15 Dec 2017 | 01.57 pm
Interview: James Skehan, New Ireland Assurance
PRIME funds range favoured by passive investors
15 Dec 2017 | 01.57 pm
With more than 40 years of pensions industry experience under his belt, James Skehan is Head of Pensions with New Ireland Assurance. For the last eight years, he has also headed up General Investment Trust, the trustee subsidiary company of New Ireland.
There are c.9,700 small company pension schemes with an average of six members. So how does Skehan view the Pension Authority’s proposed slimmed-down pension landscape for the members of these schemes and the companies involved?
“One solution being proposed by the Authority is to have a number of master trusts to mop up these small schemes, thus reducing the number of schemes and replacing many lay trustees with a professionals,” he notes. “The upsides of master trusts include the possibility of reduced costs, value for money and collective bargaining potential. However there could also be less personalisation and less targeted communication,” says Skehan, noting that the construction industry has operated a master trust for many years.
Another option, according to Skehan, is to replace the company pension scheme with access to individual PRSAs. “However, replacing a company pension scheme with individual PRSAs would remove the potential for savers to obtain a better tax-free lump sum option at retirement.
“With a PRSA, up to 25% of the accumulated fund can be taken as a lump sum, whereas in a company pension scheme, in addition to this option, an individual can also take a lump sum based on salary and service up to a maximum of 1.5 times the final salary. In practice, this means a lump sum of somewhere between 50% and 70% of the accumulated fund – clearly a much more attractive benefit than the PRSA model.”
Skehan argues that there is no need for one-man company pension schemes to be set up under trust, given that in most cases, the employer, trustee and member are one and the same. He adds that the contract-based approach would eliminate the need for trustees without in any way reducing the regulatory safeguards that are needed.
“The PRSA model is a good example of this, although for company directors there are significant advantages to the existing trust-based scheme that should be considered,” Skehan explains. “The main advantage that a company scheme has over a PRSA relates to the level of contributions that can be paid in.
“The maximum contributions that are paid to a PRSA (by an individual and/or the company) are aged-related and range from 15% to 40%. In a trust-based company scheme, higher contributions can be paid in and there is also greater scope to pay in lump sums to make up for previous years of service. With a PRSA, contributions can only be paid in respect of the previous year.”
Skehan has also been assessing the Pension Authority’s favouring of defined contribution schemes comprising default investment strategies, with opt-out/in options. “A key aspect of defined contribution pension schemes is investment choice and investment performance,” he says. “From a member’s perspective, the only certainty is the level of contributions being paid in by their employer and themselves.
“The performance of the investment fund that members select will have a significant effect on the eventual retirement fund that they will end up with at retirement. Offering investment choice has become best practice for DC schemes, to the extent that pension legislation provides an indemnity for trustees (under certain conditions) where investment choice is provided.
“In practice, the vast bulk of members, typically 80% or more, end up invested in the default strategy, with only a minority getting involved in actively selecting funds. It is therefore crucial that the default investment strategy is fit for purpose and suits the vast majority of scheme members. A key challenge for trustees and advisers is to get members to engage with investment choice, particularly as they approach retirement.”
Asked what type of investment funds do clients currently favour, Skehan says: “Employees included in group schemes will typically invest in the default strategy whereas company directors and individual pension investors are more likely to actively direct their pension savings.
“New Ireland does not manage investment funds – instead we employ a range of market leading global independent investment managers together with local boutique investment firms. There are over 60 individual pension funds available which are aligned to the ESMA risk rating scale of 1 (very low risk) to 7 (very high risk).
“With New Ireland the individual pension investor can opt for an off-the-shelf solution or can construct their own investment portfolio with the help of their advisor. In recent years, our iFunds range – a multi-manager, multi-asset, multi-fund approach – has proved very popular with investors wanting active investment management but with a spread of risk across different funds and managers. For those who favour passive management, our PRIME funds range which is managed by State Street Global Advisors is an ideal solution. ”