Finalised IORP II may not make it to UK after Brexit vote

The directive, the result of a lengthy trilogue led by the Dutch presidency, made key concessions to defined benefit schemes on the issues of cross-border transfers and cross-border funding.

It also appears to rule out the introduction of solvency models like the holistic balance sheet in the pensions industry.

We’d need to be clear that that wouldn’t have the effect of causing an explosion in cross-border schemes

François Barker, Eversheds

The directive will now go to the Committee of Permanent Representatives, and then the EU parliament, before it comes into force.

But experts warned schemes to “wait and see” whether IORP II is ever implemented in this country, after the UK voted to leave the EU.

Article 78 of the new rules requires EU member states to bring their national legislation in line with the directive within two years of it coming into force, expected to be later this year after translation of the text.

Crucially, this means the UK could be obliged to implement the legislative changes at the same time as finalising exit arrangements under the two-year period allowed in Article 50 of the Lisbon Treaty.

“Technically we’d be under an obligation to implement it,” said James Walsh, EU and international policy lead at the Pensions and Lifetime Savings Association.

“But in practice, if that was a matter of weeks before the UK was to leave, would we really be expected to?”

He said the PLSA would be providing a briefing on IORP II for its members.

A spokesperson from the Department for Work and Pensions said the DWP would be unable to clarify whether the UK will adopt the new directive until further details of its exit from the EU are known. “It’s very much business as usual,” the spokesperson said.

Others also emphasised that it is too early to come to any conclusions.

François Barker, head of pensions at law firm Eversheds, pointed out the legal status of the referendum: “The status of the referendum is an advisory vote of what the UK population thinks, but at the minute it does not of itself trigger Brexit.”

Flexibility for cross-border schemes

Should the directive come into force in the UK, cross-border schemes will not have to be fully funded at all times, as was stipulated in previous drafts of the regulations.

Leading industry figures had expressed concerns about the requirement, arguing that it would put DB schemes and their employers under immense pressure.

Instead the directive recognises that schemes may be in deficit and requires that they agree a recovery plan with the relevant authority – in the UK’s case, the Pensions Regulator.

Cross-border transfers of schemes will require the consent of both home and target member states, and domestic transfer of schemes will not require the regulator’s consent.

Some have raised concerns that the directive could define cross-border schemes as any scheme with pensioners in another country.

Most UK schemes pay pensions in other EU member states, and would incur compliance costs from becoming cross-border.

A recital states that this “does not in itself constitute a cross-border activity”, but this definition is not included in the articles themselves.

“We’d need to be clear that that wouldn’t have the effect of causing an explosion in cross-border schemes, to include those who simply have retired members living abroad,” said Barker.

Wait and see

But others were more relaxed about the implications of IORP II’s implementation.

Georgina Beechinor, senior associate at law firm Sackers, said: “I don’t think in practice there are going to be major differences for UK pension funds, because a lot of the focus here is on governance and of course the government and the regulator have done so much in recent years in this area.”

She said schemes would not be able to take action on IORP II until further details emerge on Brexit, but added that the terms of negotiation in Britain’s exit from the EU may require schemes to implement the directive anyway.

“It’s very much wait and see at the moment,” she said.