Spotlight: recent developments in asset management in Ireland
Overview of recent activity
Looking back over 2021 and the first half of 2022, we have seen the Irish asset management industry bounce back from the worst of the market uncertainty triggered by the covid-19 pandemic and Brexit and, more than that, indicators show that the industry is going from strength to strength as we emerge from these recent challenges. For example, the net asset value of Irish domiciled investment funds reached over €4 trillion for the first time in 2021. This represents an increase of 22 per cent from 2020, and the figure is set to exceed €5 trillion by 2025. The Irish funds industry alone provided €14.8 billion in economic output in 2021. It delivered €914 million in taxes to the Irish Revenue in 2021 and directly employs 17,000 people (and over 34,000 in total through direct and indirect employment) throughout Ireland. Ireland was the also fastest-growing domicile for investment funds in Europe in 2021, and has been so for the past seven years.
It is no wonder, then, that the importance of the financial services sector is highlighted in the government’s ‘Ireland for Finance – The strategy for the development of Ireland’s international financial services sector to 2025’ (Strategy 2025), which recognises the opportunity to continue to build on Ireland’s success in this sector; among other commitments within the strategy, there is a recognition that the government must be ‘willing to be creative and to continue to stay ahead of competitive pressures through the introduction of legislation which enhances our product offering, while continuing to ensure adequate protection of the public and investor’. This commitment to facilitating the enhancement of Ireland’s product offering can be seen over the years and recently with regard to enhancements in the investment limited partnership legislation (discussed later in this chapter). Furthermore, Strategy 2025 identifies the area of sustainable finance as one of the key pillars for development and recognises the importance of this area over the coming years. With this in mind, Sustainable Finance Ireland has been established to advance the sustainable finance agenda in supporting the delivery of the strategic targets set out in Strategy 2025. This includes the creation of an International Sustainable Finance Centre of Excellence in partnership with the UN development programme.
With well-established infrastructure, a skilled workforce and a flexible operating environment, and with the continued support of the government, we can be confident that the Irish financial services sector is well positioned for further growth over the coming years.
General introduction to the regulatory framework
The Central Bank is responsible for the authorisation and supervision of regulated financial service providers in Ireland, including regulated investment funds, investment managers, and insurance and reinsurance undertakings. The powers delegated to the Central Bank are set out in the laws and regulations applicable to the relevant financial services sector. In addition, the Central Bank issues guidance in relation to various aspects of the authorisation and ongoing requirements applicable to financial service providers. In general terms, the Central Bank expects that best practice be adopted by an authorised entity, and requires that financial services providers have systems, procedures and policies in place to ensure that regulatory requirements are met and to mitigate risk.
The regulation of pension schemes is a matter for the Pensions Authority, the statutory body for the pensions industry in Ireland.2
Common asset management structures
Ireland as a domicile provides a variety of potential asset management structures (structures), which can be broadly categorised as regulated by the Central Bank or unregulated.
i Regulated structures
There have been four main types of regulated fund structure in Ireland: Irish collective asset management vehicles, variable capital investment companies, unit trusts and common contractual funds. Each of these regulated fund structures may be established as UCITS pursuant to the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011, as amended (UCITS Regulations)3 or as an alternative investment fund (AIF) pursuant to the EU (Alternative Investment Fund Managers) Regulations 2013 (AIFM Regulations).4
In addition to the above, a regulated investment limited partnership (ILP) is also available as a structure for AIFs. Following industry engagement with government, the legislation governing ILPs was updated by the enactment of the Investment Limited Partnerships (Amendment) Act 2020 (2020 Act). The 2020 Act looks to modernise the law governing ILPs in Ireland with a view to making the ILP the vehicle of choice for implementing private equity, venture capital, private debt and real assets investment strategies in Ireland and Europe. As well as modernising the ILP in line with other types of Irish investment fund structures, the amendments to the existing ILP regime are intended to bring the ILP in line with comparable partnership structures in other leading jurisdictions by incorporating ‘best in class’ features for this type of vehicle.
Each of the structures may be organised in the form of umbrella schemes with segregated liability between compartments (sub-funds).
Irish collective asset management vehicle
An Irish collective asset management vehicle (ICAV) is an Irish corporate investment fund vehicle that has been specifically tailored to the needs of the global funds industry. Since its introduction in 2015, the ICAV has proven to be the most popular structure for new funds established in Ireland. One of the main reasons for the popularity of the ICAV is that, unlike investment companies established in Ireland as public limited companies, an ICAV that is structured as an umbrella fund is only required to produce financial accounts at a sub-fund level, while a public limited company must produce financial accounts at the umbrella level (resulting in investors in a sub-fund receiving financial accounts for all of the sub-funds in the umbrella). In addition, there is no requirement for an ICAV to hold an annual general meeting of shareholders, and non-material changes can be made to the ICAV’s by-laws without shareholder approval. The ICAV may also be eligible to elect to be treated as a transparent entity for US federal income tax purposes, unlike an investment company established as a public limited company, which is not eligible to make such an election.5
Variable capital investment companies
A variable capital investment company must be incorporated as a public limited company pursuant to the Irish Companies Act 2014, as amended. The day-to-day management and control of the investment company are undertaken by a board of directors (although this can be delegated to a management company), with ultimate control resting with the shareholders. Provided that this day-to-day management and control of the investment company take place in Ireland, an investment company can obtain a certificate of Irish tax residency from the Irish tax authorities and is not liable for Irish tax on its income or gains.
A unit trust is a contractual arrangement constituted by a trust deed entered into between an Irish management company and a trustee. The assets of the trust are held by the trustee, but the beneficial ownership of the assets remains with the unit trust’s unitholders. Unlike an investment company or ICAV, a unit trust does not have a separate legal personality, and contracts in relation to the trust are entered into by the management company on behalf of the trust, or a particular sub-fund of the trust, as provided for in the trust deed.
Common contractual funds
The common contractual fund (CCF) is a tax-transparent structure first established in Ireland in 2003. It was specifically developed to facilitate the pooling of pension fund assets in a tax-efficient manner so that the investing pension funds would be treated from a tax perspective in the same way as if they made the underlying investments directly rather than through the CCF.
