All hail the PRSA, the 21-year-old that finally came of age with a stellar 2023. Introduced in 2002 and touted as a revolution in the world of Irish pensions, it is perhaps fair to say that it hasn’t really lived up to the promise, with sales volumes over the years lagging behind other types of pension products like personal pensions and executive pension plans. However, 2023 may prove to have been a watershed moment for this arguably slightly dull—and often overlooked—pension savings vehicle.

What was different about 2023? Well, there are probably two key changes that have impacted the PRSA market heavily in the last year or so. The first change really came about prior to 2023 with the introduction of IORP¹ II, which place considerable additional ongoing governance burdens on occupational pension schemes. These included:

• The appointment of key function holders such as a risk function and internal audit function for each scheme
• The preparation of annual audited accounts for each scheme
• Increased requirements around member engagement
• New fitness and probity requirements for trustees

While the changes required under IORPs II are likely to strengthen the governance of occupational schemes, with the aim of improving member outcomes, the new requirements raise significant challenges, particularly for executive pension plans (one-member company schemes). For an executive pension plan, meeting the additional governance requirements for each scheme would be practically impossible, and would certainly result in additional costs that would make the structure unsustainable. While executive pension providers had initially worked on the basis that the IORPS II requirements would not fully apply to executive pensions, the Pensions Authority (the regulator for pensions business in Ireland) clarified that the new rules would indeed apply to one-member schemes, requiring life and pension providers to seek solutions to this challenge.

One potential solution identified is the master trust. Under a master trust, multiple employer schemes can be drawn together under what is effectively one umbrella trust. A single third-party trustee is appointed to meet the management and trustee requirements of the collection of employer schemes as a whole. This solution can help address the cost challenges identified above (as only one internal audit function, risk management function, etc., is required for the master trust, rather than needing one for each of the individual arrangements within the master trust). However, master trusts may not be a perfect solution. Wrapping a large number of small schemes under one master trust would result in considerable additional complexity for the trustees, in particular where a wide universe of investment options and benefit structures apply. For a master trust to be effective and cost-efficient, it is likely that some level of standardisation would be needed, which may reduce the level of flexibility (e.g., around choice of investments) that may have been possible through a one-member scheme. In addition, while the costs of a master trust would be significantly lower than replicating the governance arrangements for each scheme, the complexity of the master trust arrangement will generate some overhead that would need to be borne by members.

This was perhaps the moment for the PRSA to sweep in from the wings and save the day. Instead of moving to a master trust arrangement, one-member executive pension arrangements could transfer to a PRSA contract, maintain similar investment options, and perhaps avoid the cost overhead of a master trust. As a result, we started 2023 with PRSAs well-placed to fill some of the void. But wait a second, if PRSAs are such a great solution, why had the sales volumes been relatively modest, and why was there a need for executive pensions in the first place?

One fly in the ointment hindering greater PRSA uptake though was a tax disadvantage for PRSAs relative to many other pension arrangements—namely that when an employer made a contribution into an employee’s PRSA, it was treated as a benefit in kind, negating the tax benefit for the individual. However, amendments to tax legislation introduced at the start of 2023 deftly swiped the fly from the ointment, leaving PRSAs ready to fill some of the executive pension void. It’s worth noting at this point that there are broadly two types of PRSA—the standard and non-standard. Structurally, these are very similar, but the standard PRSA is designed primarily as a mass-market product. It has limits on the level of charges that can be imposed, as well as tighter restrictions on investment options. The non-standard PRSA has more flexibility on the level of charges, as well as the investment universe for the product. This latter point, in particular, may make the non-standard PRSA a more popular vehicle for transfers from executive pensions.

Is this increased attractiveness of PRSAs manifesting itself in sales numbers? Well, already we are seeing increased interest in PRSAs, with some new providers entering the market (e.g., Saol Life and Acorn Life), and we understand that there are other companies in the wings exploring potential PRSA offerings. Just as important, we are seeing a serious uptick in PRSA sales relative to the previous year. The traditional measure of new business volumes in the Irish life insurance market is the annual premium equivalent (APE). By this measure, we estimate that over 2023, PRSA sales through life insurers were more than 2.5 times the 2022 level. Where PRSAs accounted for about 9% of total pensions APE in 2022, that has jumped to almost 20% in 2023 and is growing all the time. Over 25% of pensions APE sold through life companies over the second half of 2023 was directed towards PRSAs.

