Pensions & COVID-19: A Single Member Scheme Spotlight

Many investors and business owners alike have significant concerns on the longer term economic consequences of COVID-19. Whatever the scale of the economic fall-out it will have some impact on demand for property investment, the rental sector and SMEs in Ireland. Many single member pensions will have exposure to alternative asset classes such as directly held property and to corporate debt, where many borrower companies will be SMEs.

We look at some of the issues that are likely to arise for those schemes that hold these asset classes as well as their pension providers. We also briefly consider the challenges faced by pensioneer trustees and administrators in handling divestment requests and the practical concern around the distribution of annual benefit statements.

Fees and liquidity

Providers of single member pensions apply a Management Charge (MC) to their schemes, usually on an annual basis. The providers normally act as both the pensioneer trustee and the administrator of the schemes, so the MC is applied for carrying out this work. The MC is usually paid by the scheme itself or by the sponsoring employer. In the case of a Standard Personal Retirement Savings Account (PRSA) the MC is limited to a maximum of 1% a year of the fund value.

If the pension provider is operating an Exempt Unit Trust (EUT) to hold certain assets that require ring-fencing, due to gearing for instance, then there may be a further administrative charge associated with those vehicles. Very often assets held in this manner will be unregulated, such as loans made to private companies and directly held residential or commercial property. The EUT also provides flexibility when there is a need to transfer the asset to another pension or post-retirement vehicle, such as an approved retirement fund. The rationale for investing in such assets is the potential for a greater return than can be expected from regulated securities or investment funds.

Directly held residential property

The Government has recently approved a series of emergency measures to provide security of tenure for tenants impacted by the COVID-19 pandemic. The measures have introduced moratoriums on evictions and rent increases for the duration of the emergency. Also, notices of termination of tenancies due to take effect during the emergency cannot now go ahead. The issue for pensions that hold residential properties as an investment is that the duration of the emergency is unknown.

Many single member schemes are likely to face liquidity issues where rental income is not forthcoming. Where the scheme does not have the required level of cash it may struggle to pay the provider’s MC or to make mortgage repayments to a lender. Where there are other assets in the scheme with greater potential liquidity, it may be possible to discuss a partial sale of those assets with the member trustee to allow for payment of the mortgage and charges. Where these options aren’t available, pension providers are unlikely to have any other option than to defer their charges to a later date. Lenders that provide mortgages to pensions to purchase properties are also likely to come under pressure to grant repayment moratoriums, as most lenders in the market are allowing repayment moratoriums for private mortgagors.

Investment in private companies

Single member schemes often choose to invest in private companies and pensioneer trustees will typically only permit the investments to proceed by way of debt, as there are Revenue rules restricting investment in private company share capital. The lending transactions between the borrowing company and the pension are similar to small private debt or alternative credit transactions. Very often, the borrowing company will be a start-up that is not yet in a position to obtain bank finance. Given the deteriorating economic environment, it is likely that these small businesses will seek moratoriums on loan repayments to the pension investors. Where a request has been made it would be advisable for member trustees and their advisors to try to negotiate a reduced level of repayment with a deferred balance and to seek legal advice on the loan documentation to see if amendments are necessary. Where a full moratorium is granted, issues will potentially arise on scheme liquidity. Where security has been provided by the borrowing company pension investors will be in a stronger position. However, choosing to enforce security upon an event of default is a costly undertaking and is made less certain where asset values are falling.

Divestment requests and delay

Pensioneer trustees will undoubtedly receive high volumes of divestment requests for regulated assets held by single member schemes, given the current level of volatility being experienced by financial markets. Where a request is made, pensioneer trustees will need to consider their duty of care while also ensuring that there is no unnecessary delay in executing the instruction once it is agreed that it can proceed.

Where there is a concern that a proposed divestment is “knee jerk” and is likely to crystallise losses, it would be prudent to contact the scheme member and their advisor immediately and inform them of the Pension Authority’s caution against any immediate reactions. Where the member insists on proceeding with the proposed divestment, the trustee should consider a confirmation from their financial advisor that they deem the decision to be an appropriate one and that they have fully briefed their client on the consequences of the divestment.

In most instances, the pensioneer trustee will also be the scheme’s administrator. Once a divestment request from a member trustee is accepted, it should be carried out as quickly and efficiently as possible and this is particularly the case during a period of market volatility. The Financial Services and Pensions Ombudsman has recently made a reward against a pension provider where delays have occurred, after the receipt of an instruction for the purchase or sale of securities.

Annual Benefit Statements

The Pensions Authority is yet to provide guidance for trustees and administrators on the distribution of Annual Benefit Statements (ABS). Where an ABS needs to be posted to a member, instead of emailed or uploaded to a pension provider’s portal because the pension member does not have internet access, then providers may find themselves posting the ABS outside of the 12 month window. We anticipate that the Pensions Authority will take the current circumstances into account, where, for example, the provider does not have access to materials and printers to distribute ABSs by post.

Conclusion

Providers of single member schemes operate in a different industry than their group scheme counterparts. While trustees and administrators deal with many of the same regulatory issues as those experienced by group schemes, member trustees of single member pensions will often accept greater risk for the opportunity to invest in unregulated assets that may become illiquid during a downturn or recession. Remote working will undoubtedly add a layer of complexity for administrators and pensioneer trustees, so it is critical that the correct procedures and resources are in place so that any instruction can be actioned. Internal training events for client-facing staff during the lockdown are useful and can provide a forum for addressing technical queries.

Discuss your COVID-19 related pensions queries now with a member of our award winning Pensions team.

The content of this article is provided for information purposes only and does not constitute legal or other advice.