On 27 March 2014, the European Commission published a proposal for a revised EU Pensions Directive (also known as the directive on the activities and supervision for institutions for occupational retirement provision orIORP Directive). The intention is to standardise occupational pension regulation across the EU, and to promote the creation of cross-border pensions schemes.

The IORP Directive applies to all EU occupational pension schemes (with certain exceptions for small schemes and public sector schemes). It does not apply to personal pension schemes.

Once finalised, member states will be required to implement IORP II in national law by 31 December 2016. The IORP Directive was implemented in UK law primarily by measures included in the Pensions Act 2004 but detailed consideration will need to be given to the revised measures. The “fit and proper” requirements for trustees in IORP II are likely to prove controversial, as it appears they will apply to lay trustees in the UK.

The revised IORP Directive, widely referred to as IORP II, introduces new minimum governance standards, including a “fit and proper” test for those running an IORP. There is an additional requirement for schemes to disclose information to members about their pension entitlements by way of an annual standard-form pension benefit statement.

There was widespread relief that earlier proposals to impose scheme solvency capital requirements, imported from the insurance directive (Solvency II), have not been adopted. However, the existing provisions in the IORP Directive relating to the calculation and funding of a scheme’s technical provisions are largely unchanged. This means that there has been no relaxation of the requirement for schemes that operate on a cross-border basis to be fully funded at all times. This could create funding problems for some schemes in the event of a “yes” vote by Scotland for independence.

The specific objectives of IORP II

The proposal has four stated objectives:

  • to remove remaining prudential barriers for cross-border IORPs. This is to be achieved by requiring that the investment and disclosure of information rules are those of the home member state, as well as by clarifying procedures for cross-border activities;
  • ensuring good governance and risk management;
  • providing clear and relevant information to members and beneficiaries; and
  • ensuring that supervisors have the necessary tools to effectively supervise IORPs.

The main changes included in IORP II

Some of the principal changes envisaged under the IORP relate to:

  • Governance – the revised governance provisions are extensive and require IORPs to have in place a system providing “sound and prudent management of their activities”. The persons who run the scheme (the trustees) will be required to satisfy “fit and proper person” requirements. This includes the holding of adequate professional qualifications, knowledge and experience, together with being of good repute and integrity.
  • Prudential supervision – the main objective of prudential supervision is the protection of members and beneficiaries. Member states must ensure that IORPs are subject to prudential supervision in relation to a number of areas, including the funding pf their technical provisions and investment management.
  • Remuneration policy - an IORP must also implement “sound remuneration policies” in relation to those running the scheme, and these should be appropriate to the size and internal organisation of the IORP. The policy should not encourage excessive risk-taking and should be publicly disclosed.
  • Risk management - IORPs should have sufficient capacity to have a risk management function, an internal audit function and, where applicable, an actuarial function. The risk management system must be able to identify, monitor and manage all risks including those associated with outsourced functions such as investment.
  • Transfers – members states must allow IORPs to make cross-border transfers of all or part of schemes registered in their territory. A transfer must be approved by the relevant authority in the receiving scheme’s member state, which will be the Pensions Regulator in the UK.
  • Investment – IORPs should be permitted to invest in accordance with the rules of their home state, which should reduce the cost of cross-border activity. A host member state may not impose additional investment restrictions on a scheme carrying out cross-border activities.
  • Disclosure of information – an IORP will be required to provide an annual benefit statement to members. Any material change to the information provided in the previous year’s statement must be clearly explained in an accompanying letter.

Comment

While many of the proposed revisions are to be proportionate to the size and complexity of the specific IORP, it is likely that a number of smaller schemes may suffer increased governance costs as a result of the IORP II proposal. UK legislation already imposes many of the requirements laid out in IORP II but once the proposal is finalised, there may be areas where increased UK regulation is required.

There are particular concerns over the “fit and proper person” requirements. These represent a significant change and have been criticised as too prescriptive. Under current IORP provisions, those running a scheme must have the appropriate qualifications or employ professionals that satisfy this requirement. If adopted in its current form, this would mean that most lay trustees would not satisfy the first limb of the “fit and proper” requirements.

Although the draconian Solvency II funding requirements have not been imposed, the retention of the requirement for cross-border schemes to be fully funded at all times was a disappointment, as its removal was leaked earlier in the year. This is a key obstacle to cross-border activity in that it continues to limit the ability of multinationals to use their home country pension funds for cross-border activity. As such, it seems at odds with the stated intention to promote the creation of cross-border schemes and to address the complexity of cross-border pension provision.