemes are currently exempted from most of the Investment Regulations applying to all other pension schemes. In particular one-member schemes can borrow to invest and are also not required to be predominantly invested (i.e. more than 50%) in listed shares and bonds.Therefore, currently a one-member scheme can be 100% invested in property, either with or without gearing, or could be invested more than 50% in unlisted share and bonds. One-member schemes are also not currently required to diversify their investments and avoid risk accumulation, as other schemes are.Therefore, a one-member scheme could invest 100% in one property or another investment asset, with or without borrowing.

Implementation of IORPS II Directive

An EU Directive on occupational pension schemes, called IORPS II, was due to be implemented into Irish law by 13^th January 2019. However, there has been a delay in making the required Regulations and so it will be later in Q1 or Q2 2019 before they are likely to be made. One-member schemes have been exempted from the prudent person investment rules under the current IORPS I regime. However, the Department of Employment Affairs and Social Protection has indicated that this position will change with the new Regulations: ‘While the Directive allows Member States the discretion not to apply some of the provisions to smaller schemes, the general principle being followed in the transposition (of IORPS II) into Irish law is that all schemes should be subject to sound protections for pensions and consumers. Money saved for pension purposes should be properly protected to ensure that the saver has adequate resources for retirement years. To exclude small schemes from the provisions of the Directive would be contrary to the policy of enhancing standards for consumers. The application of the Directive is prospective, not retrospective so these changes will not affect existing investments and borrowings by schemes. From transposition forward, single-member schemes will no longer be allowed to enter into new borrowing agreements, except for short term and liquidity purposes, and all future investments will have to be in accordance with the rules in the Directive.’

Borrowing

From the Department’s comments above, one-member schemes will not be able to take on new borrowings after the IORPS II Regulations come into force later in 2019. But any borrowings held at that date can be held and run off over the remaining loan term, it would seem.

What is not clear yet is whether indirect borrowing by one-member schemes will also be prohibited, e.g. where a SSAS invests in a sub fund of an exempt unit trust, where that fund borrows.

Investing Restrictions

From the Department’s statement it appears that new investments made by one-member schemes after the IORPS II Regulations come into force later in 2019 will have to abide by the prudent person investment principles of the IORPS II Directive, the principal ones of which are:

assets must be invested in such a manner as to ensure the security, quality, liquidity, and profitability of the portfolio as a whole;
assets must be predominantly invested on regulated markets. Investment in assets which are not admitted to trading on a regulated financial market must, in any event, be kept to prudent levels;
assets must be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and accumulations of risk in the portfolio as a whole.

The above rules would prevent new one-member schemes set up after the IORPS II Regulations come into force in 2019 from:

investing more than 50% in property and unlisted securities such as Loan Notes issued by private companies; at least 50% of the fund at all times will have to be invested in listed shares and bonds quoted on a stock exchange or in collective funds which in turn invest in listed shares and bonds.
investing substantially in one or two investments, e.g. investing 100% in one particular investment; the scheme’s investments will instead have to be ‘properly diversified’ at all times and avoid ‘excessive reliance’ on a small number of particular investments.

For one-member schemes already up and running by the date the IORPS II Regulations come into force in 2019, the Department suggests that existing investments can be held, even if they don’t comply with the prudent person investment rules above.

However new investments made after that date by existing one-member schemes will have to comply with the rules above, e.g. at least 50% of new investments after that date would have to be in listed shares or bonds, or in collective funds investing in listed shares and bonds, and no new borrowings can be taken on.

Restrictions on Unit Fund Choices

One-member schemes will likely find that after the IORPS II Regulations come into force in 2019, life companies will restrict some unit fund choices, e.g. investment in unit linked property funds and other funds invested largely in illiquid and unlisted assets may be limited to a maximum of 50%.

Some specialist funds which are not diversified may be pulled and no longer available.

Impact

The new rules should not impact much on most one-member schemes which currently invest in a conventional mix of assets, e.g. a typical mixed or managed fund or funds.

It will impact most on SSAS and self-directed insured schemes, where clients adopt a personalised and non-traditional asset allocation, e.g. those who want to invest substantially or fully in one or more properties (with or without borrowing) and/or in unlisted securities, e.g. Loan Notes issued by private companies. These schemes will be forced to invest more in conventional assets such as listed shares and bonds.