New regulatory framework (IORP II)
Directive (EU) 2016/2341 of the European Parliament and the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORP II) amends the provisions of the Directive 2003/41/EC of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (IORP I). Changes relate to the governance of IORPs, cross-border activities and information requirements.
IORP II has been implemented into Belgian law by the Act of 11 January 2019 transposing directive (EU) 2016/2341 of the European Parliament and the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (the IORP II Implementation Act), which amends the existing Act of 27 October 2006 on the supervision of institutions for occupational retirement provision (the IORP Act).
The IORP II Implementation Act entered into force on 13 January 2019.
Hereunder, we summarize the key changes to the IORP Act.
Cross-border activities and procedures
One of the most important goals of IORP II is to create an internal market for the operation of institutions for occupational retirement. The IORP II Implementation Act therefore provides the following new rules:
- A definition of cross-border activity (art. 2, 10°)
- A special procedure for the cross-border transfer of pension rights (sections II/1. and II/2.)
- Abrogation of the possibility for the supervisory authorities of the host member state to impose special investment rules for the assets pertaining to cross-border activities; such possibility was to date not used under Belgian law
- Determination of the supervisory powers of the home member state's supervisory authority (art. 146)
- Clarification of the scope of the full funding requirement (art. 63)
The most important change is the introduction of a separate procedure for a cross-border transfer that may or may not lead to cross-border activity. The FSMA has announced that it will shortly publish a circular setting out the procedures and requirements in this respect.
IORP II contains an extensive set of rules on governance. However, most of these governance principles were already applicable to Belgian IORPs through the FSMA's existing circulars and will not be a significant game changer for most Belgian IORPs. The IORP II Implementation Act incorporates most existing "soft law" requirements. The main changes are:
- The requirement to draw up written policies relating to risk management, internal audit, actuarial activities and remuneration.
The requirement to have in place four effective and permanent key functions. IORPs must have in place the following functions:
- Risk management function
- Actuarial function
- Compliance function; and
- Internal audit function
Only the risk management function is new. The actuarial function replaces the function of appointed actuary.
IORPs must appoint at least one independent person from within or outside the IORP to be responsible for each key function. For reasons of proportionality, it can be allowed that a person combines a key function with another function within the IORP, except for the internal audit function, which must be exercised independently at all times. IORPs may also outsource all or part of the key functions.
These key functions also have a "signaling" function towards the FSMA, i.e. they have to notify the FSMA if there is a substantial risk that the IORP will not comply with an important legal provision or if the IORP has committed a significant material infringement of the regulations and the board of directors is aware of this but did not remedy the situation in time.
The persons appointed as actuary, compliance officer and internal auditor today will automatically be deemed to be respectively the actuarial, compliance and internal audit key function holders until their re-appointment or the appointment of another person, which should be done by 31 December 2020 at the latest. IORPs must appoint a risk management function holder by 31 December 2019 at the latest. All documents relating to the (re)appointment of a key function holder must be provided to the FSMA at least three months prior to the actual appointment.
- The fit and proper requirements are now also applicable to persons who perform a key function or to whom a key function is outsourced.
Prior notification and approval requirement for members of operational bodies and key functions holders.
The appointment and reappointment of a member of an operational body and of a key function holder are subject to prior approval by the FSMA. Such prior approval is not required for a reappointment (in which case only a prior notification is required). The resignation or dismissal of any of the aforementioned persons must also immediately be notified to the FSMA. The law does not set a deadline for the IORP to make the necessary notifications or by which the FSMA must take its decision.
Existing members of operational bodies can fulfil the term of their current mandate without any notification to or approval from the FSMA. If they are re-appointed, they will only need to notify the FSMA and provide the necessary documents, but there's no approval requirement. New members or changes in function of members of operational bodies will have to be notified to the FSMA and are subject to its prior approval.
- IORPs must carry out an own-risk assessment (ORA) every three years (or sooner if there are any significant changes). This requires IORPs to draw up a policy that sets out how such ORA will be carried out and how this will be integrated in the IORP's decision making processes at the latest by 31 December 2020. The first ORA report should be submitted to the FSMA by 13 January 2022.
IORPs must inform the FSMA before the outsourcing of a function, activity or operational task. As regards the outsourcing of key functions or of significant or critical tasks, the IORP must notify the FSMA before the outsourcing agreement takes effect.
Investments and permanent inventory
The provisions of Title II, Chapter V, Section VI of the IORP Act in relation to the investments of IORPs will as from now apply to all assets and not only to the covering assets. IORPs must include all assets in the permanent inventory (for each separate estate). The covering assets must be identified separately.
The IORPs must also indicate in their statement of investment principles the way in which their investment policy takes into account environmental, social and governance factors.
IORPs must incorporate these changes into their SIPs by 31 December 2020.
Transfers of pension liabilities
IORPs must notify the FSMA in advance of transfers of pension liabilities to another IORP or to an insurance company. The new provisions also impose certain majority rules for the approval of a transfer by the members and beneficiaries concerned.
Multi-employer IORPs for unrelated employers
The IORP II Implementation Act has also introduced a few new rules specifically for multi-employer pension funds that do not belong to the same group of undertakings. These are specific Belgian rules which do not stem from IORP II and are designed to protect the sponsoring undertakings. Article 20/1 IORP Act introduces the following rules:
- Voting right for sponsoring undertakings under specific circumstances
- Fair representation of all sponsoring undertakings when determining the modalities for convening and the organisation of the general meeting
- Sponsoring undertakings can always submit a proposal for appointment of an independent director to the general meeting
- Sponsoring undertakings can always put an item for discussion on the agenda of the general meeting or the board of directors
The articles of association may not limit such rights. IORPs must comply with these new requirements by 31 December 2019 at the latest.
Your key to do's
IORPs have until 31 December 2020 to amend and update their corporate and governance documents, including the articles of association, (asset) management agreements, SIP, financing plan and the various governance policies, in order to make them compliant with IORP II.