On 27 March 2014 the EU Commission published its proposal for a recast version of the IORP Directive (2003/41/EC). The IORP Directive was originally issued in June 2003 and was designed to harmonize the regulation across the EU of institutions for occupational retirement provision (or “IORPs”) whilst encouraging the development of cross-border pension schemes. The provisions of the IORP Directive were introduced in the UK by means of the Pensions Act 2004.

After carrying out a review of the IORP Directive, and after having sought the advice of the European Insurance and Occupational Pensions Authority (EIOPA), the EU Commission had originally proposed that a recast IORP Directive (otherwise known as IORP II) would introduce insurance company level funding requirements for IORPs across the EU. However, after a concerted lobbying effort by a number of parties within the pensions industry concerned by the potential negative impact on pension scheme funding, employers, and the wider economy, in May 2013, the EU Commission announced that IORP II would not include new solvency rules.

Instead, in the impact assessment, published alongside the proposal for the recast IORP Directive, the EU Commission has stated that IORP II will have the following four main objectives:

  • removing remaining prudential barriers to cross-border IORPs;
  • ensuring good governance and risk management in relation to IORPs;
  • providing clear and relevant information to members and beneficiaries; and
  • ensuring supervisors have the necessary tools to effectively supervise IORPs.

The proposed IORP II amounts to a significant amendment of the original IORP Directive (for instance the number of Articles has risen from 24 to 80), and EU Member States will be required to bring the new Directive into force by 31 December 2016.

Changes for cross-border IORPs

The proposed recast IORP Directive retains the current requirement that cross-border IORPs be fully funded at all times.  This has been a barrier for cross border defined benefit schemes that are subject to stricter obligations than single country schemes.

However, pursuant to a new Article 13, the proposed IORP II provides that members states must allow the cross-border transfer of all or part of IORPs registered in their territories. The new Article 13 provides that any such transfer must be subject to the prior authorisation by a competent authority of the receiving institution’s home Member State, who must also be provided with full information. Article 13 also provides that unless national social and labour law provides otherwise, any such cross-border transfer shall be subject to the prior approval of the members and beneficiaries concerned, or, where applicable, their representatives.

Changes relating to governance and risk management of IORPs

The proposed IORP II includes a large number of changes to governance requirements of IORPs.

A new Article 21 provides that the administrative, management or supervisory body of the IORP is ultimately responsible for the IORP’s compliance with the laws, regulations and administrative provisions adopted pursuant to the Directive.

Meanwhile, a new Article 22 establishes that IORPs need to have in place an effective system of governance which provides for sound and prudent management of their activities. Article 22 provides that this system shall be proportionate to the nature, scale and complexity of the activities of the IORP so as to ensure that the governance requirements will not be too burdensome for small institutions.

The new Article 23 requires IORPs to ensure that all persons who effectively run the IORP or have key functions have professional qualifications, knowledge and experience which are adequate to enable sound and prudent management of the IORP and to properly perform their key functions and that they are of good repute and integrity. This constitutes a potential significant change from the current position whereby those running an IORP must either have appropriate professional qualifications / experience or alternatively employ professional advisers who do. In the context of UK pension schemes, it is difficult to see how lay trustees will be able to meet the new requirements.

The new Article 24 sets out that IORPs must have a “sound remuneration policy” for those persons who run the institution, and this policy must be appropriate to the size and internal organisation of the IORP. IORPs will also be required to regularly disclose ‘publicly relevant information’ regarding the remuneration policy (unless otherwise required under EU law). The IORP’s remuneration policy will be required to be established, implemented and maintained in line with the IORP’s activities and risk management strategy, its risk profile, objectives, risk management practices and the performance of the IORP as a whole.

Pursuant to a new Article 27, IORPs will also be required to have in place an effective internal audit function which evaluates the adequacy of the internal control system and other elements of its governance, including outsourced or subsequently re-outsourced activities.

