Investment Duties

Investment of Pension Assets

The pension trustees must invest the pension contributions in accordance with the terms of the trust.  Pension trust rules usually provide for the widest possible powers of investment.  The Pension Act confirms and supplements the duties of the trustees to provide for the proper investment of the resources of the scheme in accordance with its rules.

The trustee’s duty to invest is fundamental. The purpose of the pension trust is to invest in order to accumulate a fund which is available to pay the pension benefits.

The methods of investment will depend largely on the size of the pension scheme. Larger schemes may appoint an investment manager to undertake investment decisions. There is now significant EU legislation which governs pension investments. Other provisions seek to ensure the integrity and competence of the parties involved in making investment decisions.

Trustees’ Duties in Investment

The traditional common law test of the required standard of investment is that of the “prudent man”.  The trustee must act as a prudent person would, in relation to investments for persons for whom he stood in a paternal type relationship. He must act as he would in his own interests, but dampened by a measure of caution.

Modern developments in general negligence law have increased this standard.  The statutory duties in relation to investment will also inform the standard of care required. In the context of investment, the non-professional trustee, should take and implement proper professional advice in relation to investment, unless all discretionary duties are delegated to an appropriate insurer or other investment manager. The trustees must exercise care in selecting and monitoring the investment adviser.

In addition to the duty of care, the pension assets must be invested in the best interests of beneficiaries. In accordance with his fiduciary duties, the trustee must act in good faith in accordance with his powers. He must use them for their proper purposes. He must not gain personally, in any way.

Trading and Inappropriate Investments

Pensions schemes must invest and must not trade.  Trading activities are not permitted. Trading may cause the scheme to lose its significant tax advantages with immediate effect. If the scheme trades, it will be denied tax-exempt status.

An order may be made against trustees personally, who wrongfully undertake trading activity.  An injunction may prohibit trading and impermissible investments.  An order may be made, which requires that assets should be restored to the scheme.

An application may be made under the Pensions Act by the Pensions Authority to order the divesting of scheme assets.  The may be done where the holding of the assets jeopardises the interests of members.

Common Law Standard

The principal duty of trustees is to invest prudently and cautiously.  Hazardous investments are to be avoided. The default statutory trust powers require investment in a limited category of liquid and presumptively safe assets. Invariably, much wider and pension trust powers are granted in the pensions trust deed.

The common law requirements reflect general investment principles. There is generally a trade-off between risk and reward.   Risk should be diversified by a spread of investment assets.   A spread of assets can be achieved by investing in appropriate unit-linked funds or other collective investment schemes.

The investments should reflect the underlying obligations and liabilities of the pension scheme in terms of accumulating assets and paying pensions in payment. The investment should be prudent and on the cautious side, given that it is made with other people’s money to meet their retirement income requirements.

Investment Tensions

There is a dilemma in investment. There is no certainty about the future. Investment requires return and growth. Placing assets in liquid form at all times would itself be a failure to invest. There may be periods, even very prolonged where this would be prudent and the proper course.

The financial crisis and the rebound in its aftermath has reminded investors of the fragility and volatility of financial markets. It has shown that even assets which had been believed to be of the highest grades (such as government bonds) were vulnerable to perceived insolvency risks, which may affect their price.

The trust deed may provide for so-called ethical investments. It may prohibit investments in certain types of “unethical” assets or in jurisdictions with oppressive regimes. Investment such as arms, alcohol, tobacco, may be defined as unethical. Subject to the provisions of the trust deed, the trustees must continue act in the best financial interests of the members and the beneficiaries, while giving effect to the ethical investment provisions.

IORPS I Directive

The EU Institutions for Occupational Retirement Provision (IORPs) Directive (2003) and the implementing Regulations (2005 onwards), provide mandatory investment rules. The IORPs legislation applies to investment by occupational pension schemes, whether defined benefit and defined contribution.

The IORPS legislation applies to Trust RACs which are in the nature of a group occupational pension scheme. The legislation does not apply to personal pensions or PRSAs. They may be provided by regulated insurers and regulated financial services providers in the latter case. They do not allow for direct investment.

