Published article originally appeared in the The Sunday Business Post, 6 January, 2019.
IORP II is a European Pensions Directive which is due to become law in Ireland on or before 13 January 2019.
Traditionally, employers establishing pension schemes do so through life companies or pension consultancies. As pension schemes are set up under trust, this involves appointing trustees. Typically, employees or directors of the employer are installed as trustees on a voluntary basis. These trustees usually outsource the administration, investment and any other related services to the provider who assisted with establishing the scheme. Trustees often became wholly reliant on those service providers for managing the scheme's affairs.
IORP II is likely to alter that model of scheme governance.
Professionalisation of trusteeship
A key concept within IORP II is the requirement that trustees have an effective system of governance in place. To put such a system in place, trustees need to understand what is involved in running their scheme. IORP II introduces a requirement that trustees must collectively be "fit and proper" persons. This may mean that at least one member of the trustee board will need a professional trustee qualification.
If this becomes a legal requirement, many employers will need to consider whether to: (1) replace the trustee board with a professional trustee; or (2) appoint a professional trustee to join the trustee board. In our experience, the latter approach works well. The professional trustee will know what is involved in running the scheme but can draw on the knowledge and experience of his fellow lay trustees to understand the employer's business.
Increased compliance burden
In establishing an effective system of governance, IORP II requires trustees to adopt a range of governance policies covering risk management, internal audit, actuarial activities (if relevant), outsourced activities and remuneration. IORP II also requires trustees carry out their own-risk assessment.
All these additional requirements (which must be reviewed triennially) will generate a layer of costs for trustees. Employers (who are typically responsible for scheme expenses) will need to budget for these costs.
Employers may have in-house resources and expertise to assist trustees in complying with these requirements. However, for some employers, the increased regulatory burden and cost may prompt them to consider alternative options for pension provision, such as master trusts.
A more pro-active Pensions Authority
In line with IORP II, the Pensions Authority has confirmed that it will be adopting a forward-looking risk-based approach to scheme supervision. The governance culture of schemes will be a key focus for the Authority.
Employers will have an interest in ensuring trustees are compliant as scrutiny into a scheme's affairs by the Authority could lead to administrative sanctions for trustees and consequential reputational damage for employers.
Also, as employers indemnify trustees, they may be exposed to the costs trustees incur in dealing with or defending such regulatory investigations, prosecutions or fines.
IORP II will require trustees, to issue member benefit statements to deferred members (former employees with retained benefits) for the first time. Trustees will rely on employers in sourcing accurate contact details for these former employees. If those details prove to be inaccurate data breaches are inevitable with the potential for fines. Employers will therefore need to support trustees in tracing those former employees to minimise the risk of such data breaches arising.
Service level agreements
IORP II requires trustees to enter into legally binding agreements where they outsource certain activities.
Again, as employers are indemnifying pension trustees, they need to ensure that the terms of such agreements are not excessively pro-provider. At a minimum, employers should ensure the provider's limitation of liability provisions are in line with market norms. Otherwise, those providers may escape liability where issues arise, with the result that trustees are exposed and look to the employer to indemnify them.
Much of the commentary and focus to date on IORP II has been on the increased governance requirements it will impose on trustees. However, trustees cannot be viewed in isolation. They perform functions associated with employer related pension provision. Employers should therefore have an active role in supporting trustees in taking whatever steps they need to take to ensure they can comply with IORP II. The employer indemnity in favour of trustees means that its interests are very much aligned with those of the trustees in ensuring their pension schemes do not become subject to regulatory scrutiny for non-compliance or poor governance practices.