The CCF is an unincorporated body established by an Irish management company pursuant to which investors participate and share in the property of the CCF as co-owners. As a co-owner, each investor in a CCF is deemed to hold an undivided co-ownership interest as a tenant in common with other investors. CCFs are constituted under contract law by the execution of a deed of constitution between a management company and a depositary. As an unincorporated body, a CCF does not have separate legal personality.
Investment limited partnerships
The ILP is also a tax-transparent structure. An ILP is an unincorporated body created by contract between the general partner or partners and one or more investors who participate as a limited partner or partners. As an unincorporated body, the ILP does not have separate legal personality. There is no limit on the number of limited partners in an ILP, and in general they are not liable for the debts and obligations of the ILP. The general partner is responsible for the management of the ILP’s business and is liable for the debts and obligations of the ILP. As mentioned above, there were a number of enhancements introduced to the ILP structure by the 2020 Act, including the following:
- Umbrella ILPs: ILPs may now be established as umbrella schemes with segregated liability between sub-funds. This structure is attractive as it allows separate strategies or investor types to be accommodated in different sub-funds of the same umbrella.
- Safe harbours: if a limited partner takes part in the management of an ILP, the limited partner may lose the benefit of limited liability. The 2020 Act broadens the safe harbours, which allow limited partners to take certain actions without being deemed to take part in the management of the ILP: for example, sitting on advisory committees and approving changes to the limited partnership agreement.
- Amendments to the limited partnership agreement by majority: the 2020 Act removes the requirement for all the limited partners to approve an amendment to the limited partnership agreement. Instead, the limited partnership agreement may be amended by majority of the general partners and limited partners (and in some instances, where the depositary certifies that the changes do not prejudice the interests of limited partners, an amendment may be made without limited partner approval).
- Withdrawal and redemption by investors: the 2020 Act streamlines the process for the contribution and withdrawal of capital in line with the process applicable to other Irish fund vehicles and partnership structures in other jurisdictions.
ii Unregulated structures: limited partnerships
The limited partnership established pursuant to the Limited Partnership Act 1907 (1907 Act) is the most favoured structure for unregulated investment funds in Ireland.
A limited partnership is a partnership between one or more general partners and one or more limited partners, and is constituted by a partnership agreement. To have the benefit of limited liability, the limited partners are not permitted to engage in the management of the business of the partnership or to contractually bind the partnership: these functions are carried out by the general partner. There is a general limit of 20 partners in a limited partnership established pursuant to the 1907 Act, although this limit can be raised to 50 where the limited partnership is formed ‘for the purpose of, and whose main business consists of, the provision of investment and loan finance and ancillary facilities and services to persons engaged in industrial or commercial activities’.6
Fund structures regulated by the Central Bank may be open-ended with liquidity, closed-ended with no liquidity or have limited liquidity, which means they are open to redemption at least one or more times during the life of the fund. One exception is where the regulated structure is authorised by the Central Bank pursuant to the UCITS Regulations, in which case the structure is required to be open-ended with at least two redemption dates per month.
Closed-ended schemes are generally subject to the Prospectus Regulation7 unless otherwise exempted (qualifying investor AIFs are generally able to avail of an exemption). In addition, closed-ended schemes may, in certain circumstances, be subject to other European regulations (e.g., the Transparency Directive8 and Takeovers Directive9).
Main sources of investment
i Regulated investment funds
Ireland’s success as an onshore domicile for investment funds is well known, and the development of Ireland’s funds industry continues to be an area of strategic importance for the Irish economy. Statistics show that Irish-domiciled investment funds had over €3.92 trillion in total assets in April 2022 (up by over €1 trillion in the two years since the end of March 2020). The April 2022 figures show remarkable growth in the Irish funds industry following the global market turmoil brought on by the covid-19 pandemic and, more recently, by the Russian invasion of Ukraine. While the majority of assets under management are held in UCITS funds, Irish-domiciled AIFs had just short of €900 billion in net assets in April 2022. The majority of the investment in these regulated investment funds comes from non-Irish institutional investors.
ii Insurance and reinsurance
As of June 2022, there were 36 life insurers, 92 non-life insurers and 62 reinsurers (including captives and special purpose reinsurance vehicles) with head offices in Ireland. There were a further six life insurers and 23 non-life insurers with branches in Ireland. In addition, 124 life insurers and 664 non-life insurers operate in Ireland on a freedom-of-services basis pursuant to the relevant EU directives. 15 life insurers authorised in the United Kingdom or Gibraltar and 51 non-life insurers authorised in the UK or Gibraltar previously operated in Ireland on a freedom of services basis but are now permitted to run off their business as part of the Central Bank’s temporary run-off regime.10 In ‘Insurance Corporations Statistics for Q1 2022’, the Central Bank indicated that Irish insurers and reinsurers hold €179 billion worth of investment fund shares, including €66.424 billion in equity fund shares, €46.633 billion in bond fund shares and €2.152 billion in real estate, with the remaining amounts invested in mixed and other funds.11
iii Pension schemes
The Central Bank of Ireland estimates the total assets of the Irish pension fund sector to stand at €131.7 billion at the end of Q1 2022. Separately, the Pensions Authority has published the results of its defined benefit scheme review of 2021 statistics (based on the annual actuarial data returns submitted to it by 31 March 2022). The asset allocation of the 540 active and frozen defined benefit schemes in Ireland (with assets of €65.5 billion) is as follows:
- 23.8 per cent in equities;
- 33.7 per cent in EU sovereign bonds;
- 11.9 per cent in other bonds;
- 4.2 per cent in property;
- 3.2 per cent in cash;
- zero per cent in net current assets;
- 0.2 per cent in with profit insurance policies; and
- 23.3 per cent in ‘others’ (which include absolute return funds, alternative assets, hedge funds, commodities, derivatives, global absolute return strategies and annuities).
In terms of insurance and reinsurance, there are significant international and domestic insurers and reinsurers headquartered in Ireland. In 2016, the introduction of a new prudential regime under Directive 2009/138/EC on the taking up and pursuit of the business of insurance and reinsurance (Solvency II) forced insurers and reinsurers established outside the European Economic Area (EEA) to assess whether to redomicile their global operations in a European centre such as Ireland. Since 2017, this trend continued with UK-based insurers and reinsurers looking to relocate within the EEA as a Brexit contingency solution. Ireland has remained one of the most sought-after European countries for insurers and reinsurers looking to redomicile.