It's also interesting to note the Pensions Authority’s statistics on the PRSA market. Over 2021 and much of 2022, the number of in-force PRSAs grew fairly steadily, averaging around 4,300 extra PRSAs per quarter, with around two additional standard PRSAs for every one non-standard. In Q4 2022 the picture began to change, and since then the average has doubled, with 8,600 additional PRSAs on average each quarter, and over half of those non-standard. In fact, in the second half of 2023 the number of in-force PRSAs grew by almost 23,000, and almost 15,000 of those were non-standard. This is a huge increase and is likely to reflect pensions new business that had been directed towards executive pensions now shifting more into non-standard PRSAs.

While all of this bodes well for the future of the PRSA, there are still some challenges which, if addressed, could further enhance the success of the product in the coming years. These stem primarily from the inflexibility of the PRSA structure and the additional red tape that is associated with PRSAs and perhaps adds unnecessary cost to the product structure. In particular, it’s notable that PRSAs have additional consumer protections that are not present for other products—the requirement to provide half-yearly statements and investment reports, certificates of comparison required for some transfers into PRSAs, restrictions on the types of charges that can apply, restrictions on the investment universe available for standard PRSAs, and the oversight role of the PRSA Actuary, to name a few.

This perhaps stems from the fact that 21 years ago the consumer protection landscape in Ireland was quite different, and with PRSAs intended as a mass market, simple product, some additional protections for consumers were perhaps desirable. Roll on to 2023 and the landscape is quite different. With enhanced conduct of business requirements, more mature product oversight and governance frameworks within insurers, and the additional responsibilities for manufacturers and distributors under the Consumer Protection Code, it’s difficult to see why PRSAs need additional protections relative to other retirement vehicles.

For example, transfers from Defined Contribution (DC) and Defined Benefit (DB) schemes into PRSAs require, in many circumstances, the completion of a certificate of comparison. This is typically funded by the contributor and can cost in excess of €1,000 to produce, creating a barrier to moving to a PRSA that does not exist for other pension products. Is it needed, and does it provide enhanced protection for those transferring to PRSAs? Anecdotally, certificates of comparison are a compliance burden and a cost rather than a value add, i.e., certificates of comparison are prepared because the legislation requires it, rather than forming a key step in the advice and decision-making process. Clearly there may be situations, particularly in transfers from DB schemes, where the complexity requires additional advice, but this is less likely to be the case for transfers from DC arrangements. We understand that the Pensions Authority is considering changes to legislation that would allow for a generic certificate of comparison for DC to PRSA transfers, which would highlight risks and identify points that members should consider before transferring, without needing individualised advice and calculations. This should help reduce cost without compromising consumer outcomes, but the pace of legislative change in the world of PRSAs can be slow.

Similarly, the disclosure requirements around PRSAs lead to a material volume of information being sent to contributors on an annual (and indeed half-yearly) basis, which again could be simplified with a view to making sure consumers receive the information they need without being overwhelmed with paperwork.

One further recent change in the legislative environment is the removal of the requirement for contributors to effectively terminate their PRSAs by age 75. Prior to this, PRSAs were primarily an accumulation stage vehicle, although it was possible to have a short life as a decumulation stage vehicle with a tax-free lump sum and some post-retirement drawdown applying in the early years of retirement, at least until age 75, at which point the whole pot would need to be transferred to another post-retirement vehicle—typically an Approved Retirement Fund (ARF) drawdown product. Removing the age 75 limit could be another huge game-changer for PRSAs, opening the possibility of PRSAs serving as whole-of-life pension products that can meet the need of contributors in both the accumulation stage, building up a pension pot to fund retirement, and in the decumulation stage as that pot is drawn down to provide income in retirement.

Speaking of game-changers, with the imminent arrival of a new auto-enrolment (AE) regime (now due to come into effect in January 2025) the pensions landscape in Ireland is likely to undergo further material changes. AE will sit alongside the existing pensions regime, and the full impact of AE on the wider pensions landscape in Ireland, including on the PRSA market, may take some years to emerge.

In the meantime, we are already seeing how these changes (IORP II making PRSAs more attractive, better tax treatment and more age-related flexibility) have been taken up by both customers and by product providers. With the continually evolving Irish retirement landscape set for further change, maybe now is the time for the PRSA to shine.

¹ Institutions for Occupational Retirement Provision.