Small self-administered pension schemes (SSAPS) have been a favoured retirement instrument of company owners and directors and other high net worth individuals for many years. The ability to include leveraged property investments was long considered one of their primary attractions. However, forthcoming regulatory changes may rule out these investments as well as placing an increased administrative burden on the schemes thereby threatening their continued existence.
SSAPS are very different to most pension schemes where members hand over their contributions to a life assurance company or other investment manager for investment. In a SSAPS the member decides the investment strategy and chooses the funds, equities and other instruments in which they wish to invest.
The schemes offer this increased level of control over investments along with the significant tax benefits associated with pension schemes generally. They also offer flexibility in making contributions to suit the tax position of the company or individual concerned.
Legal trust
The schemes are set up under a legal trust in which the investment is under the direct control of the members or trustees. That trust must be approved by the Revenue Commissioners. This arrangement usually entails higher administration and other costs than those associated with workplace or other standard schemes but the control over investments and other benefits have tended to outweigh this disadvantage – up until now at any rate.
For example, these schemes can be used by individuals to get into investment areas which might not otherwise be open to them. These include property. An individual may not have the disposable income in one area of their life to fund a property investment, but they may be able to use the liquidity in their pension fund to do so. It is also possible for the scheme to borrow against the asset and fund its purchase through ongoing contributions and fund growth – subject to certain limitations on the extent and term of the debt.
The other attraction is the greater choice of investments allowed. Most pension schemes offer quite a limited range of investments to members, possibly three or four different funds of varying risk profiles which are made available on a pick and mix basis. In an SSAPS the member can choose their own investment portfolio, again within limits laid down by Revenue.
That’s all about to change with the advent of new regulations under the IORP II directive as well as the Pension Authority’s stated aim of reducing the number of occupational pension schemes in Ireland from well over 100,000 to a few hundred.
Harmonised standards
The IORP II directive is highly complex and brings new harmonised standards into force for all pension schemes but its impact on SSAPS will be particularly heavy. "Under IORP II all schemes will need to invest in accordance with the 'prudent person' rule and this could have a big impact for smaller schemes, in particular one-member schemes such as small self-administered or executive pension schemes," says Declan Maher, head of corporate pension and risk sales with Bank of Ireland Wealth Advice & Distribution.
“The ‘prudent person’ rule will ensure scheme assets are predominantly invested in regulated markets, will limit direct property investments and only allow borrowing for temporary liquidity purposes, which up until now these single member schemes were exempt from such requirements.”
The directive will also require all schemes, regardless of size, to meet the same audit standards. Joe Hanrahan of Brewin Dolphin believes that is disproportionate in terms of the cost burden and calls for a derogation for such schemes from some aspects of the directive.
He also questions the investment limitations. “Article 19 of the directive only allows for borrowing in very limited circumstances for liquidity purposes but investments in regulated markets can be highly leveraged anyway. Many of the people who set up these schemes tend to be making a lot of serious financial decisions already. They have set up companies and so on. What’s wrong with them having a part in investment decisions? Also, pensioner trustees who run these schemes do it properly. They are well managed schemes and the people involved are not fly-by-nights.”
That may well be the case, but the changes coming down the track could well see this form of pension scheme effectively disappear – unless of course there is a change of heart on the part of the Government and regulator.