Concerns over potential member liability claims risk becoming a “significant barrier” to the introduction of in-scheme drawdown (ISD) in Ireland, the Irish Association of Pension Funds (IAPF) has warned, as it recommended that the Pensions Authority develops guided retirement pathways.

In its response to the Pensions Authority’s consultation on ISD, the IAPF said it was “generally in agreement” with the seven features set out by the authority for ISD.

However, the association raised concerns around default funds, because members’ needs “sharply diverse through retirement”. This is because there are huge variants in the need for income, appetite for investment risk and the length that the capital needs to be preserved.

“Any single default could be very unsuitable for many members; therefore, it is important that the existing options of an approved retirement fund (ARF) and an annuity continue to be available,” it stated.

In addition to the “significant barrier” this poses to ISD, the IAPF also identified trustees’ concerns about liability for advice, which may later prove incorrect, as another barrier. Risk to employers should also be considered, it said, as many deeds include indemnity from the employer to the trustees.

Therefore, it said trustees might expect guidance in relation to default funds, clarifying the objectives of such a fund.

“For example, guidance from the Pensions Authority could state that ‘the default drawdown strategy should aim for modest real growth of S+1–2%, minimise short-term losses, and maintain sufficient liquidity’,” the IAPF stated.

The UK’s guided retirement pathways were highlighted by the association as an example of how ISD default funds could be developed. It stressed that any guided retirement pathways are developed through consultation between the Pensions Authority and key stakeholders in the pensions business.

“This could give members, trustees and employers comfort regarding defaults,” it stressed. It also said that guided retirement pathways will be necessary to achieve cost efficiencies within ISD.

The IAPF stressed that it is “important that an obligation is not imposed on any existing scheme” as it warned that this could lead to instability in the market.

“There may be several master trusts that do not wish to, or cannot, provide for ISD. They should be enabled to select a transfer out path for members at retirement, potentially to another scheme that offers ISD,” it stated.

With the introduction of the Irish state’s auto-enrolment (AE) scheme, MyFutureFund, imminent, the association also called for alignment between the AE scheme and master trusts in how ISD is applied.

The IAPF further highlighted that ISD would see trustees move from a ‘saver oversight’ role to an ‘income management’ role, directly influencing members’ retirement outcomes. It also “blurs the line between pension scheme and an investment/retirement income product”, which requires enhanced communication duties.

Therefore, the IAPF said that high minimum standards of governance must be required for schemes that operate ISD, because trustees will be managing more complexity. It called for trustees to be subject to training at the start of a scheme offering ISD, and annually.

“We recommend the Pensions Authority consider a pre-approval process for trustees of master trusts and schemes that operate ISD similar to the system used by the Central Bank. Revenue approval would also be required,” the IAPF stated.

The IAPF believes ISD will see a high rate of take-up by members, who will prefer the “convenience and familiarity” of staying in their pension scheme. Therefore, when it comes to advice on the suitability of ISD, the IAPF believes that this should “sit outside of the core offering by the trustees”.

“Early co-ordination will be required between the Pensions Authority and the Central Bank on the regulation of financial advice associated with ISD to ensure that duplication is avoided and to ensure alignment of policy objectives,” the IAPF stated.

Indeed, the association envisages that additional regulation will be required to ensure that advisers are “sufficiently qualified” to provide advice on ISD.

“Providing advice on ISD is complex and specific authorisation may be a requirement for advisers,” it said.

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