With regard to asset management and investment funds, Ireland emerged as a favoured EU hub for UK investment firms seeking a European base post-Brexit because of the relative advantages it has over a number of other EU countries across a number of metrics including tax, legal system, labour laws and regulation. By the end of 2020, there were 358 management companies (including MiFID firms, UCITS managers and AIFMs) authorised in Ireland, an increase of approximately 100 since the United Kingdom voted to leave the European Union. This trend has continued with about 390 management companies now authorised in Ireland by the Central Bank.
The continued positive growth in net assets of Irish-domiciled funds has also been remarkable. In particular, the continued growth of the ETF market globally has benefited Ireland as the leading jurisdiction for the establishment of ETFs in Europe.
The principal regulations governing insurers and reinsurers are the European Union (Insurance and Reinsurance) Regulations 2015 (2015 Regulations), which transposed Solvency II into Irish law and entered into force on 1 January 2016. They are supplemented by the Insurance Acts 1909 to 2018 and the regulations made under those Acts. The Solvency II legal framework applying to Irish insurers and reinsurers also includes the European Commission delegated regulations and implementing regulations, and relevant Level 3 European Insurance and Occupational Pensions Authority guidance on interpreting Solvency II requirements. Insurers and reinsurers must limit their activities to those for which they are specifically authorised, to the exclusion of all other business activity. The Central Bank imposes strict rules on insurers and reinsurers to formalise appropriate internal policies and procedures to ensure that investment risks relating to assets used for regulated capital purposes are adequately managed. The rules in relation to asset management activity by insurers and reinsurers are governed by the rules set out in Solvency II.
Solvency II codified and harmonised insurance regulation throughout the EEA, and set new standards for the amount of capital that insurers and reinsurers must hold based on their individual risk profile, as well as new standards for governance, risk management and supervision, and reporting and transparency. Under Solvency II, asset managers need to provide insurance clients with greater levels of detail in relation to the assets underlying their investments than was previously required. The implementation of Solvency II has been the most substantial regulatory change affecting Irish and European insurers and reinsurers in many years, as it provided for a new risk-based capital adequacy regime.
Solvency II also involved significant changes for asset management by insurers and reinsurers. Solvency II has introduced across EEA Member States, for the first time, a solvency calculation based on an economic and prospective approach to the risks inherent to the business conducted by insurers and reinsurers both on the asset and liability side As a result, a key factor in the calculation of an insurer or reinsurer’s regulatory capital requirements is market risk. Under Solvency II, insurers and reinsurers are able to invest in any asset (in the interests of policyholders and beneficiaries), including high-risk and volatile assets, provided they are willing to hold the necessary extra capital for this risk.
Provisions in relation to asset allocation affect which funds insurers can choose to invest in because of the prescribed methods for the valuation of assets and liabilities. Solvency II requires that insurers and reinsurers diversify their asset portfolios, which will affect an insurer or reinsurer’s choices in investment funds. Asset managers should be aware of the different capital charges that are applied to assets and liabilities. Of particular interest is the market risk module, which is split into the following sub-modules: interest rate risk, equity risk, property risk, spread risk, concentration risk and currency risk. Different categories of assets and liabilities will be subject to different rules depending on how they are classified. For example, structure debt and equity investments are subject to favourable capital charges.
Insurers and reinsurers must have processes in place to ensure the appropriateness, accuracy and completeness of the data that they use to calculate their capital requirements. To comply with this requirement, insurers and reinsurers are likely to demand assurances from asset managers that the data they have received meets these standards, and that there are appropriate governance and control procedures in place to ensure these standards are met. Under Solvency II, there must be a higher level of transparency in the funds in which insurers invest. This includes complying with the look-through approach, which states that insurers and reinsurers must base their risk assessment of a fund on the assets that underlie the fund. Asset managers of funds will be obliged to provide details of these underlying assets to insurers and reinsurers or risk losing insurers and reinsurers’ business.
Under Solvency II, insurers and reinsurers must have close relationships with their asset managers owing to the increased pressure to provide detailed data within tight time frames. Asset managers must ensure they have product strategies that reflect the requirements of Solvency II in relation to asset allocation to ensure that their portfolios remain attractive to insurers and reinsurers.
Recent developments in the insurance sector
Following Brexit, UK and Gibraltar-based insurers and reinsurers who were previously licensed to carry on business in Ireland on a freedom to provide services or freedom of establishment basis have now lost their passporting rights to carry on insurance and reinsurance in Ireland. Consequently, 56 such firms have entered into a temporary run-off regime, established under the Withdrawal of the United Kingdom from the European Union (Consequential Provisions) Act 2020, which enables those firms to run off their existing business but prohibits them from entering into new insurance contracts.
Covid-19 has had a substantial impact on the insurance industry. In March 2020, the European Insurance and Occupational Pensions Authority (EIOPA) and the Central Bank instructed insurers not to make dividend payments in light of the ongoing crisis. Significant market volatility has resulted in uncertainty in insurers’ business plans.
Regulation (EU) No. 1286/2014 on key information documents for packaged retail investment and insurance-based investment products (PRIIPs Regulation) introduced, on a pan-European level, a standardised pre-contractual disclosure document (key information document (KID)) for the benefit of retail investors purchasing certain packaged retail investment products or insurance-based products that, following the postponement of the initial application date, came into effect on 1 January 2018. Products within the scope of the PRIIPs Regulation include:
- life assurance-based investment products;
- investment funds (discussed below in the section on recent developments – funds and private equity);
- structured term deposits; and
There are a number of products explicitly excluded from the PRIIPs Regulation, including notably non-life insurance products, pension products and annuities not recognised in national law. However, any product that falls under the definition of PRIIPs must also be sold to retail investors to fall within the scope of the PRIIPs Regulation. The KID is required to include information under certain prescribed headings, including:
- information on the product manufacturer;
- a description of the main features of the product as well as costs borne by the investor;
- the risk–reward profile of the product;
- performance information, including future performance scenarios and expected returns;
- a comprehension alert highlighting that the product may be difficult to understand;
- how complaints can be made; and
- certain other relevant information that may be necessary for understanding the features of the product.