The Directive allows States to exempt schemes with less than 100 members.  The Irish legislation provides that the rules do not apply to single-member pension arrangements.  After a period of uncertainty, the domestic legislation has not exempted any other categories or schemes from the main substantive requirements. Some compliance obligations do not apply to schemes with less than 100 members.

If the investment rules are breached, this will jeopardise the tax-exempt status of the pension scheme, thereby leading to the risk of an immediate substantial income tax liability.

Statutory Investment Requirements

The statutory rules reflect and reinforce the established general principles of investment which apply to trustees. To some extent, they reiterate the above common law rules. However, they also make more specific directive requirements and restrict the discretion of trustees.

Pension scheme assets must be invested in the best interests of the members and other beneficiaries. They must be invested in a manner which ensures the security, quality and liquidity of the portfolio as a whole. They must be predominantly invested in regulated markets. Assets invested otherwise must be kept to prudent levels.

The assets of the scheme must be diversified so as to avoid excessive reliance on a particular asset, issuer or group. Investment in the sponsoring employer/business may not constitute more than 5% of the portfolio as a whole. The limit is 10% in the event that the employer/sponsor is part of a larger group.

Schemes may not borrow or guaranteed third party borrowing. Borrowing for temporary liquidity purposes is permissible. Investment in derivative instruments is only permissible insofar as it reduces specific risks and facilitates portfolio management.

Investment Policy and Statements

The trustees of an occupational pension scheme must set out their investment policies in writing.  The investment policy must be reviewed triennially.  It must be changed as and when required, where the actual investments are inconsistent with the policy.

A statement of investment policy principles is required for a pension scheme with more than 100 members active or deferred members.  The statement must be in writing and state the investment objectives, the investment risk management provisions, the risk management process and the strategic asset allocation with respect to the nature and duration of the pension liabilities.

Effect of Statutory Funding Requirements

The effect of the statutory funding requirement may be to restrict investment for defined benefit schemes and some other scheme, in particular types of assets absolutely or in particular circumstances. Some types of investment must be entirely disregarded in calculating the funding level for statutory purposes. Others must be included at less than their actual value.

The statutory funding requirement for defined benefit schemes (and the required funding certificate), requires that  an actuary value the scheme assets. It is a legal requirement that there is  100% funding. In some cases, a higher reserve is a also statutory requirement. Accordingly, the funding rules may dictate the composition of the overall scheme investments.

Self-investment in the employer must be ignored  entirely in the calculation of the funding requirement and certificate. They are treated as worthless. Other  investments, deemed too risky or imprudent are given reduced weight, so that a percentage only of their value is included.

Substantive Statutory Investment Requirements

The EU regulations on pension investments require that thepension assets be invested predominantly in regulated markets so as to ensure the security, quality, liquidity, and profitability of the portfolio. As least 50 percent of the scheme assets must be so invested.   As a whole, the investments should be appropriate to the nature and duration of the expected retirement benefits liabilities.

A regulated market may be an EU / EEA or non-EU investment market / stock exchange. EEA Regulated markets are those regulated as stock exchanges or otherwise regulated under MiFID and Investment Services legislation.  Non-EU regulated markets are those subject to equivalent regulation as a stock exchange or equivalent non-EU regulated markets.

Investment in derivatives is permitted but it is subject to prudential controls.  The investment must be diversified unless they are in Government bonds and other high-quality liquid investments.  Investments in the sponsoring employer should not exceed 5 percent of the pension assets portfolio as a whole or where the investment is in a group of related companies, 10 percent.  Certain exceptions apply. There is a higher upper limit of self-investment by small member-controlled schemes of 20%, subject to the overriding constraints of the prudent person principle.

Fund / Policy Investment

An investment in an insurance policy or its equivalent, which is in turn invested in a regulated marker is deemed invested in a regulated market and properly diversified, provided that the trustees comply with the diversification and regulated market requirements in selecting the investments with reference to which the policy or fund will invest.

