The new IORP Directive is nearing the end of its journey through the European institutions. The final text will now be hammered out in so-called “Trilogue” negotiations involving the Council of the European Union, MEPs and the European Commission, which are underway. Many important issues are still to be resolved, including whether:

  • member consent will be required on all transfers,
  • trustees will be required to have professional qualifications,
  • all DC plans should be required to appoint a depository, and
  • the funding requirements for cross-border schemes should be relaxed.

Subject to the outcome of the UK’s EU Referendum in June, the Directive is likely to have a material impact on the running of both domestic and cross-border “Institutions for Occupational Retirement Provision” (IORPs - or pension plans in plain English). As one example, there is a risk that the proposed text could mean that in future a pension plan with one or more pensioners living in another Member State would be classified as a cross-border scheme (which is not currently the case).

Background

The previous European Commission originally published its proposal for a new, revised Directive on the activities and supervision of IORPs (IORP II) in March 2014. The revised Directive is designed to improve the governance and transparency of IORPs across Europe, increase their use for cross-border activity and support long-term investment by IORPs. The original text proposed by the Commission has now been reviewed by the Council of the European Union and MEPs (led by the Economic and Monetary Affairs (ECON) Committee) with several important amendments being proposed to it. The text for the new Directive is currently being finalised in Trilogue negotiations involving the Council, MEPs and the European Commission. The outcome should be known during the Summer.

Key issues

On the whole the amendments proposed by the Council and MEPs to the Commission’s original text are positive and indicate that the final version of the Directive will be less prescriptive and more principles-based than the original proposal. However, the final position on a number of important issues will not be known until the outcome of the Trilogue negotiations is confirmed. In the meantime, we have set out below the current state of play on some of the key issues covered by the new Directive, taking into account the:

Commission's original proposal for a revised IORP Directive (27 March 2014)

Fourth compromise text issued by the Council of the European Union (28 November 2014)

Report of the European Parliament's ECON Committee (28 January 2016)

1. Trustee qualifications, experience and expertise

Commission proposal:
All persons who run an IORP to have "professional qualifications, knowledge and experience" which are "adequate to enable them to ensure the sound and prudent management of the IORP and to properly carry out their functions".

Proposed amendments: Both the Council and the ECON Committee have proposed amendments to remove the requirement for all trustees to have professional qualifications and instead to allow the qualifications, knowledge and experience of those running an IORP to be looked at collectively when assessing whether these are adequate.

Expected outcome: It is likely that the position adopted by the Council and the ECON Committee will be adopted. This will preserve the role of lay trustees.

2. Transfers

Commission proposal: Cross-border transfers subject to consent of members and beneficiaries or their representatives (unless national law provides otherwise) and subject to the approval of the competent authority in the home Member State of the receiving plan.

Proposed amendments: The Council has proposed that the consent of all transferring members and beneficiaries should be required on cross-border transfers. In contrast, the ECON Committee has proposed that the consent of the majority of members or beneficiaries concerned or their representatives should be obtained on all transfers – including those between IORPs within the same Member State. It has also proposed amendments that would, in our view, run the risk that the transferring and receiving plans on a partial transfer would have to be fully funded in order for the transfer to take place.

Expected outcome: It seems likely that the requirements for consent on transfers under the Directive will be strengthened. However, some of the proposals, such as the need to obtain the consent of all transferring members and beneficiaries on cross-border transfers and the need for plans to be fully funded before a partial transfer could take place could create difficulties in practice, particularly for UK plans where bulk transfers are more commonplace than in other Member States. Therefore, it is to be hoped that a practical position is reached on this.

3. Cross-border schemes – Funding requirement

Commission proposal
: Limited changes to the requirements that apply to cross-border schemes and, significantly, the requirement for such plans to be fully funded “at all times” is retained.

Proposed amendments: The ECON Committee has proposed removing the requirement for cross-border schemes to be fully funded “at all times”. Instead, underfunded cross-border schemes could put in place a recovery plan in the same way as non-cross-border schemes, provided “the interests of members and beneficiaries are fully protected”.