The European Union (Insurance Distribution) Regulations 2018, which transpose Directive (EU) 2016/97 on insurance distribution (Insurance Distribution Directive) (IDD) in Ireland, came into effect on 1 October 2018. The IDD represents a noteworthy departure from the manner in which insurance and reinsurance distribution is regulated. In particular, the IDD aims to enhance EU regulation of the insurance market by ensuring a level playing field for all participants involved in the sale of insurance products to strengthen policyholder protection, promote cross-sectoral consistency and make it easier for firms to trade on a cross-border basis. One of the most significant changes introduced by the IDD involves additional requirements that apply to insurers and reinsurers and insurance intermediaries when they carry on insurance distribution relating to the sale of investment-based insurance products.
Regulation (EU) No. 2019/2088 on sustainability-related disclosures in the financial services sector (Disclosures Regulation) entered into force on 29 December 2019 but only applies from 10 March 2021. It requires any person selling an investment-based insurance product to disclose sustainability risks in respect of that product to investors. Sustainability risk is defined as being ‘an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of an investment’. If an investment-based insurance product promotes environmental and social characteristics, further disclosures as to how those characteristics are met must be provided at the pre-contractual stage. The purpose of the Disclosures Regulation is to make finance flows consistent with the European Union’s commitment to lowering emissions and ensuring climate-resilient development. To assist with the identification of products as promoting environmental and social characteristics, Regulation (EU) 2020/852 on the establishment of a framework to facilitate sustainable investment (Taxonomy Regulation) and its delegated acts provide technical guidance on the classification of activities based on sustainability factors. More information on the Disclosure and Taxonomy Regulations and the wider European Union sustainable finance framework can be found in Section VI.v.
The Consumer Insurance Contracts Act 2019 (CICA) introduces significant changes in relation to contracts between insurers and consumers (which is widely defined to include not only natural persons but also unincorporated bodies such as clubs and charities as well as incorporated bodies with an annual turnover of less than €3 million). CICA was partially commenced in September 2020. Provisions that were commenced at that point invalidate basis of contract clauses that have the effect of turning pre-contractual representations into contractual warranties. These provisions also abolished the principle that a claimant under a policy must have an insurable interest. The rights of third parties against insurers were also enhanced and limitations on subrogation rights were introduced. More burdensome provisions of CICA came into force in September 2021. These include the abolition of the traditional principle of utmost good faith to be replaced by a duty on consumers to answer all questions honestly and with reasonable care. Similarly, at renewal stage, consumers will only be required to update information if the insurer makes such a request. Proportionate remedies for misrepresentation by consumers will also come into force, which make distinctions between innocent, negligent and fraudulent misrepresentation. More onerous requirements will be placed on insurers to provide details of premiums paid by consumers at renewal stage.
The trustees of a pension scheme are constrained in the investment choices they may make by the governing documents of the scheme (or, if no investment powers are contained in the pensions scheme, by the Trustee Act, 1893 and the associated Trustee (Authorised Investment) Orders, and by statute). The Pensions Acts 1990 to 2018 (Pensions Acts) impose a duty on the trustees of pension schemes to provide for the proper investment of the resources of the scheme.
In general, the trustees of a pension scheme will be given the power to appoint one or more investment managers under the scheme’s governing documents. An investment manager appointed to pension scheme assets will be bound by any restrictions on investment in the scheme’s governing documents and by the relevant statutory restrictions. These restrictions will generally be referred to in the investment management agreement. Ultimately, trustees cannot delegate their primary responsibility to invest, and trustees remain under a continuing obligation to supervise the investment manager.
Irish pension schemes must comply with domestic legislation transposing Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORP II), which sets a common basis for the operation and supervision of pension funds in EU Member States. The main requirements of IORP II were transposed in Ireland through amendments to the Pensions Acts, although one-member arrangements benefit from a derogation from new requirements until 22 April 2026 and an open-ended derogation from the investment rules and borrowing restrictions in respect of investments made or borrowings entered into before the IORP II transposition date.
With regard to investment decisions, the Pensions Acts (as amended for IORP II) require trustees to invest in accordance with the prudent person rule and, among other stipulations, to invest assets in the interests of members and beneficiaries as a whole. When investing, the trustees of a scheme must invest its resources:
- in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole;
- predominantly in regulated markets (and, where there is investment in assets that are not admitted to trading on a regulated financial market, the trustees must keep any such investment to prudent levels); and
- in such a manner that the resources shall be properly diversified in such a way as to avoid excessive reliance on any particular asset, issuer or group of undertakings and accumulations of risk in the portfolio as a whole (and, for that purpose, where the trustees invest in assets issued by the same issuer or by issuers belonging to the same group, they must invest in a manner that shall not expose the scheme to excessive risk concentration).
If the trustees of a scheme have invested in the employer, they must not invest more than 5 per cent of the resources of the scheme as a whole and, where the employer belongs to a group, they must not invest more than 10 per cent of scheme resources in the undertakings belonging to the same group as the employer. If a scheme is sponsored by a number of employers, the trustees must invest in those employers prudently and take into account the need for proper diversification.
Investment by the trustees of a scheme in derivative instruments is possible insofar as such instruments contribute to a reduction in investment risks or facilitate efficient portfolio management provided they are valued on a prudent basis, taking into account the underlying asset; they are included in the valuation of the assets of the scheme; and the trustees avoid excessive risk exposure to a single counterparty and to other derivative operations.
When investing, the Pensions Acts now also provide that the trustees of a scheme may, in accordance with the prudent person rule, take into account the potential long-term impact of investment decisions on environmental, social and governance (ESG) factors.
Recent developments in pensions asset management
The European Market Infrastructure Regulation (EMIR),12 which entered into force on 16 August 2012, seeks to ensure greater transparency in the financial system by, inter alia, regulating transactions in over-the-counter derivatives (OTCs) in the EU. Pension schemes that use OTCs fall within the scope of EMIR, albeit with some exemptions from the full force of the Regulation, and the trustees of a pension scheme are responsible for compliance with EMIR. Under EMIR, pension schemes are classified as financial counterparties along with financial institutions (such as banks, hedge funds and custodians), but pension funds have been exempted from compliance with some aspects of EMIR for a period of time.