Pension investments may be made in an insurer’s unit trusts or in another regulated collective investment company / investment fund.  In this case, the underlying investments as a whole must comply with the IORP rules. The IORPs rules look through the insurer’s or collective investment fund, in relation to the requirement for investment on regulated markets and the general prudential obligations.

The Pensions Authority may certify  certain policies and contracts of assurance annuities as suitable for pension purposes. The legislation was amended in 2011, in order to provide for the certification by the Board of the policies, rather than for their approval.

Directed Investment

Where schemes allow self-direction (or an element of it) by the pension beneficiary, the trustees may be  protected in giving effect to the directions.  The Pension Act provides that where investments are made in accordance with the directions of members under scheme rules, the trustees are not to be liable for loss caused solely by reason of those directions.

There are a number of conditions applicable to this exemption. It is narrow in scope and must be strictly complied with.

The scheme must lawfully permit self-directed investments and the investments themselves must be permissible under the scheme rules.  If no direction is given, there must be a default investment strategy. All members must give the directions. They must be given information about the types of investment subject to the direction rules of the scheme and the default investment strategy

The trustees must furnish prescribed information to the members. The trustees must ensure that the members have such further information as is necessary to enable them to make informed decisions in relation to giving directions.

The investment choices must comply with the statutory IORPs investment requirements. The investments must meet other applicable Revenue requirements in relation to investment.

The statutory investment restrictions do not apply to a single member arrangement, where the pension beneficiary has a discretion as to where to invest. However, other restrictions apply to small self-administered scheme, which include most single member schemes. 2021 regulations removed exceptions for single member schemes.

Investment Advisers

Trustees must generally appoint or use appropriate investment advisers in accordance with their common law and statutory duties of care.  Although the trustees may not delegate their obligations, they may, and prudence will often usually, require that they should delegate day to day investment decisions to investment managers, subject to their general direction and instructions.

Prudence and care will be required in the appointment of professional investors and in the outsourcing of investment decisions. Many schemes, particularly those which are smaller and medium in scale will undertake most investment functions through life insurance companies.

An investment agreement may be entered with a life company in the case of larger schemes, in order to deal with matters outside the scope of standardised life policies.

Investments may be made in funds in order to obtain greater diversification, equivalent to that available to larger funds.  This may spread investment across a range of intermediary funds, appropriate to the scheme’s requirements.

Small Self-Administered

A small self-administered scheme is commonly established by an employer for the benefit of one or more senior employees / directors. A small self-administered scheme is one with 12 or fewer members.  Certain schemes with more than 12 members may be regarded as being small SSAPs.

There are restrictions on the type of investments which a small self-administered scheme may make.  A pensioneer trustee must be appointed who is Revenue-approved.  The pensioneer-trustee must ensure that the rules and restrictions on investment are complied with.

The restrictions derive from tax legislation, rather than pensions legislation.

Transactions, which breach the restrictions are deemed payments subject to tax by the recipient. An obligation to withhold tax applies. They are not prohibited in themselves. However, the taxation consequence represents a substantial disincentive.

SSAPs are being limited by the phasing in of the IORPs investment requirements.

Restricted Investments

The restricted transactions include any of the following

• loans to a scheme member or anyone connected
• acquisition of assets from a pension beneficiary or person connected with a pension beneficiary
• sale of assets to a pension beneficiary or anyone connected
• acquisition of a holiday property to be used as a residence for a pension beneficiary or a person connected
• the acquisition of shares in a close company in which a pension beneficiary is a participator.  See section on close companies and corporation tax for the relevant definitions, which are extremely broad in scope;

The acquisition of tangible movable property is treated in the same manner as real property.

There are additional investment restrictions in relation to small self-administered pension schemes.  A small self-administered scheme is commonly established by an employer for the benefit of one or more senior employees / directors. A small self-administered scheme is one with 12 or fewer members.  Certain schemes with more than 12 members may be regarded as being small SSAPs.

There are restrictions on the type of investments which a small self-administered scheme may make.  A pensioneer trustee must be appointed who is Revenue-approved.  The pensioneer-trustee must ensure that the rules and restrictions on investment are complied with.

