What does the new IORP directive mean for UK schemes?

IORP II needs the formal approval of the European Parliament and once it enters into force, member states will have 24 months to transpose it into their national legislation, which means it should apply by the end of 2018. 

Depending on when the UK leaves the EU and what exit terms are agreed, it may be that the UK does not have to transpose IORP II into national legislation

What this means for UK schemes is currently uncertain following the result of last month’s referendum, in which the UK electorate voted to leave the EU. 

Depending on when the UK leaves the EU and what exit terms are agreed, it may be that the UK does not have to transpose IORP II into national legislation.

However, given that exit terms may necessitate compliance, it is worth schemes being aware of the key terms. 

There are some elements of IORP II that mirror provisions in the existing directive, but the key points to note are where new requirements have been added, because these are the areas where UK legislation could change, although the precise requirements will depend on how the UK government interprets the directive. 

As can be seen from the list of some of the new provisions below, these include areas that are already covered by UK law and regulatory guidance; in these areas any changes may therefore not be substantial. 

It is also worth noting that some of the requirements below are expressed as being subject to what is proportionate to the size of the scheme and the nature, scale and complexity of its activities.

• Schemes will need to have an effective system of governance that provides for sound and prudent management of their activities. This includes requirements for written policies in relation to risk management, internal audit, actuarial activities and outsourced activities.

• Schemes will have to establish and apply a “sound remuneration policy” for all those who effectively run the scheme, perform key functions and certain other categories of staff.

• Schemes will need to have in place an effective risk management function including in relation to asset-liability management, investment, and operational risk management. 

• Schemes will have to carry out and document their own risk assessment at least every three years.

• Schemes will have to provide for an effective internal audit function, which shall include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance.

• IORP II contains more detail about disclosure than the existing directive, including a requirement for an annual pension benefit statement containing key information for members, such as pension benefit projections, contributions paid and a breakdown of costs deducted by the scheme. IORP II also sets out some requirements about the way information should be provided to members, for example, that it should be written in a clear manner and presented in a way that is easy to read.

• There are several express references to investment and environmental, social and governance factors in IORP II. For example, it states that within the ‘prudent person’ investment rule, member states shall allow schemes to take into account the potential long-term impact of investment decisions on ESG factors, and also refers to these factors being considered in the context of the new governance requirements. 

• There is a new procedure for cross-border transfers, including requirements in relation to member consent and authorisation of the relevant regulators.

Schemes are likely to welcome the fact that a recital to the directive specifically states that the further development at EU level of solvency models is not realistic or effective, and that no quantitative capital requirements, such as holistic balance sheet models, should therefore be developed at EU level.

The key point for UK schemes is that at the moment, Brexit means the impact of IORP II is uncertain. No immediate action is therefore required by UK schemes, but they should be aware that, depending on exit terms, there is potential for UK legislation on areas such as scheme governance to change.

Matthew Swynnerton is a partner in law firm DLA Piper UK