Back with a vengeance

Claire Southern and Helena Davies explains how the IORP mark II focuses on governance and communications

The European Commission has unveiled its re-written draft pensions directive on Institutions for Occupational Retirement Provisions (IORP), which regulates occupational pension schemes across Europe. The new directive, which replaces the 2003 version, applies to all occupational schemes with a hundred or more members and, once finalised, would have to be implemented into UK law, and be effective here in practice, by the end of 2016.

A major plank of the review of the directive, which began back in 2008, was a desire to bring it more closely in line with the insurance sector directive, Solvency II, through the introduction of scheme solvency capital requirements. This aspect stalled last year as a result of the opposition of a number of member states to these requirements and, in particular, to the ‘holistic balance sheet’ approach to pension scheme funding. This issue has been parked for the moment and a new version of the directive, which concentrates on governance and member communications, has been released.

Even without (for the time being) the solvency provisions, the draft directive is greatly expanded from the 2003 version and contains a package of new and potentially onerous measures for trustees of occupational schemes. UK legislation already imposes some of the requirements but, once the proposal is finalised, there are likely to be areas where increased regulation is required.

Professional qualification for trustees

One measure that immediately jumps out is an obligation for those who ‘effectively run the scheme’ to satisfy ‘fit and proper person’ requirements, including the need to have adequate professional qualifications, knowledge and experience for sound management. The 2003 version of the directive required members of the governing body or advisers to have professional qualifications. The new text removes the reference to advisers and places the new requirement on the governing body alone. This does not fit with the UK system of lay trustees and, depending on how the UK implements it, might require a complete re-think of trustee training programmes. It is also not clear how far the new obligation extends: who comes within the realm of ‘effectively running’ the scheme. If it includes those to whom trustee actions have been delegated then trustees will need to consider how to monitor this.

Member communications

The section on member communications starts off fairly innocuously with ‘motherhood and apple pie’ standards, such as avoiding the use of jargon, using characters of ‘readable size’ and stating that colour should not be used where it might ‘diminish the comprehensibility of the information’. Once again, however, one requirement stands out: schemes will have to provide (annually and free of charge) a standardised and EU harmonised two page pension benefit statement.

The contents of the pension benefit statement include:

• Costs and charges broken down into various categories including administration, safekeeping and transactions

• Total capital, also expressed as annuity per month

• Contributions over the past 12 months by employee and employer

• Target benefits, or capital, at retirement age and at two years before and two years after

• A description of each investment option

• For DC schemes, risk and return profile showing a synthetic graphical indicator

• Chart of performance for the last 10 years

The two page limit will be challenging. Detailed requirements already exist under the disclosure regulations but it is likely that some fine-tuning will be required. An increase in costs seems inevitable; this provision by itself could account for a large proportion of the European Commission's own estimated costs for one-off implementation of the new directive of 22 euros per scheme member.

The new section on communications also requires:

• prospective members to be informed about all the features of the scheme and any investment options including how environmental, climate, social and corporate governance issues are considered in the investment approach

• information to be given to members during the pre-retirement phase and whilst they are pensioners


The directive requires schemes to have an effective system of governance in place, including:

• risk management

• internal audit (carried out separately from risk management)

• actuarial function

• notification to the regulator of the outsourcing of important functions, with power for the regulator to request information about outsourced functions at any time

Schemes would also have to maintain:

• a detailed risk evaluation for pensions, to be updated regularly and after a major change in risk profile. UK schemes are of course already required to assess the employer covenant; the worry here is the references to funding which appear to mirror Solvency II type standards

• a remuneration policy including details of the pay of those who "effectively run" the scheme. Again, depending on how far this definition extends, this might include disclosing scheme managers' pay

• (where members fully bear the investment risk) arrangements for a nominated depository with responsibility for asset oversight and safekeeping

Cross-border schemes

An important aspect of the revision of the directive was to encourage more schemes to operate across member state borders. There was therefore intense pressure last year to remove the requirement for cross-border schemes to be fully funded: this is one reason why there are so few cross-border schemes. It is a major surprise, therefore, that this requirement has been retained. It could have ramifications if Scotland votes for independence later this year and remains in the EU, thereby creating a swathe of new cross-border schemes.

This issue outweighs the positive aspects of the directive on cross-border, including provisions preventing a host member state from obstructing the activities of a cross-border scheme or from imposing tighter investment restrictions on cross-border schemes.

Next steps

The draft directive will be considered by the European Parliament and the Council of Ministers as part of the usual EU legislative process. Some detail is likely to change but not the overall structure. In terms of the effect in the UK, much will depend on how the government implements it.

One word of warning – references to scheme solvency have been left in the introductory text to the directive, leaving open the possibility of this contentious issue to come back to haunt us next year when the new European Commission is in place following the current elections.

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