Since 12 February 2014, financial counterparties, including trustees of pension funds, have to report any new OTCs that they enter into with the trade repository within one business day of entering the contract. Any amendments to the terms of OTC transactions and any early terminations of OTC transactions must also be reported from 12 February 2014 onwards. Any OTC transactions that were entered into on or after 16 August 2012 and that remained outstanding on 12 February 2014 also had to be reported on 12 February 2014. All counterparties to a transaction, including the trustees of pension funds, must maintain a record of concluded or modified OTC transactions for at least five years after they have been concluded or modified. Pension funds were granted an exemption from the EMIR clearing requirements for certain OTC trades. The last such exemption was granted in May 2021, when it was agreed that the exemption from the requirement would continue until 18 June 2022, leaving the possibility of one further one-year extension if insufficient progress was deemed to have been made on solutions to deal with outstanding issues regarding ‘the cash collateral problem’.
Reporting requirements for pension schemes have been introduced by the EIOPA and the European Central Bank, by a regulation published in the Official Journal of the European Union on 26 January 2018. This regulation came into force on 15 February 2018, but the first annual reporting deadline set by the Pensions Authority was deferred until 31 December 2020. This regulation requires certain pension funds to report, on a quarterly and annual basis, detailed data on assets, liabilities and members.
There are reduced reporting requirements for pension funds based on their assets or size of membership. The Central Bank of Ireland is responsible for the collection, compilation and transmission of this statistical data.
With effect from 29 January 2019, all occupational pension schemes established under trust were required to (among other things) take all reasonable steps to gather and hold certain information on the pension scheme’s beneficial owners and set up a beneficial ownership register. This requirement has now been revoked for approved schemes. The effect of commencement of relevant sections of the Criminal Justice (Money Laundering and Terrorist Financing) (Amendment) Act 2021, along with the coming into operation of the European Union (Anti-Money Laundering: Beneficial Ownership of Trusts) Regulations 2021, meant that, with effect from 24 April 2021, occupational pension schemes (where established as an approved scheme pursuant to Part 30 of the Taxes Consolidation Act 1997), among other arrangements (including approved retirement funds), are excluded from the requirement to establish and maintain a beneficial ownership register. It also meant that they are not included in the new requirement to file a return of beneficial ownership information to the state’s central register of beneficial ownership established for trusts.
The Second Shareholders’ Rights Directive has been transposed into Irish law by the European Union (Shareholders’ Rights) Regulations 2020 (SRD Regulations). The SRD Regulations aim to increase transparency and shareholder engagement in corporate governance.
The SRD Regulations apply to relevant institutional investors, which include a pension scheme where the scheme is an occupational pension scheme regulated in Ireland, and invests directly, or through an asset manager, in shares traded on an EU regulated market. If a pension scheme meets these criteria, it must publicly disclose an engagement policy, its investment strategy and any arrangements that it holds with asset managers. Public disclosure means publishing the information to make the matter available ‘free of charge on the website of the relevant institutional investor’. Guidance is awaited as to how this requirement should be interpreted in a context where the trustees of most occupational pension schemes regulated in Ireland do not host a scheme website.
Regulation (EU) 2019/2088 of the European Parliament and of the Council of 27 November 2019 on sustainability-related disclosures in the financial services sector (SFDR) took effect on 10 March 2021. The SFDR requires financial market participants, which include pension funds, to disclose certain sustainability information to prospective and current scheme members and beneficiaries. The overall aim of the SFDR is to support the European Union’s goals in relation to climate, sustainability and the environment. The SFDR requires the information to be made available to include:
- where the pension fund considers the adverse impacts of investment decisions on sustainability factors (defined as environmental, social and employee matters; respect for human rights; anti-corruption; and anti-bribery matters):
- a statement of due diligence policies regarding those impacts, including (at least) identification and prioritisation of the impacts, a description of the principal impacts, brief summaries of engagement policies and a reference to adherence to responsible business conduct codes; and
- from 31 December 2022, a clear and reasoned explanation of whether and how it considers adverse impacts on sustainability factors, and a statement that more information is available in the pension fund’s annual report;
- where such adverse impacts are not considered, clear reasons for why the pension fund does not do so, including, where relevant, information as to whether and when it intends to consider such adverse impacts;
- information regarding the consistency between the pension fund’s remuneration policies and the integration of sustainability risks (sustainability risk is defined as an environmental, social or governance event or condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment);
- the manner in which sustainability risks are integrated into the pension fund’s investment decisions;
- the extent to which the pension fund includes financial products that promote environmental or social characteristics, further details including:
- a description of the environmental or social characteristics or the sustainable investment objective; and
- a statement of the methods of assessing and measuring impacts, including data sources, screening criteria and relevant sustainability indicators; and
- for prospective members only, an assessment of the prospective impact of the relevant sustainability risks on investment returns.
As mentioned above, in the context of investment requirements, IORP II was transposed into Irish law with effect from 22 April 2021, setting a minimum standard for the management and supervision of pension schemes in order to protect the entitlements of members and beneficiaries. In addition to updating the investment requirements, the legislation introduces many new obligations on Irish pension schemes including:
- minimum qualification and experience standards for trustee boards;
- the appointment of key function holders for risk management, actuarial and internal audit;
- requirements for written policies on risk management, internal audit, remuneration and, where relevant, actuarial and outsourced activities;
- standards for internal controls, administrative and accounting procedures and contingency plans; and
- communications and information to be provided to active members, prospective members, deferred members, those nearing retirement and pensioners.
The transposition of IORP II introduced to the Pensions Acts a requirement on the Pensions Authority to adopt a forward-looking and risk-based approach to supervising pension schemes, and provides it with powers to intervene where the interests of members are believed to be under threat. Its transposition also deletes provisions from the Pensions Acts that previously exempted small schemes and one-member arrangements from various provisions. Various transitional measures are provided for, however, including for existing one-member arrangements so that some provisions will apply to these one-member arrangements from the end of a five-year derogation period (i.e., from 22 April 2026). They also benefit from an open-ended derogation from the investment rules and borrowing restrictions in respect of investments made or borrowings entered into before the transposition date.
iii Alternative investment funds
Regulated investment fund structures in Ireland may be established as UCITS (authorised by the Central Bank pursuant to the UCITS Regulations) or AIFs (authorised by the Central Bank pursuant to the AIFM Regulations that implement the Alternative Investment Funds Managers Directive (AIFMD)).
