Articles - Implications of the IORP review for employers & employees

Nearly ten years since the European Pensions (or "IORP") Directive came into force, a review is underway by the European Commission. The Commission's three broad aims are to:
- Simplify the process for setting up cross-border pension schemes;
- Introduce measures allowing occupational pension schemes to benefit from risk-mitigation mechanisms; and
- Modernise the prudential regulation for defined contribution (DC) schemes.

 By Georgina Beechinor, Associate, Sacker & Partners LLP & Eric Bergamin, Partner, Bergamin Pensioenrechtadvies B.V.

 Taking Solvency II principles as a starting point, to kick-start its review the Commission asked the European Insurance and Occupational Pensions Authority (EIOPA) for advice on the EU-wide legislative framework for IORPs, including the scope of the Directive, certain cross-border aspects, governance, information requirements and funding.

 To date, a great deal of time has been spent on the funding aspects of the Directive, with the Commission keen to introduce tougher measures that would, in its view, put occupational pension schemes on a level playing field with insurance companies. But in the wake of considerable objection from the pensions industry around the EU,these measures have been taken off the table, for the time being at least.

 The focus nowis on the desire to raise standards of governance and disclosure for pension schemes,a key driver being the migration from defined benefit (DB) arrangements to DC and the associated transfer of risks from employer to employee. Given this trend,the Commission wants to bolster the security of members' benefits in line with international standards, guidelines and good practices . As the current pensions Directive does not set out detailed governance responsibilitiesfor those running pension schemes, it is taking this opportunity to set specific standards in the occupational pensions field.

 While much of the detail is awaited, the initial consultation by the European Insurance and Occupational Pensions Authority (EIOPA) on the Commission's Call for Advice looked at ways to ensure that pension schemes have sound management, including the means to secure a high standard of protection of members' benefits and the ability to set an overall risk profile that matches its financial strength. It also proposes clearer disclosure rules and a consistent approach to communications across the EU.

 Likely impact for employers and pension scheme members

 In the UK, the governance of DC schemes is already a key focus for the Pensions Regulator, which has recently consulted on a new code of practice, regulatory guidance and a regulatory approach relating to the administration and governance of occupational DC schemes. In addition, the Government has this year taken a fresh look at the disclosure requirements for both occupational and personal pension schemes in the UK.

 One area we may see change is in the standards required of those running occupational pension schemes. The initial EIOPA consultation looked at strengthening the test for pension scheme management, which is currently to be undertaken by "fit and proper" persons. Should the requirements become more onerous, there is a risk that lay trustees, particularly those nominated by the pension scheme membership, may no longer be able to meet the overriding requirements, with the result that pension scheme management is pushed further towards professional, independent trustees. As such, valuable history and knowledge of schemes could be lost, a perspective which is more difficult for professional trustees to replicate.

 However, given the high standards already set, it is unlikely that the new Pensions Directive will herald significant upheaval for those involved in pension scheme governance in the UK, with the possible exception, as mentioned above, of the lay trustee issue.

 Similarly, in the Netherlands, pension scheme governance is already well integrated in pensions legislation. For example, Dutch funds have been governed since the 1950sby equal numbers of employer and employee representatives.

 While there is no significant difference between the standards of governance of Dutch DB and DC schemes, adistinction can, however, be found depending on the way in which a scheme has been set up. For example, standards vary, depending whether a scheme is run by an insurance company, pension fund or (most recently) the PPI (‘Premie Pensioen Instelling’, a basic pension arrangementthat can only operate on a DC basis).

 Since the financial crisis, the Dutch Pensions Regulator (‘De Nederlandsche Bank’) has paid even closer attention to the quality of pension scheme governance. In addition, the Dutch Parliament is set to adopt more stringent and complex legislation, which will include new rules for the involvement of pensioners onapension scheme's governing board. It is therefore likely that, as in the UK, no significant changes to pension scheme governance will be required as a result of the new Directive.

 Sustainable and affordable pension systems, one of the targets of the EU Commission, start with good governance. To this end, a well developed legal framework on pension scheme governance is key. But given the existing "vast differences in the nature, scale and complexity" of pension schemes around the EU and within individual member states, it is reassuring that the Commission is intending to introduce a proportionate approach that would take account of the different systems already in existence.

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