A new Article 28 requires that in the case of IORPs where members and beneficiaries do not bear all the risks, that an effective actuarial function is provided to co-ordinate and oversee the calculation of technical provisions as well as to assess the appropriateness of the methodologies and underlying models.

Article 29 provides that IORPs need to produce a risk evaluation for pensions regularly and without delay following any significant change in the IORP’s risk profile.

Articles 35 and 37 provide that IORPs need to appoint a single depository for safe-keeping of assets and oversight duties if members and beneficiaries bear the full investment risk.

Changes relating to information disclosure requirements

Article 38 sets out new general principles relating to information which must be disclosed to existing members, prospective members and beneficiaries. The information disclosed must be written in a clear manner and in comprehensible language.

IORPs will be required to provide annual pension benefit statements to members, and Articles 40 - 44 include detailed provisions on the form and content of these statements.

Articles 45 to 53 provide that key components of the pension benefit statement will be:

  • personal details of the member
  • information regarding the identification of the IORP
  • information relating to guarantees
  • information regarding balance, contribution and costs
  • information regarding pension projections
  • information regarding investment profiles
  • information regarding past performance of investments.

Articles 55-58 includes new specific requirements regarding information which must be provided at other specific times to prospective members, members approaching retirement and those members who have already started drawing pension benefits.

Changes relating to supervision of IORPs

Article 59 now designates the protection of scheme members and beneficiaries as the main objective of prudential supervision. Prudential supervision is to be carried out by the "competent authorities" in the relevant Member States. In the United Kingdom the general view is that this would be the Pensions Regulator. In carrying out their general duties, the competent authorities, as part of their prudential supervisory responsibilities, will be required to consider the potential impact of their decisions on the stability of financial institutions within the European Union.  With this in mind, Article 60 now provides that Member States must ensure that IORPs are subject to the prudential supervision including the supervision of:

  • conditions of operation
  • technical provisions
  • funding of technical provisions
  • solvency margins
  • investment rules
  • investment management
  • conditions governing activities.

Article 61 provides that the competent authorities will be required to carry out their prudential supervision of IORPs using a "prospective and risk-based approach", and the supervision must comprise an appropriate combination of off-site activities and on-site inspections.

Pursuant to Article 63, the competent authorities will be required to review the strategies, processes and reporting procedures which are established by IORPs to comply with the recast Directive. Member-States will be required to ensure that competent authorities have monitoring tools, including stress-tests, to enable them to identify deteriorating financial conditions in an IORP and monitor how the deterioration is remedied.  

New provisions are also included in the proposed IORP II providing for the exchange of information between supervisory bodies of different Member States and how the receipt of confidential information should be managed.

Changes relating to investment rules

The existing Article 20 of IORP relating to investment rules has been amended in the proposed IORP II. The recast Article 20 now provides that a host Member State may no longer impose additional investment rules on institutions carrying out cross-border activities.

In addition, the existing wording in Article 20 which allows IORPs to invest in ‘risk capital markets’ was considered by the EU Commission to be ambiguous, and instead the proposed Article 20 now provides that Member States must not prevent IORPs from investing in “instruments which have a long term economic profile and are not traded on regulated markets multilateral trading facilities or organised trading facilities."


Whilst the announcement that Solvency II-style funding requirements would not be included in the proposed recast IORP Directive were widely welcomed, there is still concern that such requirements could nevertheless one day be applied to IORPs, given that the Internal Market and Services EU Commissioner Michel Barnier has expressed that pension fund solvency remains an “open issue”.  In addition, some commentators have expressed disappointment that the requirement that cross-border IORPs must be fully-funded at all times has been maintained in the recast IORPs Directive. Some actuarial firms, for instance have noted that retention of the full-funding rules could cause significant funding problems for some pension schemes in the event of Scotland voting for independence from the rest of the UK.

The changes to the governance and disclosure requirements have also drawn concern from some quarters (particularly, e.g. in the UK about how this will "fit" with the existing disclosure framework), something compounded by a perception that the EU Commission has not provided sufficiently detailed estimates of the costs to pension schemes.