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IORPs II - New Obligations

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Irish pension schemes may soon have to deal with significant new regulatory requirements under a proposed EU directive. However, there is still time for Irish employers and pension scheme members to make their concerns felt to Irish and European officials.

Directive 2003/41/EC, also known as the “IORPs Directive”, was adopted in June 2003, and implemented into Irish law in 2004/5. It sought to set out a panEuropean
framework for the operation of pension schemes (Institutions for occupational retirement provision, or IORPs), and included mandatory requirements on key areas such as
the funding of DB schemes and the investment of scheme assets.

It was also intended to enable schemes located in one Member State to operate on a cross-border basis, although the results to date have been disappointing. A proposal for a new IORPs Directive, known as IORPs II, was published by the European Commission in March 2014 and the new Directive is due to be adopted in 2016.

The European Commission’s approach can be described as “hawkish” on the issue of regulation of European pension schemes. Very crudely, Commission officials tend to compare pension schemes to insurance companies, and seek to regulate scheme solvency and governance according to that benchmark. 

By contrast, the Council of the EU and the European Parliament are more open to the view that pension schemes are established on a voluntary basis by employers, and
that the regulatory regime should be supportive as well as prudential. How this debate resolves itself at EU level will have profound implications for Irish pension schemes.

Commission proposals

The Commission text of the Directive contains extensive new requirements for IORPs. The proposed new requirements include:

  1. Effective risk management, internal audit and actuarial functions: Under the Commission proposals, all IORPs would be required to have an “effective system of governance” in place which provides for “sound and prudent management” of the IORP’s activities. This includes a requirement for those running the IORP to put in place:
    • a risk management function
      • to identify, measure, monitor, manage and report on a continuous basis the risks to the IORP on an individual and aggregate level
    • an internal audit function
      • to evaluate the adequacy and effectiveness of the IORP’s internal controls and the other elements of the IORP’s governance arrangements, including the oversight of outsourced functions
    • an actuarial function (where appropriate)
    • effective internal controls and contingency plans.
    • IORPs would also be required to prepare and maintain:
      • a risk evaluation report covering issues such as the effectiveness of the risk management system, the overall funding of the institution and a qualitative assessment of the sponsor support
      • a remuneration policy, covering the persons who “effectively run the institution”, other persons who carry out key or outsourced functions
        and staff whose professional activities have a material impact on the IORP’s risk profile.
  2. A new fit and proper persons test:
    • The proposed text includes changes to the “fit and proper persons” requirements for those who run an IORP. The new Directive would require all persons who run an IORP to have “professional qualifications, knowledge and experience” which are “adequate to enable them to ensure the sound and prudent management of the institution and to properly carry out their key functions”.
    • The current position is that the requirement to have appropriate professional qualifications and experience can either be met by those running the IORP or their advisers. The new proposals could in practice lead to the demise of lay trustees in Ireland.
  3. A requirement for DC plans to appoint a depository:
    • Under the proposed text, all DC pension schemes would be required to appoint a depository for the safe-keeping of assets. This will result in increased costs for such plans. Member States would have the option of extending this requirement to all occupational pension plans.
  4. Prescriptive information requirements:
    • The proposed text would impose an obligation on IORPs to issue:
      • annual pension benefit statements to members
      • information about “all the features” of the scheme to prospective members
      • pre-retirement information to members at least two years before retirement
      • information about their benefits and payment options to pensioner members.

The requirements relating to prospective members, members pre-retirement and pensioners are high-level. In contrast, there are very detailed and prescriptive requirements relating to the format and content of pension benefit statements, in an attempt to harmonise these across the EU.

Bizarrely, all the required information must fit on two sides of A4 paper when printed, although the requirements themselves take up seven pages of A4 paper when printed.

Also, the draft Directive contains a relaxation of some of the regulatory requirements for crossborder schemes. However, the Commission’s text retains the requirement for cross-border schemes to be fully funded at all times, despite this being cited as one of the key barriers to the establishment of such schemes currently.

Council and Parliament response

Following its publication by the Commission, the proposed text for the new Directive was reviewed and debated by the Council of the European Union, resulting in a compromise text published late last year. The draft Directive is now being considered by the European Parliament.

A key role in this is being played by Irish MEP, Brian Hayes, who is the rapporteur to the Parliament’s Economic and Monetary Affairs (ECON) Committee. Brian Hayes recently produced the Committee’s draft report on the revised Directive.

Both the Council and the ECON Committee have recognised the need to adopt a more high-level, principles-based approach in the Directive. They have also both sought to:

  • significantly reduce the level of prescription over the contents of Pension Benefit Statements, and
  • remove the requirement for trustees to have professional qualifications and allow the knowledge and experience of those running an IORP to be looked at collectively, when assessing whether these are adequate.

The Council has also proposed that national regulators should have the power to exempt DC schemes from the requirement to appoint a depository, where equivalent protection is in place.

The ECON Committee has proposed further amendments which would:

  • replace the requirement for crossborder schemes to be fully funded at all times with a requirement for them to be fully funded at the moment that they “start operating a new or additional scheme
  • include an express statement in the Directive that no “quantitative capital requirements” for IORPs (basically, minimum solvency requirements) should be developed at an EU level
  • include an express statement in the Directive recognising that it is not appropriate to adopt a “one-sizefits-all” approach to the regulation of IORPs across the EU.

While this represents a significant change from the Commission proposals, at least three issues remain with ECON draft report:

  1. The ECON Committee’s proposal for schemes to be fully funded at the moment the institution starts operating a new or additional scheme applies to non-crossborder schemes as well as crossborder schemes. The meaning of the term “starts operating a new or additional scheme” is uncertain, and it could be
    construed as applying to:
    • a new section being added to an Irish DB scheme
    • a change in the basis of future benefit accrual under that scheme, or
    • a merger of two Irish DB schemes.
  2. The ECON Committee’s report contains a new requirement for member consent to be given on all pension transfers. If implemented, this would mean that the existing Irish provisions permitting transfers without consent in certain cases could no longer apply.
  3. The ECON Committee has proposed a new definition of "host Member State" and introduced a definition of “cross-border activity” which could apply cross-border
    requirements to certain schemes which would currently not be caught.

Next steps

The ECON Committee is due to finalise its report on the draft Directive in the autumn. The final version of the Directive will then be determined in talks between the Commission, Council and Parliament (known as ‘trilogue’ negotiations). These negotiations are due to take place early next year.

Given the changes that have been proposed by both the Council and the ECON Committee, it seems likely that the final version of the Directive will be less prescriptive and more principles-based than the original text. However, the final position will not be known until the negotiations are complete.

Trustees, employers and representative bodies should continue to raise issues of concern with Irish and European officials while this process is ongoing, to ensure the
best result from the current process. Ultimately a new Directive will be adopted, and this will then have to be incorporated into Irish law. It will be too late to raise concerns with the terms of the Directive at that point.

This article first appeared in Industrial Relations News.  


This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full terms and conditions on our website.

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