UCITS are subject to various liquidity requirements, investment restrictions (both in terms of permitted investments and required diversification), and borrowing and leverage limits. The UCITS III Product Directive13 and the Eligible Assets Directive14 significantly increased the range of permissible investments for UCITS, which enabled alternative investment fund managers to adapt their investment approach to the UCITS model, giving the market access to liquid alternative UCITS funds. However, because of the various leverage and counterparty exposure restrictions that apply to UCITS and the fact that a UCITS may not appoint prime brokers to rehypothecate fund assets, there are limits on the type of alternative or hedge fund strategies that can be used by a UCITS. The limits on a UCITS being able to pursue an alternative fund strategy needs to be balanced against the fact that some institutional investors and pension funds are able to invest a higher percentage of their assets in a UCITS than into unregulated funds or even regulated non-UCITS funds. However, if the strategy does not fit within a UCITS framework, managers will establish the product as an AIF.
AIFs are regulated by the Central Bank pursuant to the AIFMD Regulations, which are supplemented by the Central Bank’s AIF Rulebook.15 The AIFMD Regulations implement the AIFMD into Irish law.16 AIFs encompass all non-UCITS or alternative funds, and not just hedge funds. Whether a particular AIFM is within the scope of the AIFMD depends on its location and that of the AIFs it manages, as well as the countries into which the AIFs are marketed. In summary, the AIFMD applies to all EU AIFMs that manage one or more EU or non-EU AIFs; all non-EU AIFMs that manage one or more EU AIFs; and all non-EU AIFMs that market one or more EU or non-EU AIFs in the EU.
The AIFM can be either an external manager of the AIF or the AIF itself, where the legal form of the AIF permits internal management (e.g., the Irish variable capital investment company and ICAV) and the AIF chooses not to appoint an external AIFM (an internally managed AIF). If an internally managed AIF is authorised as an AIFM and is permitted to delegate this function to a non-EU manager, that manager does not have to be authorised as an AIFM under the AIFMD. This point is of particular importance as it allows non-EU managers to access European markets without having to become authorised as AIFMs.
Irish AIFs may be established as retail investor AIFs (RIAIFs) or qualifying investor AIFs (QIAIFs) under the rules set out in the AIF Rulebook. The AIF Rulebook also specifically provides for the establishment of particular AIF structures: for example, real estate and private equity RIAIFs and QIAIFs (see Section VI.iv) and loan origination QIAIFs (LO-QIAIFS), the latter representing the first dedicated regulatory regime in the EU for loan origination funds. AIFMs that meet the additional conditions relating to LO-QIAIFs are able to manage the LO-QIAIF and market it within the EU using the AIFMD passport.
iv Private equity and real property
As stated above, the AIF Rulebook specifically provides for the establishment of real estate and private equity RIAIFs and QIAIFs.
A key element in the development of private equity funds and real estate funds as QIAIFs has been the use of special purpose vehicles, one of the benefits of which is enhanced access to Ireland’s extensive double taxation treaty network. QIAIFs are permitted to establish multilayered special purpose vehicles, typically wholly owned subsidiaries established pursuant to Section 110 of the Taxes Consolidation Act 1997. A Section 110 subsidiary can, therefore, be used as the investment vehicle for the QIAIF, and has access to Ireland’s double taxation treaty network. The recent enhancements of the regulated ILP structure should now also offer an attractive alternative for managers seeking to implement private equity, venture capital and real property strategies.
Real estate investment trusts (REITs) were established in Ireland in recent years. Irish REITs must be incorporated under the Irish Companies Act 2014, be resident in Ireland, have their shares listed on the main market of a recognised stock exchange, and meet a number of conditions and restrictions in terms of borrowing, permitted investments, sources of income and risk spreading. Although the Central Bank has not determined that all REITs established in Ireland are AIFs for the purpose of the AIFMD, it has indicated that the onus would be on a REIT to demonstrate otherwise. Furthermore, it has advised that REITs that are structured as unauthorised AIFs must comply with the Central Bank AIF Rulebook for retail AIFs.
v Recent developments – funds and private equityDevelopments in relation to sustainable finance regulation
With the aim of furthering sustainable finance and ESG integration, the European Commission (Commission) introduced a package of legislative measures in 2018 that includes three key regulations: the Taxonomy Regulation, the Disclosures Regulation and the Low Carbon and Positive Impacts Benchmarks Regulation. The Disclosures Regulation came into effect on 10 March 2021 (SFDR Level 1), requiring all financial market participants (FMPs), including AIFMs, UCITS management companies and self-managed UCITS, to consider sustainability from a number of perspectives and to:
- publish information on their websites regarding their policies on the integration of sustainability risks in their investment decision-making process;
- make pre-contractual disclosures on how they incorporate sustainability risks in their business; and
- comply with pre-contractual transparency rules on sustainable investments.
The high-level principles-based requirements contained in SFDR Level 1 are supplemented by more detailed Level 2 requirements (SFDR RTS). The SFDR RTS require FMPs to comply with more detailed pre-contractual disclosures and annual reporting disclosures. FMPs must make these disclosures in the mandatory templates that are set out in the annexes to the SFDR RTS for relevant products. In addition, certain Taxonomy Regulation-related disclosures apply to those products and funds that are categorised as ‘Article 8’ or ‘Article 9’ under the Disclosures Regulation. This subset of Article 8 and Article 9 funds are subject to additional disclosure requirements regarding the alignment of their investments with the Taxonomy Regulation. Further, the Taxonomy Regulations require that ‘Article 6’ funds include a negative statement in their offering documents and annual reports that underlying investments do not take into account the EU criteria for environmentally sustainable economic activities.
