The new European Pensions Directive - IORP II became effective in January 2017. Member States now have two years in which to transpose its provisions into national law. We outline some key aspects of the new Directive.
The European Pensions Directive - IORP II (the “Directive”) aims to improve governance, transparency and accountability in workplace pensions and increase “cross-border” pensions activity.
With a transposition deadline of 13 January 2019, much effort will be devoted by Member States in assessing what changes are needed to national law to give effect to the Directive. This will be particularly interesting for the UK given the likely parallel Brexit timeline.
Key points of the Directive
- The introduction of a standardised Pension Benefit Statement at EU level to simplify and standardise the key information to be given to each pension scheme beneficiary with simple and clear information about an individual’s pension entitlements.
- A requirement for pension schemes to carry out and document their own risk assessments. The risk assessment must be undertaken every three years or without delay following any significant change in the risk profile of the scheme. Where environmental, social and governance factors are considered in investment decisions, the risk assessment should include an assessment of new or emerging risks. These include “risks related to climate change, use of resources and the environment, social risks, and risks related to the depreciation of assets due to regulatory change.”
- The Directive seeks to simplify cross-border pension activity and the transferring of assets between Member States with a number of new measures. These include the introduction of a pension-fund transfer procedure and the option of mediation where there is disagreement between regulatory authorities. Mediation will be facilitated by the European Insurance and Occupational Pension Authority - EIOPA. The Directive also permits cross-border schemes to be underfunded for a limited period subject to regulatory supervision and putting a recovery plan in place. Regulatory authorities must ensure an IORP implements appropriate measures without delay to protect beneficiaries.
- The Directive requires that trustees collectively have qualifications, knowledge and experience which are adequate to enable them to ensure sound and prudent management of the scheme. There is no requirement, however, for trustees to hold a professional qualification.
- Schemes must establish and apply a “sound remuneration policy” for those who effectively run a scheme and those whose activities have a material impact on the risk profile of the scheme. This policy must be reviewed every three years and be publicly disclosed.
- A new concept of “Key Functions” is introduced in relation to risk management, internal audit and actuarial functions. Apart from the internal audit function (where the person responsible must be independent), the key functions may be carried out by a single person/organisation. However, the person/organisation carrying out a key function cannot perform a similar role for the sponsoring employer. There is scope for exceptions, however, where the management of conflicts of interest is explained.
- The Directive introduces a general principle, where relevant, to take account of the objective of ensuring the intergenerational balance of pension schemes by aiming to have an equitable spread of risks and benefits between generations in pension provision.
- Member States will have a choice whether to require defined contribution schemes to appoint a depositary (custodian) with responsibilities that include the safekeeping of assets and oversight duties. If a depositary is not appointed, a scheme will need to make arrangements to prevent and resolve any conflict of interest in the course of tasks otherwise performed by a depositary and an asset manager.
Ireland has two years to implement the Directive’s provisions into national law. Some of its provisions/concepts will already be familiar, whether through the Pensions Authority Codes of Governance or Consultation on the reform of pensions in Ireland. No doubt the implementation of the Directive in Ireland will need to be woven into or considered alongside any new plans for the provision of pensions generally. The UK technically remains obliged to transpose the Directive’s provisions until it actually exits the EU, so it will be intriguing to see how this develops.