The European Commission has finally adopted a proposal for a new IORP (Institutions for Occupational Retirement Provision) Directive, which will have an impact on all UK occupational pension schemes.
What is changing?
The new Directive provides for:
- schemes to have “an effective system of governance which provides for sound and prudent management of their activities”, with a “fit and proper” test for those exercising key scheme functions (note that this is in addition to the existing requirement for schemes to operate adequate internal controls);
- better information to members, including a standardised annual Pension Benefit Statement about members’ individual pension entitlements;
- removing obstacles to cross-border provision, including a procedure for pension fund transfers across EU member states; and
- encouraging occupational pension funds to invest in financial assets with a long-term economic profile, supporting the financing of growth in the real economy (e.g. in infrastructure).
Solvency and cross-border funding: no change (for now)
In line with the Commission’s much-publicised climb-down last year, the proposal does not amend the wider solvency rules for pension funds, so there are no new funding requirements for occupational schemes. However, trustees and employers should be aware that solvency is not permanently off the table, and technical work on it continues.
Contrary to earlier leaked drafts of the Directive, there is to be no relaxation of the current rules which require cross-border schemes to be fully funded. In the event of Scottish independence, defined benefit schemes with members in both Scotland and the remaining United Kingdom could therefore become subject to the onerous funding requirements that currently apply to cross-border schemes. These include obtaining annual valuations, and making up any shortfall on the Pensions Act 2004 funding basis within two years of the effective date of each such valuation.
The proposed text of the Directive suggests that member states will have to implement the Directive by 31 December 2016, which means the new requirements are not as far away as some might have hoped!
Those involved in the running of occupational pension schemes need to be prepared to review governance and communication issues once more, when we have more detail about how the United Kingdom will translate the Directive into domestic law.