To ensure there is a single rulebook for sustainability disclosures, the European Supervisory Authorities determined that the additional taxonomy-related requirements should be incorporated into the SFDR RTS. It had been intended that these requirements would become effective as of 1 January 2022. However, the Commission confirmed in July 2021 that because of the level of detail, length and nature of the new regulatory technical standards for SFDR RTS and the Taxonomy Regulation, and the need for a smooth implementation of the new standards, the standards would be addressed in one single delegated act and the implementation date was initially delayed from 1 January 2022 to 1 July 2022. On 6 April 2022, the Commission announced that it had adopted the SFDR RTS. However, within days of adoption, the Commission mandated the European Supervisory Authorities to review and propose amendments to the SFDR RTS. In June 2022, the European Supervisory Authorities published a statement clarifying key areas of the SFDR disclosures, including:
- use of sustainability indicators;
- principal adverse impact disclosures;
- taxonomy-related financial product disclosures; and
- ‘do no significant harm’ disclosures.
The upshot of this is that the SFDR RTS are now expected to be updated and become effective from 1 January 2023. However, this date remains subject to final confirmation by the European Parliament and Council.
As mentioned in preceding sections, the PRIIPs Regulation came into effect on 1 January 2018 and applies to all packaged retail and insurance-based investment products (PRIIPs). The definition of a PRIIP is broad, and covers a range of products including UCITS and AIFs that are made available to retail investors. In this context, a retail investor is any investor that is not a professional client as defined under MiFID II.
For UCITS, the Commission has granted an exemption from complying with the requirements of the PRIIPs Regulation until the end of 2022, which means that a UCITS that is made available to retail investors must comply with the PRIIPs Regulation by 1 January 2023.
The purpose of the PRIIPs Regulation is to require manufacturers of PRIIPs, including UCITS management companies, to draw up a standardised key information document (KID), and publish it on its website before the PRIIP is made available to retail investors. Any fund management company that manages a UCITS that is made available to retail investors must draw up a KID for each sub-fund and share class of the UCITS by 31 December 2022. Also from this date, anyone advising on or selling a UCITS to retail investors, such as financial advisers and distributors, will also be required under the PRIIPs Regulation to provide a copy of the KID to investors. For any UCITS that currently uses representative share class UCITS KIIDs, this practice may continue, as the regulatory technical standards published by the Commission explicitly allow for the preparation of a representative KID covering multiple share classes.
Overall, the form and function of the KID is similar to that of the UCITS key investor information document (UCITS KIID), with some key differences; for example:
- increased length (a KID may be three pages long, a UCITS KIID is generally limited to two pages);
- the description of a sub-fund should include additional disclosure, including on environmental and social objectives;
- differing calculation methodology and disclosure of risk indicators;
- past performance is not disclosed in the KID; rather, the performance section will include four performance scenarios (namely a stressed scenario, an unfavourable scenario, a moderate scenario and a favourable scenario); and
- enhanced cost disclosures broken down into ‘costs over time’ and ‘composition costs’.
There are also additional sections in the KID, such as complaints handling, recommended holding period and contingency for insolvency of the UCITS management company.
A key question is whether a UCITS management company will be required to produce both a KID and a UCITS KIID. The UCITS Regulations currently require that all UCITS prepare and publish a UCITS KIID. However, the UCITS Regulations were amended to state that, with effect from 1 January 2023, the production of a KID by a UCITS under the PRIIPs Regulation will satisfy these UCITS KIID publication requirements. Therefore, any UCITS that produces a KID after 1 January 2023 will not be required under the UCITS Regulations to continue to publish the UCITS KIID.
The position in the UK is different, however. The UK Financial Conduct Authority (FCA) has not imposed the same deadline for UK UCITS to prepare a KID, but instead has extended the deadline by five years to 31 December 2026. As a result of the FCA’s position, UCITS authorised in the EEA that are sold to retail investors in the UK must continue to provide a UCITS KIID. Therefore, as it stands currently, any UCITS sub-fund or share class that is marketed in both the EEA and the UK will likely need both a UCITS KIID and KID.
As the PRIIPs Regulation explicitly states that the KID must be provided whenever the PRIIP is made available to retail investors, it means a UCITS that is made available to non-retail investors only does not come within the scope of the PRIIPs Regulation and so does not need to produce a KID. In this case, the UCITS would continue to produce the UCITS KIID. However, it may be difficult to police the distribution of the UCITS to non-retail investors only, and so the cautious approach would be for fund management companies to produce the KID and make it available on its website in respect of the UCITS so that the risk of retail investors subscribing in the UCITS without receiving the KID is avoided.
In practice, it is expected that most UCITS management companies will produce a KID for the UCITS they manage, even for those UCITS that are made available to non-retail investors only.
Ireland’s response to the Russian invasion of Ukraine has been in line with the EU sanctions measures. While Irish-domiciled funds held almost €13 billion of Russian stocks and bonds as of September 2021, this accounts for only about 0.3 per cent of the total net asset value of Irish domiciled funds. While the overall exposure of the Irish funds sector to Russian securities is very much limited, the Central Bank has been actively engaged with industry through correspondence with management companies on matters such as valuations, monitoring of liquidity and investor communications. The Central Bank’s response included the facilitating of a side-pocket mechanism for illiquid Russian, Belarusian and Ukrainian assets directly or indirectly impacted by the Russian invasion of Ukraine and related sanctions.
i Irish investment undertakings and non-Irish resident investors
Where an Irish authorised fund qualifies as an investment undertaking for Irish tax purposes, it is generally not chargeable to Irish tax on its income and gains.17 However, the fund may be required to account for Irish tax (known as investment undertaking tax or exit tax) on the occurrence of a chargeable event in respect of its investors. In practice, this charge is limited to payments in respect of certain Irish-resident taxable investors. Separate rules apply to Irish real estate funds (IREFs) (see Section VII).
A chargeable event includes payments of any form made by a fund to an investor and the transfer or sale of units in a fund. An investor is also deemed for Irish tax purposes to dispose of its holding in an Irish fund every eight years (deemed a chargeable event), giving rise to a rolling eight-year tax charge until such time as the holding is disposed of. If the fund becomes liable to account for exit tax on a chargeable event, it is entitled to deduct an amount equal to the appropriate tax (currently 41 per cent) from the relevant payment and, where applicable, to repurchase and cancel such number of units held by the investor as is required to satisfy the amount of tax. Importantly, however, no Irish tax arises in respect of a chargeable event where the investor is neither resident nor ordinarily resident in Ireland, or an exempt Irish resident such as another Irish authorised fund, a Section 110 company, a pension fund or a charity. In each case, the fund must be in possession of an appropriate declaration confirming the status of the investor, although the requirement for declarations in respect of non-resident investors may be relaxed on application by a fund to the Irish Revenue where certain conditions are met.
