On 8 December 2016 the European Council published that it had adopted IORP II, which was approved and agreed by the European Parliament on 24 November 2016.

The European Council set out in its publication that the directive is aimed at facilitating the development of institutions for occupational retirement provision (IORPs) and better protecting pension plan members and beneficiaries as well as achieving the directive’s four specific objectives. These are:

  • clarifying cross-border activities of IORPs;
  • ensuring good governance and risk management;
  • providing clear and relevant information to members and beneficiaries;
  • ensuring that supervisors have the necessary tools to effectively supervise IORPs.

We examine each of these objectives in more detail below.

Cross-border activities

The directive aims to facilitate cross-border activities by clarifying the relevant procedures and removing unnecessary obstacles. In particular, the full funding requirement in relation to cross border plans has been tempered slightly.

Additionally, some confusion had arisen under the original IORP Directive, as to whether pensioners emigrating to one member state, whilst drawing a pension earned in another member state, might render a plan cross border. The recitals of the directive clarify the position on this “where the sponsoring undertaking and the IORP are located in the same Member State, the mere fact that members or beneficiaries of a pension scheme have their residence in another Member State does not in itself constitute a cross-border activity”.

The directive also provides additional measures regarding cross-border transfers including the requirement for national regulator permission to such transfers.

Good governance and risk management

Key functions

IORP II has introduced some detailed requirements in relation to the governance of IORPs. IORPs are to have in place key functions, which include risk-management, internal audit and, where applicable, actuarial. Persons who effectively run the IORP, persons who carry out key functions and, where applicable, persons or entities to which a key function has been outsourced must meet the requirements of being “fit and proper”.

Fit” means:

  • in relation to those persons effectively running the IORP, their qualifications, knowledge and experience are collectively adequate to enable them to ensure a sound and prudent management of the IORP;
  • in relation to those people carrying out key functions, their qualifications, knowledge and experience are adequate to properly carry out their key functions;
  • in relation to those people carrying out actuarial and audit key functions, they are also required to have professional qualifications.

To be considered ‘proper’ means to be “of good repute and integrity”.

Competent authorities are to ensure that they are able to assess whether persons who effectively run the IORP or carry out key functions fulfil these requirements.

Own-risk assessment

IORPs are required to carry out an own-risk assessment “in a manner that is proportionate to their size and internal organisation, as well as to the size, nature, scale and complexity of their activities”.

This risk assessment is to be carried out every three years or after any significant change in the risk profile of the IORP or of the pension plans it operates.

Many of the governance and risk management measures have similarities with the existing requirements and expectations placed on trustees of UK pension plans by domestic legislation and the Pensions Regulator.

Providing clear and relevant information to members and beneficiaries

The directive also sets out general principles in relation to the requirement for a “Pension Benefit Statement”, which should be a “concise document containing key information for each member taking into consideration the specific nature of national pension system and of relevant national social, labour and tax law.”

Ensuring that supervisors have the necessary tools to effectively supervise IORPs

The main objective of national regulators is required to be the protection of members and beneficiaries and to ensure the stability and soundness of the IORP.

Prudential supervision must include, where applicable, conditions of operation, technical provisions, funding of technical provisions, regulatory own funds, available solvency margin, required solvency margin, investment rules, investment management, system of governance and information to be provided to members and beneficiaries.

The general principles for prudential supervision should be forward-looking, a risk-based approach and comprise of a combination of off-site activities and on-site inspections.

Implementation of IORP and Brexit

Member States will have two years to transpose IORP II into their national law from 20 days after its publication in the Official Journal of the EU (publication is expected to be in early 2017). Based on current projections, the deadline for implementation of IORP II will fall before the UK’s exit from the EU, although the anticipated implementation deadline will fall very close to the expected timing of Brexit. Post Brexit, IORP II may need to be observed under agreements established between the EU and the UK going forward, depending upon the outcome of the negotiations.

Comment

The slight relaxation on cross border requirements is helpful and the governance obligations should dovetail with the current direction of travel in the UK on improving governance. Trustees and plan sponsors should monitor developments and ensure the IORP requirements are included in business planning over the next year or so.