Expected outcome: Unknown. Whilst on the face of it the ECON Committee’s proposal would appear to relax the requirements that apply to cross-border schemes, there is a risk that the need for members and beneficiaries to be “fully protected” could undermine the attempt to level the playing field between cross-border and non cross-border schemes. This term is not defined and there is clearly a risk that it could be interpreted by the Courts in an expansive way.

4. Cross-border schemes – Changing the meaning

Commission proposal:
Proposed amendment to the definition of cross-border scheme to include the situation where the relationship between a plan employer and a pensioner member is governed by the social and labour laws of another Member State.

Proposed amendments: The ECON Committee has proposed alternative changes to the definition of “host Member State” and a new definition of “cross-border activity”, which would mean that a plan would be a cross-border scheme where the social and labour laws of a Member State other than the home Member State are applicable to the plan itself rather than to the relationship between the plan members and a sponsoring employer.

Expected outcome: Unknown. However, we hope that no changes are made. The rationale for the Commission’s proposal is unclear. If this change is made it could result in many more plans being treated as cross-border schemes. For example, there is a risk that any plan which has pensioners living in another Member State could potentially be caught by the requirements that apply to cross-border schemes (which is not currently the case). The ECON Committee’s proposal could also have unintended consequences.

5. Depository for DC plans

Commission’s proposal: All plans under which members bear all of the investment risk should be required to appoint a depository.

Proposed amendment: The ECON Committee has proposed that it should be left to Member States to decide whether or not to apply this requirement.

Expected outcome: We hope that the ECON Committee’s proposed amendment is accepted. Without this DC plans would be required to appoint a depository even where adequate protection is already in place. This would add unnecessarily to the costs of running such plans and undermine the value for money for members and beneficiaries.

6. New funding requirements

Commission’s proposal:
Retain the existing funding requirements for IORPs.

Proposed amendments: The ECON committee has proposed including an express statement in the recitals to the Directive that no “quantitative capital requirements” for IORPs (such as Solvency II or the holistic balance sheet) should be developed at Union level. However, at the same time it has also proposed that the review of the Directive six years after it enters into force should consider the quantitative requirements applicable to institutions.

Expected outcome: It is difficult to predict what the final position will be. Whilst UK plans can be confident that no new solvency requirements will be included in the new IORP Directive, it would be concerning if the Directive expressly required this issue to be reconsidered in six years time.

7. Objectives of pensions regulatory regimes

Commission’s proposal:
The main objective of pension regulatory regimes should be the protection of members and beneficiaries.

Proposed amendment: The ECON Committee has proposed adding another objective alongside this being the stability and soundness of IORPs.

Expected outcome: We expect the ECON Committee’s proposed amendment to be accepted. However, this would still be at odds with the UK regulatory regime which was amended in 2014 to require the Pensions Regulator to have regard to the “sustainable growth of employers” alongside its objectives to protect members and the Pension Protection Fund in the exercise of its funding powers. If protecting the interests of employers is not recognised as a main objective of pension regulation in the Directive it could require changes to be made to the UK regulatory framework and the Regulator’s approach on funding issues.

Next steps

We would expect the text of the new IORP Directive to be finalised during the Summer. Once the Directive comes into force, Member States will have a limited period within which to implement the new requirements. This is expected to be somewhere between 18 and 24 months.

Comment

Whilst the signs are that the final version of the Directive will be significantly better from a UK perspective, than the original proposal in many respects, the final outcome is still unclear on a number of important issues for UK pension plans and sponsors. Interested parties should continue to lobby the UK Government, MEPs, the Commission and industry bodies to ensure that their concerns are addressed during the Trilogue negotiations.

As well as there being uncertainty over the final position on a number of key issues covered by the Directive, the extent to which it will apply to UK pension plans is also up in the air due to the fact that this may be impacted by the outcome of the UK’s EU referendum on 23 June 2016.