Member Article

The European Commission published its proposal for a revised EU Pensions Directive on 27 March 2014. The revised Directive on the “activities and supervision of institutions for occupational retirement provision (recast)” (known as“IORP II”) hopes to make those institutions “better governed, more transparent and increasing their cross-border activity, thereby strengthening the internal market”. 

The revised Directive seeks to address four main specific objectives and we have highlighted some of the key changes under each heading below.

1. Removing prudential barriers for cross-border IORPs

The main change here is that member states will have to allow cross-border transfers of all or part of schemes registered in their territory provided the transfer is authorised by the relevant authority in the receiving scheme’s member state. 
Cross-border transfers generally require member consent.  This is, however, subject to any contrary provisions in national law, which should mean that the ability under UK law to make transfers without member consent if certain requirements are met should be unaffected.

2. Ensuring good governance and risk management 

IORP II introduces a range of new governance requirements. Schemes must have an effective system of governance in place providing for “sound and prudent management of their activities” including having risk management, internal audit and, if appropriate, actuarial functions. 

Schemes will also have to carry out a detailed risk assessment and produce a risk evaluation for pensions report. 

All persons responsible for running an IORP must meet new “fit and proper” requirements.  This means that:

• their professional qualifications, knowledge and experience are adequate to enable them to ensure a sound and prudent management of the IORP and to properly carry out their key functions; and 
• they are of good repute and integrity.

Currently, those running a scheme must either have appropriate professional qualifications or experience themselves or employ professional advisers that do. There is a concern that lay trustees will be unable to meet the new requirements and may not be able to form a part of trustee boards in future.

3. Providing clear and relevant information to members and beneficiaries

The Directive sets out fairly extensive and prescriptive disclosure requirements including a new standardised annual benefit statement. It also sets out a long list of information which has to be included, all on no more than two sides of A4. There is a major emphasis on all member information being clear, concise and comprehensible, avoiding jargon and technical terms where possible. 

UK disclosure requirements are already pretty comprehensive and so are likely in the main to comply without material further changes to UK law being required.

4. Ensuring supervisors have the necessary tools to effectively supervise IORPs

The main objective here is to protect scheme members and beneficiaries. The competent authority of each member state (the Pensions Regulator in the UK) has sole responsibility for the prudential supervision of all IORPs in its jurisdiction. IORPs must be subject to prudential supervision in relation to a list of areas including conditions of operation, funding of technical provisions, solvency margins, investment rules and management and governance. Supervision should be based on a “prospective and risk-based approach” comprising an “appropriate combination of off-site activities and on-site inspections”.

Summary

The new Directive is far more prescriptive than its predecessor and, while the principles behind the Directive are clearly sound, it is questionable whether the level of detail contained in the Directive is strictly necessary to achieve the goals, particularly as compliance with the detailed terms is likely to have potentially significant cost implications for schemes.  

As expected, new capital adequacy requirements mirroring the Solvency II insurance directive have not been included in the Directive. Cross-border schemes, do, however continue to be required to be fully funded. This could be a significant issue for UK schemes in the event that Scotland becomes an independent country following the Referendum in September where schemes will become cross-border as a result of the change.  

Member states are required to implement the terms of the Directive by 31 December 2016. The UK government will need to carry out a detailed review of current provisions to establish what changes are required to comply and we will keep you advised of developments.