Quantitative Requirements IORPS II (2021)

Trustees of a scheme or trust RAC shall, prepare and maintain a written statement of the investment policy principles applied to the resources of the scheme or trust RAC, (b) review the statement at least every 3 years, and (c) revise the statement at any time following any significant change in investment policy  which is inconsistent with the statement.

The trustees of a scheme or trust RAC shall make the statement available on request and, following a request provide that statement –

• in the case of a request by a member or beneficiary, not later than 4 weeks from the date on which the request was made, or
• in the case of a request made by the Pensions Authority, within such time as the Pensions Authority may specify.”.

Investment Rules IORP II (2021)

The trustees of a scheme or trust RAC shall invest in accordance with the prudent person rule (within the meaning of the IORPs  Directive of 2016) and without prejudice to the generality of the foregoing shall invest in accordance with the following provisions.

When investing, the trustees of a scheme or trust RAC –

• shall invest the resources of the scheme or trust RAC in the best long term interests of members and beneficiaries as a whole, and in the case of a potential conflict of interest, shall ensure that the investment is made in the sole interest of members and beneficiaries,
• in accordance with the prudent person rule may consider the potential long-term impact of investment decisions on environmental, social and governance factors,
• shall invest the resources of the scheme or trust RAC in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole,
• shall invest the resources of the scheme or trust RAC predominantly in regulated markets and, where there is investment in assets which are not admitted to trading on a regulated financial market, shall keep any such investment to prudent levels,
• shall invest in such a manner that the resources shall 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,
• where they invest in assets issued by the same issuer or by issuers belonging to the same group, shall invest in a manner that shall not expose the scheme or trust RAC to excessive risk concentration,
• if they have invested in the employer, shall not invest more than 5% of the resources of the scheme as a whole and, where the employer belongs to a group, they shall not invest more than 10% of those resources in the undertakings belonging to the same group as the employer, and
• where a scheme is sponsored by a number of employers, invest in those employers prudently and shall consider the need for proper diversification.

In the case of investment in derivative instruments and for the purposes, by the trustees of a scheme or trust RAC, of such investment, such investment by trustees of a scheme or trust RAC shall be possible insofar as such instruments contribute to a reduction in investment risks or facilitate efficient portfolio management and –

• they shall be valued on a prudent basis, considering the underlying asset,
• they shall be included in the valuation of the assets of the scheme or trust RAC, and

The obligation to invest predominantly in regulated markets (applies in respect of the proportion of the assets of the scheme or trust RAC attributable to each individual member of the scheme or trust RAC in the same manner as they apply to the assets of the scheme or trust RAC as a whole.

Collective Investment IOPRS II (2021)

Investment in a collective investment undertaking shall be treated as being invested in a regulated market and diversified in accordance with subsection (2)(f) to the extent that the investments held by that undertaking are themselves so invested,

Investment in an insurance policy falling within the class of insurance specified at paragraph III of Annex II of Directive 2009/138/EC of the European Parliament and of the Council4 shall be treated as invested on a regulated market and diversified in accordance with the extent that the selection, by the trustees of the investments by which the return on the insurance policy will be determined complies with those provision

Investment in an insurance policy the terms of which provide that the proceeds of the insurance policy at maturity will be equal to or greater than the amount of the investment over the term of the insurance policy, shall be treated as invested on a regulated market.

Investment in an insurance policy of a type to which Article 2(3)(a)(ii) of Directive 2009/138/EC of the European Parliament and of the Council relates shall be treated as invested on a regulated market in accordance with subsection (2)(d) and diversified.

