The European Parliament, Council and Commission have agreed on the proposed text for IORP II. The text was formally approved on 30 June by the Permanent Representatives Committee (COREPER), of the Council. It remains subject to a final vote of approval later this year by the European Parliament. Once approved, the text will be officially adopted, and EEA member states will then have two years to implement it.
Colin Haines, partner at Aon Hewitt, said: “Overall, IORP II largely succeeds in finding the right balance. There are no changes to funding rules and any further changes appear to have been ruled out. Individual countries will need to see how this is implemented by national law – there is a two year period for implementation – and some may choose to introduce extra measures. UK pension funds may also find themselves subject to the Directive depending on the terms of exit from the European Union (EU). For example, if the UK joins Norway and Iceland in the EEA, then current EEA rules mean the Directive would still apply in the UK.
“Pension funds and sponsors will be pleased that the Directive states that there will be no further development, at EU level, of solvency regimes (including the much criticised Holistic Balance Sheet (HBS) concept). The Directive recognises that further changes in this area could have reduced the willingness of employers to provide occupational pension schemes. This is good news for employers who may have been concerned about the EU introducing new capital requirements for pensions - it now seems to be completely off the agenda.”
Risk management and governance
Colin Haines said: “The Directive has significant new requirements for risk management, governance and disclosure of information to members, beneficiaries and supervisors. This is timely – this week’s equity market volatility, currency movements and long-term interest rate falls shows that pension plans across Europe still face significant risks.
“We think it is right for the new Directive to focus on risk management and governance. While pension funds/sponsors will need to consider how best to introduce the requirements, many large pension funds may be doing many of these activities already, so they may not find the new requirements too burdensome.”
Colin Haines continued: “That said, the need to set up internal audit and risk management functions, designating at least two people to -effectively - run the pension plan, as well as implementing transparent organisation structures and effective internal control systems, may mean that even the largest pension funds will need to make some changes to their structures. There is also a new requirement for pension funds to produce and disclose remuneration policies for key staff – this could lead to changes in the way that pay and bonuses are determined.”
“However, the text makes clear that the system of governance should be proportionate to the nature, scale and complexity of the pension fund. It is likely that pension funds will need to see how this is interpreted in their own country.”
Cross-border provision
Colin Haines said:
“Many of the barriers for cross-border provision have been removed which is great news for international employers, as it will make it easier for them to set up cross-border funds for their European employees. There is also recognition that funding requirements for cross-border pension funds should take account of those for local pension funds in the same country. In addition, new regulations have been added which set out the process to be followed for transferring assets and liabilities on a cross-border basis. The new Directive should make it easier for international organisations to set up pan-European pension plans for their European workforces and to use their European scale to provide employee with better pension provision."
Information to members
Colin Haines said:
“The text has stated that EU citizens working in another member state need to have a clear overview of their accrued pension rights stemming from statutory and occupational pension schemes. There are new requirements for information to be given to members of a pension scheme, including before joining and when close to retirement.
“It is important for members to be provided with effective customised communication material so that they can make informed retirement saving decisions. Technology can play a major role in these communications, so the recognition given in the Directive for pension plans to have the option to use electronic means, including websites, to provide information to members is a really positive move.”
Development of pension provision in Europe
Colin Haines said: “The text states that the Commission should provide significant added value at EU level by undertaking further steps in the improvement of occupational and private pension schemes and by establishing a High Level Group of experts to enhance private retirement savings in the member states. This would include promoting the exchange of best practices between the member states, in particular with regard to cross-border activity. This can only be welcomed, especially in relation to the further development of occupational pension markets in Central and Eastern Europe where pension provision is generally much lower than in Western Europe.
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