The European Commission first published its draft Institutions for Occupational Retirement Provision (IORP II) Directive in March 2014. This included proposals that occupational pension schemes would have to comply with stringent Solvency II like funding requirements. After much lobbying the IORP II Directive finally came into place without these funding proposals on 12th January 2017. Despite this omission it will still have a considerable impact on UK occupational pension schemes and their trustees.
As IORP II is a Directive it does not have a direct effect on pension schemes but all EU Member States, which still includes the UK, had to incorporate it into national law by 13th January 2019. This is a deadline for action by Government however, and not for pension schemes. UK Schemes are only required to comply with UK legislation and regulation when it comes into force. The Government has made it clear that, where possible, it intends to comply with IORP II through existing and planned UK practice and regulation. On 23rd October 2018, the DWP published two sets of regulations designed to implement IORP II – the Occupational Pension Schemes (Governance) (Amendment) Regulations 2018 (“The Governance Regulations”) and the Occupational Pensions Schemes (Cross-Border Activities) (Amendment) Regulations 2018 (“The Cross Border Regulations”). The Cross Border Regulations amend the procedures for the authorisation and approval of cross border activity and set out new requirements for cross border bulk transfers. The governance requirements will largely be implemented through a revised Pensions Regulator Code of Practice. Pension schemes with less than 100 members are expected to be exempt from many aspects of this code.
The October 2018 Governance Regulations require trustees to establish and operate an effective system of governance which provides for sound and prudent management of their activities. This will apply to all occupational pension schemes, regardless of size. A pension schemes system of governance will have to include:-
- An adequate and transparent organisational structure with a clear allocation and appropriate segregation of responsibilities;
- An effective system for transmission of information;
- An effective internal control system;
- How environmental, social and governance factors are included in investment decisions;
- Regular internal review of the governance system.
Pension schemes which already have good governance systems in place should not have to make too many changes. The Pension Regulator’s 21st Century Trusteeship programme is already largely in line with many of IORP II requirements. Existing arrangements will however need to be reviewed and revised to reflect the new Codes of Practice when they are available. It is worth noting that the Pension Regulator’s own research on defined benefit schemes showed that only 26% met all its 21st Century Trusteeship expectations. Source: DB trust-based pension schemes research: summary report 2018
IORP II also introduces the concept of “key functions” which pension scheme trustees must have in place including:
- A risk management function – to identify and manage risk in various areas including asset-liability management, liquidity, employer covenant, investment and administration; Trustees will also have to consider new and emerging risks, including climate change, environmental resource risk and social risk.
- An internal audit function – whose remit should include evaluating the scheme’s internal control system and other areas of scheme governance including any outsourced activities: and
- Where applicable an actuarial function – in practice this is likely to be the scheme actuary.
Key function holders will have a duty to report material findings and recommendations in their particular area to the trustees and in some cases to the Pensions Regulator. Details of the circumstances that will trigger these requirements may be set out in regulations, a code of practice or guidance.
IORP II will also require each active and deferred member, whether Defined Benefit or Defined Contribution, to be given a pension statement at least annually. This statement may be in electronic form but members have the right to request a paper copy. In addition a scheme’s annual report and accounts will have to be publicly disclosed and will have to disclose “significant investment holdings” although this term is not defined.
The impact of IORP II on UK pension schemes and their trustees will largely depend on how well those schemes have already adopted best practice principles already established by the Pensions Regulator.