The new IORP Directive, which emerged from the EU’s Trilogue negotiations on 30 June 2016, will introduce new governance and disclosure requirements for occupational pension plans within the EU. It will also relax the funding requirements for cross-border schemes and introduce greater member protection on cross-border transfers.

In light of the UK’s EU referendum result it is uncertain whether the Directive will apply to UK occupational pension plans. However, the interaction of the exit negotiations and the implementation period for the Directive, and the ultimate shape of any exit, means that it is impossible to say at this stage that the Directive will not be relevant. In addition, the Directive’s requirements will apply to “IORPs” (“institutions for occupational retirement provision”) in the remaining 27 EU Member States.

Background

The text for a new Directive on the activities and supervision of IORPs (the IORP II Directive) was first proposed by the previous European Commission in March 2014. The final text recently emerged from Trilogue negotiations and although the European Parliament is yet to give its final approval (anticipated in October 2016), this is expected to be a formality.

The IORP II Directive is expected to be in effect in late 2018 and will replace the existing IORP Directive, covering issues including:

  • Scheme funding and investment
  • Cross-border schemes
  • Cross-border transfers
  • Governance
  • Member communications
  • Regulatory supervision of IORPs

Will it apply to UK pension plans?

Whether or not the new IORP Directive will be implemented in the UK is clearly uncertain following the outcome of the recent EU referendum and will depend upon the timing and terms of the UK’s exit. The extent (if at all) to which the UK will need to comply with IORP II is unlikely to be known until the terms of Brexit become much clearer. In the meantime, UK plans and sponsors should maintain a watching brief.

Even if the Directive never applies in the UK, it will apply to IORPs in the remaining 27 EU Member States.

Key points to note

1. No new solvency rules – As expected, there are no new solvency rules for IORPs in the Directive. In addition, the Directive expressly states that “no quantitative capital requirements – such as Solvency II or holistic balance sheet models derived therefromshould be developed at Union level”. A proposal for the review of the Directive (after 6 years) to include a review of the quantitative requirements applicable to IORPs has also been left out of the final text.

2. Funding for cross-border schemes – There has been a slight relaxation in relation to the funding requirements for cross-border schemes. Although such schemes are still required to be fully funded “at all times” the Directive now recognises that this condition may not always be met and in such circumstances the relevant national regulator will be required to intervene and require the IORP to “immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are adequately protected”. It is not clear what will be required to ensure that members and beneficiaries are “adequately protected”. It will be up to national regulators and ultimately the Court of Justice of the European Union (CJEU) to determine what this means. Nevertheless this would appear to allow something akin to a recovery plan to be put in place where a cross-border scheme is underfunded which may make them a more feasible and attractive option for some sponsors.

3. Definition of cross-border activities – A recital to the Directive states that where “the sponsoring undertaking and the IORP are located in the same Member State the mere fact members or beneficiaries of a pension scheme have their residence in another Member State does not in itself constitute cross-border activity”. This appears to address the concern that we and others had raised that by including a reference to “beneficiaries” (i.e. pensioners) in the definition of cross-border activities for the first time, an IORP could become a cross-border scheme if any of the pensioners happened to live in a different Member State to the one in which the IORP was located.

4. Cross-border transfers – The Directive contains new requirements that will apply to cross-border transfers. These Articles appear to have been included to make it more difficult to transfer IORPs between Member States in search of a more benign regulatory environment.

The requirements that will apply to cross-border transfers include the need:

  • to obtain the consent of the majority of the members and the majority of the beneficiaries (i.e. pensioners) concerned or the majority of their representatives (which includes trustees)
  • to obtain the prior authorisation of the competent authorities in the home Member States of the transferring IORP and the receiving IORP
  • for the long-term interests of the members and beneficiaries of the receiving IORP and the transferred part of the plan to be “adequately protected” during and after the transfer
  • in the case of a partial transfer, for the long-term interests of the remaining members and beneficiaries to be “adequately protected
  • for the receiving IORP to be “fully funded” at the date of the transfer
  • for the assets being transferred to be “sufficient and appropriate to cover the liabilities, technical provisions and other obligations or rights to be transferred” measured in accordance with the applicable rules in the home Member States of both the transferring and the receiving IORPs, and
  • for individual entitlements not to be reduced as a result of the transfer.

5. Objectives of regulatory framework – Despite lobbying on this issue, the Directive still states that “the primary objective of prudential supervision is to protect the rights of members and beneficiaries and to ensure the stability and soundness of the IORPs”. This appears to be at odds with the UK Regulator’s statutory objectives, in particular, the fact that the Regulator is required to have regard to the sustainable growth of employers in the exercise of its scheme funding powers alongside its other objectives. Therefore, if the Directive were to be implemented in the UK, the Regulator’s objectives may need to be revisited.

6. Governance – Pension plans will need to have in place and apply written policies in relation to risk management, internal audit and, where relevant, actuarial activities and outsourced activities. Plans will also be required to carry out and document a new ‘own risk assessment’ at least every three years or without delay following any significant change in the risk profile of the plan.

7. Outsourcing - Plans will be required to notify their national regulator where they outsource any activities covered by the Directive and prior notification will need to be given before any key functions are outsourced. Schemes will also be required to enter into a written agreement with the service provider where activities covered by the Directive are outsourced.

8. Remuneration policy – Plans will need to establish and apply a “sound remuneration policy for all those persons who effectively run the IORP, perform key functions and other categories of staff whose professional activities have a material impact on the risk profile of the IORP”. The policy will also apply to service providers to whom activities are outsourced. It is unclear whether and, if so, how the remuneration policy would need to be applied to professional trustees, professional advisers and service providers.

9. Professional qualifications – As expected, individual trustees will not be required to have professional qualifications as the qualifications, knowledge and experience of the persons who run an IORP can be looked at collectively.

10. Fit and proper persons – The Directive requires each Member State to ensure that the competent authority is able to assess whether the persons who effectively run an IORP, or have key functions, fulfil certain fit and proper person requirements. If implemented, this could mean that the UK Regulator would need to have greater involvement in assessing and monitoring the fitness and propriety of pension plan trustees.

11. Pension Benefit Statement - The requirements relating to the content and format of the new Pension Benefit Statement to be issued annually to members have, as expected, been considerably reduced and simplified and we would not expect them to cause a major issue for UK plans.

12. Depository - Member States have been given discretion over whether or not to require DC plans to appoint a depository.

13. ESG factors – There are multiple references in the Directive to those running an IORP being required to consider environmental, social and governance factors in investment decision making.

Comment

Somewhat ironically, the final text of the new IORP Directive, published a week after the EU referendum in the UK, addresses the vast majority of concerns raised by us and others on behalf of pension plans and sponsors in the UK and other Member States. There will inevitably be some new governance requirements if the IORP II Directive is implemented into UK legislation, but our sense at the moment is that these are likely to be manageable for most UK IORPs.