IORP II legislation is a step closer to reality. Michael Klimes finds out what it means for UK trustees.
- IORP II Directive is closer to being finalised after vote in European Parliament
- The Dutch are expected to hammer out final text among commission, parliament and council of ministers
- The text is forecast to be ratified in the summer UK schemes will probably have to implement directive by end of 2017
European pension legislation has the slowness and manoeuvrability of an oil tanker: it takes years for politicians to set its course but once the direction of travel is known, people take notice. Whatever people in the UK might think of the bureaucrats in Brussels, what they do matters..
The Institutions for Occupational Retirement Provision (IORP) II Directive is a case in point. In November 2014, UK trustees attacked plans from the European Commission (EC) to introduce a standardised member benefit statement across Europe as it would needlessly increase costs for members. People resented the prescriptiveness of the idea: the statement would have to be on two pages and in a particular font.
Recently, the European Parliament's economic and monetary affairs committee (ECON) voted on amendments to the EC's proposals which watered down many of the most controversial parts.
Now, according to Pensions and Lifetime Savings Association (PLSA) EU and international lead James Walsh, British trustees can breathe a sigh of relief on the pensions benefit statement.
"The original [EC] proposal set out in great detail exactly what the pensions benefit statement should include, what it should look like and what its format should be. It was meant to be on two pages of A4 and the font was specified at EU level.
"All of those articles, from 40 to 54, have been replaced by a single article. This means that there will be now much more flexibility at national level to decide what the pensions benefit statement will look like."
Furthermore, the UK already has a "well developed disclosure regime", so it might mean regulators in Britain settle for the status quo, Walsh adds. The key point is the flexible framework devolves the implementation of the directive to national regulators. Still, trustees can expect they will need to produce a pension's benefit statement annually to members.
Another significant area which has less clarification than the European benefits statement is the risk assessment report in the pipeline. If there is a major change to a scheme in terms of structure or investment risks, then trustees on schemes will have to produce the assessment..
"The amendments require it to cover climate change issues and so on. It will be [done] regularly, whatever that means. It might well be defined at national level. We will have to look at the final wording, to be honest, to see how it will occur," continues Walsh.
IORP II Timeline
The IORP is a long-running saga of legislation which has been grinding its way through the European Union’s bureaucracy for years. The story started with the original IORP Directive in 2003.
3 June 2003
European Parliament and European Council ratify IORP I, officially known as Directive 2003/41/EC.
27 March 2014
EC publishes its draft IORP II proposals to overhaul its pension directive, which is intended to “improve governance, transparency and cross-border activity”. The draft includes provisions to ensure schemes have effective and proportionate governance procedures, an independent audit function and a system to identify, monitor, manage and report risk on a continuous basis.
2 September 2014
EC defends IORP II against UK scheme backlash at a National Association of Pension Funds (NAPF) event, in response to a delegate's concerns that it could lead to UK member nominated trustees being outlawed.
Saskia van Ewijk from the Commission’s Insurance and Occupational Pensions Unit said: "Rest assured the intention is not to outlaw trustees at all" and that the Commission "understands the role that trustees play in the UK system".
10 December 2014
The European Council of Ministers officially signs off on its own updated proposals to IORP II Directive.
28 July 2015
MEP Brian Hayes presents draft report on proposals to ECON. These contain the Parliament's revisions to IORP II. These pension proposals hailed as a positive step by NAPF.
27 January 2016
ECON approves IORP II Directive. PensionsEurope chairman Janwillem Bouma said: "IORP II is about better governance and disclosure. It is important to take into account different types of pension schemes, as well as the role social partners have and the differences in social and labour law.”
Sources: Professional Pensions, European Commission, European Parliament, PLSA, European Council of Ministers
While IORP II is moving in a more favourable direction for UK pensions, Willis Towers Watson senior consultant Mark Dowsey warns there are issues which are yet to be resolved: "The EC [proposals] was much more prescriptive and that would have had more for reaching complications. Assuming parliament will prevail, it will be fine."
The European Parliament, EC and European Council of Ministers will now engage in talks about a final text for ratification. That process is known as the "trilogue".
The view of the IORP II proposals from the Parliament and Council are more friendly to national regulators as they are far less prescriptive than what the Commission plans.
But article 75, paragraph 1 in the Parliament's amendments to the IORP II proposals states the Commission will able to review the directive after six years. It will report on its implementation and effectiveness to the Parliament and the Council.
This, combined with the desire of the European Insurance and Occupational Pensions Authority to launch stress tests for defined benefit and defined contribution schemes in 17 member states (including the UK), raises questions. That could lead to IORP III if a new EC in 2019 wants to look at the issue of solvency across pension funds in the EU.
Walsh describes this as the "legislative hook on which solvency could hang its ambitions" and the PLSA "wants to take that out".
Another concern the PLSA has is the time to implement the directive: today, it stands at 18 months and the PLSA wishes to push it up to two years.
The Netherlands has the presidency of the European Council of Ministers in a six-month rotation from 1 January to 30 June. It is expected to move the discussions between the Parliament, Commission and Council of Ministers on a final text for ratification. Veteran watchers of policy making in Brussels expect the IORP II Directive to be approved in the summer.
The Pensions Regulator (TPR) is waiting to see what materialises. A spokesperson said: "The nature of pensions varies significantly across Europe, but the IORP Directive in 2003 represented a first step towards greater harmonisation.
"A revision to this Directive, IORP II, is currently progressing through the European legislative process. Its focus is currently on governance, disclosure and supervisory issues and has the potential to change the legislative framework for UK pensions over the next five to ten years.
"The European Parliament voted on its version of the draft IORP II Directive earlier this week. However, the legislative process is yet not complete so it is not clear where it will end up.
"Final trilogue negotiations between the European Parliament, European Commission and the European Council are expected to begin shortly. HM Treasury leads on the negotiations for the UK. We provide technical advice to our governmental partners on potential impacts of any proposals."
For the moment, it seems UK trustees can be happy with the IORP II proposals so far. The EC is not setting the agenda and snapping at their heels. That can only be a positive sign.
Where next for IORP II?
The Netherlands has the presidency of the European Council of Ministers for six months (until 30 June). It is expected to move the discussions between the Parliament, Commission and Council of Ministers on a final text for ratification. That process is known as the "trilogue".
Veteran watchers of policy making in Brussels expect IORP II to be approved at this time. Member states will have 18 months to two years to implement it.
There is a possibility that the new EC will decide to review solvency requirements of European pension funds. That could start a process towards IORP III. The IORP II proposals currently say: "[Six years after the entry into force of this Directive], the Commission shall review this Directive and report on its implementation and effectiveness to the European Parliament and to the Council."
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