Small Controlled Pension Schemes Issues
A small self-administered pension scheme (SSAs) is a type of occupational pension scheme which is primarily for the benefit of the controlling directors of the sponsoring employer. The members are usually one or more directors, who commonly control the sponsoring (and funding) employer, are trustees and are also the pension beneficiaries.
As occupational schemes, SSAPs may be self-administered, rather than wholly invested with and administered by a life insurance company or another regulated provider. The SSAP may, therefore, be used as a pension vehicle for “owner” directors. There may be a single member only who may be the trustee and controller of the corporate employer.
Additional requirements apply to an SSAP, which are not wholly insured. They are designed to prevent the perceived risk of abuse of the tax privileges which attach, in view of the potential conflicts of interest. Additional restrictions on investments apply. An independent, Revenue approved trustee must be appointed.
If a small self-administered scheme has one member only, it may qualify as a single member scheme. Due to the manner in which Ireland has implemented the IORPs directive, a single member scheme, may borrow and thereby engage in leveraged investments.
Definition of SSAP
A small self-administered pension scheme is one, which operates primarily for the benefit of “20% directors” of the corporate employer. A director is a “20% director” if he, his spouse, children and connected persons together own at least 20% of the shares in the relevant company.
The relevant restrictions apply to small self-administered pension scheme which are not wholly insured. A small-insured scheme which becomes self-administered after approval must, from the changeover date, comply with the special requirements.
There must usually be 12 or fewer members. Certain scheme members with insignificant benefits are not counted for this purpose. A scheme is deemed a small self-administered scheme if it has more than 12 members, but where it is primarily for the benefit of a small number of directors (where the majority are 20% directors and connected persons).
A scheme is deemed to be a small scheme where more than 65% of those assets relate to the provision of benefits for 20% directors of the employer, their spouses or dependents
A scheme with fewer than 12 members may be accepted as not being an SSAP, if all the members are at arm’s length from each other, from the employer and the trustees.
Small self-administered pension schemes must appoint a “pensioneer trustee”. This is a Revenue approved person who undertakes to ensure that the scheme complies with certain conditions in its operation and its investments. A pensioneer trustee is a person approved by Revenue, who is typically a well-established pension professional.
The pensioneer trustee is in effect a guardian, who must protect and hold the assets of the scheme and ensure compliance with the Revenue pension rules. The pensioneer trustee safeguards compliance with Revenue conditions in order to ensure that the self-investment facility is not abused.
The pensioneer trustee cannot be removed without Revenue’s consent. There must be a pensioneer trustee at all times. He must not delegate his powers. He must immediately advise Revenue, if he cease to be trustee for any reason.
Duties of Pensioneer Trustee
The general obligations applicable to pension trustees also apply to pensioneer trustees. These include the standard training, registration and returns. They include the statutory requirements in relation to administration and management. The pensioneer trustee may be the registered administrator.
The pensioner trustee must ensure that contributions are paid and must ensure the scheme’s investments comply with Revenue requirements. He must consent to certain investments and steps. He must ensure that the pension rules and the special SSAP requirements are complied with.
The pensioneer trustee must maintain control of assets (including overseas property); Generally, the pensioneer should be on the title in all property investments.
The pensioneer trustee must ensure that reports and accounts are submitted to Revenue. A. funding review and actuarial report must be submitted to Revenue not less than every 3 years. A SSAP scheme will usually be a defined contribution schemes, for which the funding requirements are less onerous than those applicable to defined benefit scheme.
Revenue places restrictions on investments by an SSAP. The following investments are prohibited;
- loans to members or those associated with a member of the scheme, including the connected persons and the employer;
- transactions with scheme members or persons connected with them; this includes the acquisition of assets from a scheme member or a person connected or the tale of a scheme asset to such a person;
- the acquisition of assets for personal use by a scheme member or connected person;
- the acquisition of property to be used in connection with the business of the scheme member or connected person;
- the acquisition of an interest in a close company in which the scheme member or a connected person is a participator;
- the acquisition of assets of the employer;
- the acquisition of shares in the employer;
- the acquisition of properties for sale or letting to employer, directors and connected persons is forbidden
- pride in possession articles; they include items such as furniture, vintage cars, yachts, rare books, rare stamps, jewellery, antiques. Gold may be held as an investment through an independent vehicle;
- investments in private companies may not exceed 5% of the scheme assets and 10% of the company’s share capital;
Assets must be disposed of on arm’s length basis.
