The European Parliament’s Economic and Monetary Affairs (ECON) Committee has published its draft report on the revised IORP Directive which was proposed by the previous European Commission back in March 2014. The draft report, produced by rapporteur and Irish MEP Brian Hayes (one of the keynote speakers at our conference in December), is welcome as it recognises the need to adopt a more high-level, principles-based approach to pensions regulation at an EU level. The draft report contains numerous amendments to the Commission’s proposed text and addresses several of the concerns that we (and others) havepreviously highlighted with the draft Directive. However, the ECON Committee’s proposals do not address all of the issues and may give rise to some of their own.

Background

On 27 March 2014, the previous European Commission published a proposal for a new, revised IORP (Institution for Occupational Retirement Provision) Directive. The proposed Directive contains extensive new requirements on governance and member communications for IORPs. Several issues which would impact the pensions industry in the UK and other EU Member States, have been highlighted with the Commission’s proposals, by ourselves and others, including:

  • excessive prescription over the information to be provided to scheme members in the form of a new “Pension Benefit Statement”
  • the requirement for all DC schemes to appoint a depository
  • the requirement for trustees to have professional qualifications
  • failure to remove the requirement for cross-border schemes to be fully funded at all times, and
  • the risk that new solvency requirements for IORPs could be introduced by the back door as part of the new governance requirements contained within the Commission’s text.

Positive signs

The ECON Committee has sought to adopt a more principles-based approach, recognising that a one-size-fits-all approach to pensions regulation at the EU level is inappropriate given the diversity of pension arrangements in different Member States. The draft report contains a number of welcome amendments to the draft Directive which, if included in the final text, would address many of the points highlighted above. In particular, the report contains amendments which would:

  • significantly reduce the level of prescription over the contents of Pension Benefit Statements
  • remove the ability for the European Commission or EIOPA to introduce new solvency requirements for IORPs under delegated acts
  • remove the requirement for trustees to have professional qualifications and allow the knowledge and experience of those running an IORP to be looked at collectively when assessing whether these are adequate, and
  • replace the requirement for cross-border schemes to be fully funded at all times with a requirement for them to be fully funded at the moment that they “start operating a new or additional scheme”.

In addition, the Committee’s proposals would:

  • reduce the level of prescription regarding the risk assessments that schemes would be required to carry out
  • include an express statement in the Directive that no “quantitative capital requirements” for IORPs (such as Solvency II or the holistic balance sheet) should be developed at an EU level
  • include an express statement in the Directive recognising that it is not appropriate to adopt a “one-size-fits-all” approach to the regulation of IORPs across the EU
  • provide support for the establishment of an EU wide pensions tracking service, and
  • provide for a review of the Directive after 6 years (instead of 4 years under the Commission’s proposal) and remove the explicit requirement for this review to assess the application of the solvency requirements under the Directive.

Issues to be addressed

The Committee’s draft report is positive and it addresses several of the concerns held by UK schemes and sponsors. However, some of the proposed amendments could give rise to issues of their own. In particular:

  • the requirement for schemes to be fully funded at the moment the institution starts operating a new or additional scheme applies to non-cross-border schemes as well as cross-border schemes. The meaning of the term “starts operating a new or additional scheme” is uncertain and open to interpretation by the Courts. This means that there is a risk that it could apply to purely domestic plans where:
    1. a new section is added to an existing scheme
    2. there is a change in the basis of future benefit accrual (e.g. from final salary to CARE or 1/60ths to 1/80ths), or
    3. on a scheme merger. This uncertainty would be extremely unhelpful for existing defined benefit schemes and their  sponsors where one of these scenarios is being contemplated and we hope that this will be addressed in the Committee’s final report.

the Committee’s report contains a new requirement for member consent to be given on all pension transfers. If implemented, this would mean that the existing UK rules on transfers without consent would no longer be permitted. It would also rule out any form of automatic transfer regime for small DC funds, which has been proposed in the UK.

  • the Committee has proposed a new definition of “host Member State” and introduced a definition of “cross border activity” in an attempt to clarify when a scheme is engaged in such activity. Under the current IORP Directive a scheme is treated as a cross-border scheme where the relationship between the sponsoring undertaking and members is governed by the social and labour law of a Member State other than the home Member State. Under the Committee’s new definitions a scheme would be treated as a cross-border scheme where it is governed by the social and labour law of another Member State. It is not clear when an IORP would be “governed by” the social and labour law of another Member State and so changing the test in this way could have unintended consequences.
  • although the requirements for the Pension Benefit Statement have been significantly reduced some of those that remain are not appropriate for all schemes. For example, the draft report envisages members of all schemes being provided with information on scheme investments, costs and past performance. This does not seem appropriate for members of defined benefit schemes.
  • the Commission has proposed that the main objective of pensions regulatory regimes should be the protection of members and beneficiaries. The Committee has proposed extending this to also cover the stability and soundness of IORPs. However, this still fails to recognise the need to have regard to the sustainable growth of employers, which is an important feature of the pensions regulatory system in the UK.

In addition to these new issues, the Committee has retained the requirement for DC schemes to appoint a depository. We are concerned that this will add unnecessarily to the costs of running a DC scheme in the UK. In our view, the Directive should be amended to allow Member States to determine whether or not this is necessary.

We hope that the ECON committee will address these issues in its final report.

Next steps

The ECON Committee is due to finalise its report on the draft Directive in the Autumn. We will then have the proposed amendments to the Commission’s original text from both the Council of the European Union and the European Parliament. The Directive is expected to enter Trilogue early next year and the final text will emerge out of this.

Comments

The ECON Committee’s draft report is welcome particularly as it recognises the need for EU pensions regulation to be more principles-based and to respect the diversity of different pension systems within the EU. The draft report addresses many of the issues that we and others have raised with the draft Directive. However, several issues still need to be addressed. We hope that these will be picked up in the Committee’s final report.

Ultimately, the final version of the Directive will be determined by the Trilogue negotiations. Given the changes that have been proposed by both the Council and the ECON Committee it seems likely that the final version of the Directive will be less prescriptive and more principles-based than the original text. However, we will not know the final position until the negotiations are complete. Therefore, it is crucial that schemes and employers continue to raise their concerns with UK and European officials to ensure that these are fully addressed.