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From Brussels with love: IORP II - scheme governance and cross-border

  • United Kingdom
  • Pensions

22-11-2018

Brexit may be grabbing all the headlines but EU directives must still be implemented in the UK, at least for the time being. This speedbrief looks at recent developments in relation to the recast IORP Directive 2016/2341 (IORP II) and how these will affect occupational pension schemes in the UK.

Background

IORP II replaces the original 2003 IORP Directive, which is where the current scheme funding and cross-border regimes originated.

IORP II carries forward many of the existing provisions of the 2003 IORP Directive and includes new provisions focusing on governance and reporting requirements, as well as making changes to the cross-border schemes regime. Some controversial original proposals, such as a new EU pensions solvency measure and a mandatory level of qualification for all trustees, were dropped during negotiations.

IORP II applies to most occupational pension schemes, subject to certain limited exceptions. It was adopted into EU law in December 2016 and must be implemented into UK law by 13 January 2019.

Governance

The Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (the Governance Regulations), which are due to come into force on 13 January 2019, amend the internal controls provisions of the Pensions Act 2004 to say that trustees must “establish and operate an effective system of governance including internal controls”. This must be “proportionate to the size, nature, scale and complexity of the activities of the occupational pension scheme”.

The Governance Regulations also set out a long list of related requirements to be covered in a new or updated Pensions Regulator code of practice. This includes:

  • remuneration policies
  • a written policy on “key functions” (meaning actuarial, risk management and internal audit)
  • a written policy on outsourcing key functions
  • a triennial written “own-risk assessment” of scheme governance (to cover long and short term risks such as funding, conflicts of interest, risks relating to the payment of benefits and operational risks)

This code of practice will not apply to public service schemes and authorised master trusts (which are subject to a different regulatory regime) and schemes with fewer than 100 members will be exempt from many obligations.

The code of practice is expected to be issued for consultation next year, and it will probably not come into force until late 2019 or 2020. The first “own-risk assessment” will then be required within a year of the end of the first scheme year after the code is issued.

Many of the IORP II governance requirements have been broadly addressed by separate UK government initiatives, such as those relating to environmental, social and governance factors (see our speedbrief), the Pensions Regulator’s DC code of practice and its 21st century trusteeship drive. Others, such as the requirement to prepare a detailed “own-risk assessment” every three years and to have a policy on outsourcing of key functions, are new and will most likely require changes to current scheme practice.

The Governance Regulations do not fully implement all of the IORP II requirements. A particularly notable absence is the requirement for all active and deferred members of occupational pension schemes to receive a “pension benefit statement” at least annually. That is not currently required for DB schemes in the UK.

This month, the European Insurance and Occupational Pensions Authority (EIOPA) published a report on the new pension benefit statement, stating that it should be “effective, attractive and easy to read” and be comparable with statements in other member states so as to allow for financial planning. We understand the UK government plans to address this requirement via the pensions dashboard project but how (and when) that will come to fruition remains to be seen.

Cross-border

The Occupational Pension Schemes (Cross-border Activities) (Amendment) Regulations 2018 (the Cross-border Regulations) will amend the current cross-border pensions regime (introduced under the 2003 IORP Directive) on 13 January 2019.

These new regulations change the authorisation process for UK schemes to carry out cross-border activity (which means, broadly, operating a scheme in more than one EEA state) and the rules governing bulk transfers to schemes in another EEA state.

On a related note, the requirement under the 2003 IORP Directive for cross-border schemes to be “fully funded at all times” has been relaxed under IORP II so as to permit a recovery plan. The definition of what constitutes cross-border activity has also been clarified so that it should no longer be triggered so easily or inadvertently.

The Occupational Pension Schemes (Cross-Border Activities) Regulations 2005, which set out the current UK cross-border regime, will be repealed from “exit day” via a separate set of draft regulations designed to ensure that retained EU-related law relating to pensions more generally continues to work after the UK exits the EU, mainly by changing or deleting provisions that will become obsolete.

Comment

Assuming the UK does not remain in the EEA for much longer, the cross-border changes are likely to be of limited practical application to the vast majority of UK schemes. Most UK pension schemes have historically taken steps to ensure that they do not become cross-border schemes.

The government has opted for a “light touch” approach to implementing the governance strands of IORP II, with much of the detail to be contained in a new or updated Pensions Regulator code of practice.

EU directives such as IORP II are not directly applicable to UK law. This means that IORP II itself cannot be invoked directly by members in a court action against a pension scheme or company – the risk of not implementing the directive properly lies with the government primarily. It seems that EU member states are taking varying approaches to IORP II implementation and it may be that, with Brexit looming, the UK government has concluded that a light touch is sufficient.

Occupational pension schemes need only comply with the IORP II requirements when the changes to UK law and the Pensions Regulator code of practice come into force. The new code of practice described in the Governance Regulations is not expected until late next year or, more likely, 2020.

In the meantime, schemes might consider, for example, a review of DB scheme data to ensure it is sufficient to enable annual benefit statements to be provided to active and deferred members. If schemes are undertaking a governance review, they may wish to build the new requirements into their governance planning and budgeting. In some cases, compliance will simply involve documenting governance systems already in place.

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