Investment in real property must comply with certain requirements. Property purchases must be made at arm’s length. The property must not be used for the purpose of letting to the employer, directors, associate companies or shareholders. Holiday homes must not be purchased;
Where the main or only asset is real property, Revenue takes the view that the concentration of investment in an asset which not readily realisable does not satisfy the overriding need to match investments with the scheme’s liabilities, in particular, the requirement to provide benefits. The is because the scheme would be compelled to realise its only or main asset in order to provide benefits when the first or subsequent retirements take place.
Secured borrowing for the purchase of real property is permissible in a single member scheme only. Borrowing is subject to conditions. Interest only loans are not permitted; Loan terms cannot exceed 15 years. The property must be the sole security.
Assets match Liabilities
The scheme assets / investments must meet scheme liabilities. There must be sufficient liquid investments to ensure that the retirement benefits can be provided e.g. to purchase annuities and provide benefits, including ill-health and early retirement benefits, at the required time.
The scheme must invest only, and must not trade. Property development or trading in property is not permissible. Anything beyond investment is of its nature prohibited under general pension rules.
The scheme must not be wound up other than in accordance with approved rules.
Borrowing is not permitted other than in the case of single member schemes. It is subject to conditions.
On retirement, scheme benefits may be taken by an annuity or an approved retirement fund.The purchase can be deferred for up to 5 years from retirement under certain conditions. Payment to an ARF is permitted as an alternative. Death benefits must be insured in so far as they exceed the value of member’s the interest in the fund.
Single Member Schemes
A single member pension scheme is one established to provide benefits for the sole member. A single member scheme may retain its status as such where a family legislation order is made which splits the scheme for the benefit of the member’s spouse or another.
A single member scheme is typically put in place for the benefit of a proprietary director. That director / employee may be the principal or sole owner of the employer company. The scheme allows for back funding in order to fund the retirement salary level, as it is an occupational scheme. This contrasts with a personal pension or PRSA where contributions are limited to a percentage of net earnings based on age.
Single member schemes are established in much the same way as other occupational schemes. The Rules must be tailored to the single member requirement. The scheme can be arranged and managed by a life insurance company or other provider.
Single Member Borrowing
Single member schemes may borrow to facilitate leveraged investments. The scheme trustees enjoys an exemption from the usual restrictions on borrowing. The sole member must have discretion as to how the resources of the scheme are invested for the purpose of qualification as a single member scheme.
The European Union Directive on Institutions for Occupational Retirement Provision requires diversification in pension investments, subject to exemptions which the EU States may implement. The Directive, as implemented in Ireland, provides an exemption for single member arrangements, from the diversification of investments requirement.
Provision for borrowing, by single member schemes, was introduced in 2004. The regulations were modified in 2005 and again in 2006. Prior to the 2004 legislation, schemes could in practice achieve geared investments, by investing in funds, which were themselves leveraged.
Single Member Borrowing Conditions
The Revenue has published requirements, contemporaneous with the above regulations, in relation to the terms under which borrowing by a single member scheme is allowed. The Revenue requirements provide
- borrowing must be limited to recourse to the secured pension assets;
- an assignment of rental income is not permitted;
- there should be no cross collateralisation;
- interest only loans are not permitted;
- that the loan must be for a 15-year term at most;
- that the loans should be repaid before normal retirement age;
- that use of other scheme assets would not be permitted to clear debt;
- disposals and acquisitions must be at arms’ length.
Small Self-Administered Schemes
A small self-administered scheme is one that is administered and managed by its trustees as an occupational scheme, for the benefit of a limited number of owner-directors of the sponsoring employer. The scheme is usually for a relatively small number of persons, often a single owner-director.
Pensions legislation and Revenue requirements seek to ensure that the privileges and freedom of an occupational pension scheme in relation to investments are not abused. Without these protections, there would be a temptation for the controllers of an employer company to self-invest tax-free funds in a way that benefits themselves and connected persons.
The Revenue requirements apply to “small self-administered pension” schemes (SSAPs). Compliance with the requirements is a precondition to the initial and ongoing approval of the scheme.
References and Sources
Irish Pensions Law & Practice Buggy, Finucane & Tighe 2nd Ed (2005) Ch.6
Pensions; Revenue Law and Practice (ITI) Dolan et al. (2013) Ch. 5, 6
Trustee Handbook the Pensions Authority 5th Ed 2016
Statutory Guidance the Pensions Authority (Various)
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 Looseleaf Service (Subscription)
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)