Non-Irish resident investors are thus generally not liable to Irish exit tax by deduction by the fund or on assessment in respect of their investment in Irish authorised funds. The one exception is where a non-resident investor has a branch or agency in Ireland, and invests in an Irish fund through or in connection with the branch or agency. Although no Irish tax will be accounted for by the fund, the investor will be liable to Irish corporation tax in respect of income and capital distributions it receives from the fund.
ii Investment limited partnerships
As outlined above, recent legislative changes have been made to enhance the regime for investment limited partnerships. These vehicles are transparent for Irish tax purposes, consistent with the tax treatment of investment limited partnerships internationally.
A separate regime applies to Irish authorised CCFs, being funds that permit pension assets to be pooled in a tax-transparent structure.18 A CCF is treated as tax-transparent for Irish tax purposes provided the unitholders are institutional investors and certain reporting requirements are met. As a consequence, a CCF can facilitate pooling while ensuring that the double taxation treaty benefits normally enjoyed by pension funds are not affected by investing through a CCF.
iv Taxation of investment managers
An Irish resident investment manager would normally be taxed on its trading profits at the corporation tax trading rate of 12.5 per cent. Ireland’s low corporation tax rate on trading profits compares favourably with corporation tax rates in other EU and OECD countries. Management services provided by an investment manager to an authorised fund are generally exempt from VAT. In addition, the use of an Irish investment manager by a foreign UCITS will not of itself bring the foreign UCITS within the charge to Irish tax where certain conditions are met.19
v Private equity
Private equity investors that choose not to invest through an Irish authorised fund could invest through a standard Irish company, in which case profits would be taxed at either 12.5 or 25 per cent. Tax-neutrality at the entity level could be achieved, if appropriately structured, by the use of a company qualifying for the Irish Section 110 regime, or a tax-transparent partnership or limited partnership, to invest.
REITs offer a modern collective ownership structure for Irish and international investors in real property. Provided that various conditions as to diversification, leverage restrictions and income distributions are met, an Irish REIT is exempt from Irish corporation tax on income and gains arising from its property rental business. Investors in a REIT are liable to Irish tax on distributions from the REIT. In the case of non-Irish resident investors, income distributions from the REIT are subject to dividend withholding tax (currently 20 per cent), although certain non-residents may be entitled to recover some of the tax withheld, or otherwise should be entitled to claim credit against taxes in their home jurisdictions. Non-resident pension funds may also be eligible for exemption.
Since 2017, a new tax regime applies to regulated funds that invest in Irish real estate and related assets. Where a regulated fund derives at least 25 per cent of its value from assets that are Irish real estate, shares in unquoted real estate companies, Irish REITs and certain debt securities issued by Irish securitisation companies, then the fund will be considered to be an IREF. An IREF may be required to impose a 20 per cent withholding tax on a percentage of the amount paid on events such as the making of a distribution to investors or the redemption of its units. There are certain classes of investors that are exempt from withholding tax, primarily Irish-taxable investors.
There are also specific rules, introduced in 2019, that can give rise to an income tax charge for an IREF that has shareholder debt and whose debt and finance costs exceed certain thresholds. The exact impact of the new rules may be different for each IREF, depending on its finance costs, property costs and other factors.
The introduction of the ICAV was a welcome development in expanding the attractiveness of Ireland’s authorised fund offering. Unlike the preceding Irish corporate regulated fund, the variable capital investment company, the ICAV as a private limited company allows US-taxable investors to treat the fund as a ‘check-the-box’ vehicle for US tax purposes. In so doing, the ICAV may avoid certain adverse tax consequences for US-taxable investors who invest in structures that may be deemed as a passive foreign investment company for US federal income tax purposes.
Ireland was one of the first countries to enter into an intergovernmental agreement (IGA) with the United States with respect to the Foreign Account Tax Compliance Act (FATCA) provisions of the US Hiring Incentives to Restore Employment Act 2010 in December 2012. Under the IGA, FATCA compliance is enforced under Irish tax legislation, including the Financial Accounts Reporting (United States of America) Regulations 2014, and reporting rules and practices. Subject to certain exceptions, Irish authorised funds are generally reporting financial institutions for FATCA purposes, and are subject to FATCA due diligence and reporting requirements. Irish financial institutions that are within its scope are required to register and obtain a global intermediary identification number to avoid a 30 per cent withholding on their US-sourced income and proceeds from the sale of certain US income-producing assets. The Irish Revenue Commissioners receive similar information from the Internal Revenue Service regarding Irish taxpayers. Ireland has also adopted the common reporting standard (CRS), which is the new global standard on the automatic exchange of information designed to combat tax evasion. The CRS regime requires certain investment entities (including Irish investment funds) to report certain information relating to investors to their local tax authority.
As we move into the second half of 2022, it is clear that the Irish financial services sector has emerged stronger than ever from the market uncertainty created by the covid-19 pandemic and Brexit. International confidence in Ireland as a market-leading financial services hub has been clearly demonstrated by significant increases in total assets in the Irish funds sector as well as the continued growth in asset managers establishing management companies in Ireland. The industry’s commitment to development and innovation is also demonstrated by enhancements to the ILP structure.
As such, there are reasons to be very optimistic about the continued development of the Irish financial services sector. This is underpinned by Irish Funds, the industry body for the Irish funds sector, forecasts for the coming years. Irish Funds anticipates the level of international assets in Irish-domiciled funds to top €5 trillion by 2025, with the number of people directly employed in the industry, across asset management, depositaries, administrators, professional advisers, transfer agents and other specialist firms, set to increase by 25 per cent to over 20,000.
The Irish asset management sector is very focused on ESG and the future of sustainable investing and the opportunities that brings. With the continued support of the government through, for example, the Sustainable Finance Ireland initiative, the Irish asset management sector can continue to remain optimistic with regard to its continued development and growth.