The new IORP Directive

The final text of the IORP directive clarifies a number of areas that have been quite uncertain throughout the drafting process, in particular those relating to cross border schemes.

Many had hoped that there would be a relaxation of the full funding requirement for cross border schemes. The final text still requires that cross border schemes remain fully funded, however, unlike the previous requirements, it does make the distinction that a cross border scheme may be underfunded at a given point in time. Where a cross border scheme is underfunded at a point in time it will be required to put in place measures to ensure beneficiaries are adequately protected. It is also clearer in what is meant by a cross border scheme, and the risk of UK schemes paying pensions to expatriate residents outside the UK, being caught by an earlier draft definition appears to have been removed.

Crucially there has been no introduction of a quantitative solvency measure for pension schemes, something that has been feared since the inclusion of the “Holistic Balance Sheet (HBS)” in initial drafts of the directive. Despite not being included in recent IORP drafts, EIOPA continued to give the introduction of the HBS serious consideration, notably conducting Europe wide Quantitative Assessment of its likely impact last year. Many in the industry feared that they would use this as a way to introduce solvency measures by the back door.


UK Pensions regulation has been moving in the direction of focussing on an integrated approach to risk management and a collaborative approach between pension schemes, their sponsors and advisors. The IORP directive formalises a lot of these guidelines into an ‘Own Risk Assessment’. Schemes will need to formalise how risk assessment fits in to schemes’ overall management processes, and maintain a register of any risks the schemes or their members face.  This has the rather circular effect of reinforcing the UK’s regulatory direction of travel in these areas, which in itself was driven largely a response to signposts in the earlier drafts of the IORP.

Interestingly, the directive looks to formalise guidance around ethical, social and governance risks that schemes face particularly in regards to their investments. This was something that was initially resisted throughout the drafting process of the directive. Recent investigations into the financial impact of holding assets that might not be viewed as “ethical” on some inevitably arbitrary measure suggests that negative outcomes may reveal themselves long term in the form of ‘stranded assets’, meaning that if, for example, global restrictions were placed on the use of fossil fuels  that these assets would lose value.

If, as expected, Article 50 is triggered, the directive would not need to be adopted into UK legislation. However, as noted above, many of the principles in the Directive have already, to an extent, found their way into the UK regulatory framework. The broad principles supporting trustees in gaining a better understanding of the risks faced by their schemes and managing those risks within an integrated framework is clearly an approach which should be embraced  by trustees, on the basis of its own merits, regardless of how the Directive is ultimately dealt with by the UK government.

Featured Article