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IORPs (institutions for occupational retirement provision) are funded occupational Defined Benefit and Defined Contribution pension schemes. Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORP II) repeals the earlier Directive 2003/41/EC of 3 June 2003 with the introduction of enhanced governance requirements, a greater emphasis on a forward looking and risk based approach and the introduction of an annual pension benefit statement for members.
The responsibility for implementing IORP II will fall on pension trustees and therefore it will be important that trustees are aware of what is required and understand the actions needed for implementation. It is noteworthy however that the directive will not be retroactive.
The investment rules are set out under Article 19 of the directive. Under Article 19 (1) (d) there is a new investment rule which requires IORPs to ensure that scheme assets are predominantly invested in regulated markets. As a provider of regulated products, BlackBee Investments Ltd is in a strong position to enable trustees comply with this new investment rule.
The proposed implementation of IORP II has faced criticism as previously under IORP I one-member pension schemes were exempt from the “prudent person” investment rules, however it has been indicated that this position will change with the implementation of IORP II and no derogation will be allowed for smaller pension schemes, which will be subject to the full rigor and costs associated with the directive.
Concern has been raised regarding the extent to which this will restrict smaller pension schemes investing in property and borrowing. Effectively, one-member schemes set up after the IORPS II regulations come into force will be restricted from investing in property, typically buy-to-lets.
The new directive introduces a number of new governance requirements around key functions. There is an obligation to ensure that a risk management function, an internal audit function and for defined benefit schemes, an actuarial function are established. Key function holders are required to act independently and to perform their duties fairly and objectively. Any material findings should be reported to the Board of the IORP and to the regulator in certain cases.
The directive also introduces a requirement on IORPs to conduct own risk assessments (ORA) at least every three years. The purpose of which is to assess the effectiveness of the risk-management system and to describe how the ORA informs the management and decision making processes of the IORP.
Clearer communication will be required to be provided to prospective members, members and beneficiaries. Key information is to be provided by way of a pension benefit statement (PBS) at least annually to each member of the IORP. The main goal of the PBS is to outline the current position of the members benefit, a projection of future benefits, which is to include a best estimate scenario and an unfavorable scenario and a disclaimer that those projections may differ from the final value of the benefits received. A breakdown of the costs deducted by the IORP over the last 12 months must also be included. This information is to be provided free of charge and in a durable medium.
IORP II also introduces a broader ethical focus on environment, social issues and corporate governance (ESG) factors. In making an investment decision trustees are permitted to consider the long term impact of their decision on ESG concerns.
Ultimately the directive provides stricter rules for the management of pension schemes which are designed to assure pension scheme members that their schemes are run properly.
The directive was due to be transposed into Irish Law on the 13 January 2019 however this has now been delayed due to the commencement of judicial review proceedings by the Association of Pension Trustees of Ireland. The case was heard in October and High Court judgment is awaited.
Article written by BlackBee’s Compliance Manager Laura Creagh