Scheme costs to ratchet up under IORP II revision

The update to the Institutions for Occupational Retirement Provisions directive, which will come into effect in 2017, also introduced new governance requirements for schemes, encouraged investment in long-term assets and required cross-border schemes to be fully funded. 

It will also will require schemes to have an “effective system of governance”. This should “include an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities and an effective system for ensuring the transmission of information”, the directive stated.

James Walsh, EU and international policy lead at the National Association of Pension Funds, said the key impact on UK schemes will be the extra costs arising from the increased governance and information requirements.

The commission estimated the new regime will cost schemes a one-off adjustment of €22 (£18.15) per member, and an annual cost of between €0.27 and €0.80 per member.

“The NAPF is very much in favour of high standards of scheme governance and good communication, but the question is how you go about achieving it,” said Walsh. “The directive sets out an extensive list of new requirements on both those fronts and some of those look over-prescriptive and won’t necessarily generate or lead to practical improvements to scheme members.”

Schemes will also be required to have a risk management system that produces a risk evaluation, following a significant change to the institution.

“The evaluation should include new or emerging risks relating to climate change, use of resources and the environment,” the directive stated.

It also stipulated that schemes’ trustees should be “fit and proper” and have professional qualifications.

Jonathan Camfield, partner at consultancy LCP, said this could have a significant impact on the trusteeship regime in the UK as it is based on lay trustees.

“Potentially it will require a complete reworking of the trusteeship regime in the UK,” he said. “Member-nominated trustees may not be able to continue without significant training.”

Tim Smith, senior associate professional support lawyer at law firm Eversheds, said this could push schemes towards professional trustees.

“Obviously this would have cost implications,” he said.

See the latest edition of The Cut for a breakdown of the key points.