Investment in bonds issued by the government of any Member State shall be treated as diversified

Restricted Self Investment IORPS II

In the case of a scheme investment of all or part of the resources of the scheme in the employer or, where the employer belongs to a group, that group, such investment  shall be deemed to include investment in –

• property, other than land or buildings, which is used for the purpose of any business carried on by the employer, or as the case may be, that group,
• loans to the employer or as the case may be, that group,
• money due to the scheme held by the employer or as the case may be, that group, or
• shares or other securities issued by a person in that group, and

It shall not include investment in

• a cash deposit with any person in that group who, in accordance with, or pursuant to, any enactment, is an authorised deposit taking institution, or
• an insurance policy or contract of assurance issued by a person in that group who is the holder of an authorisation within the meaning of Article 2 of the European Communities (Life Assurance) Framework Regulations 1994 ( S.I. No. 360 of 1994 ),
• a segregated fund or a managed fund, or other collective investment fund, managed by a person in that group who is the holder of an authorisation issued by the Central Bank of Ireland pursuant to the Investment Intermediaries Act 1995 , the European Union (Markets in Financial Instruments) Regulations 2017 (S.I. No. 375 of 2017), or any other enactment,
• a unit trust scheme authorised by the Central Bank of Ireland under the Unit Trusts Act 1990 and managed by a person in that group,
• an investment company authorised by the Central Bank of Ireland under Part 24 of the Companies Act 2014 ,
• a collective investment scheme authorised by the Central Bank of Ireland under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 ( S.I. No. 352 of 2011 ),an undertaking for collective investment in transferable securities authorised by a competent authority in another Member State in accordance with Council Directive 2009/65/EC5 of the European Parliament and of the Council, or
• bonds issued by the government of any Member State.

Pensions Authority

The trustees of a scheme shall –

• notify the Pensions Authority, in such form as the Pensions Authority may specify, where all or part of the resources of the scheme are directly invested in debt instruments, excluding investments in collective investment undertakings and investments in an insurance policy, and
• on request by the Pensions Authority, furnish it with all relevant information on the credit assessment process applied by a scheme.

The Pensions Authority shall –

• monitor the adequacy of the credit assessment processes of schemes, and
• assess the use of references to credit ratings issued by credit rating agencies in their investment policies and, where appropriate encourage mitigation of the impact of such references, with a view to reducing sole and mechanistic reliance on such credit ratings.

References and Sources

Irish Books

Irish Pensions Law & Practice Buggy, Finucane & Tighe         2^nd Ed (2005) Ch.10

Pensions; Revenue Law and Practice (ITI) Dolan, Murray, Reynolds, McLoughlin (2013)

Trustee Handbook the Pensions Authority 5th Ed 2016

Statutory Guidance the Pensions Authority (Various)

Website

www.pensionsauthority.ie

UK Books

Pensions Law Handbook 12 Ed Nabarro Nathanson Bloomsbury

Corporate Insolvency 6e: Employment & Pension Rights (6th Revised edition)

Occupational Pensions (Subscription) Lexis Nexis

Pensions Law and Practice with Precedents (Subscription)    Sweet & Maxwell

Sweet & Maxwell’s Law of Pension Schemes (Subscription)

The Guide for Pension Trustees World Economics Ltd

The Guide for Pension Trustees website, you can:

Tolley’s Pensions Law Loose-leaf Service (Subscription)

Statutes

Pensions Act, 1990

Pensions (Amendment) Act, 1996

Pensions (Amendment) Act, 2002

Pensions (Amendment) Act, 2006

Social Welfare and Pensions Act, 2005 (Part 3)

Social Welfare Reform and Pensions Act 2006

Social Welfare and Pensions Act 2007

Social Welfare and Pensions Act 2008

Social Welfare (Miscellaneous Provisions) Act 2008

Social Welfare and Pensions Act 2009

Social Welfare and Pensions (No. 2) Act 2009

Social Welfare (Miscellaneous Provisions) Act 2010

Social Welfare and Pensions Act 2010

Social Welfare and Pensions Act 2011

Social Welfare and Pensions Act 2012

Social Welfare and Pensions (Miscellaneous Provisions) Act 2013

Social Welfare and Pensions Act 2013

Social Welfare and Pensions (No. 2) Act 2013 49/2013

Social Welfare and Pensions Act 2014

Social Welfare and Pensions (No. 2) Act 2014 41/2014

Social Welfare (Miscellaneous Provisions) Act 2015 12/2015

Social Welfare and Pensions Act 2015 (Part 3)