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Institutions for Occupational Retirement Provision (IORP) - regulation memo
Institutions for Occupational Retirement Provision (IORP) - regulation memo
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Institutions for Occupational Retirement Provision (IORP) - regulation memo

09/03/2018

IORP II is the key European regulation for workplace pension funds, replacing the 2003 IORP Directive. IORP II enters into force in January 2019. Its scope is broad and includes Environmental, Social and corporate Governance (ESG) factors

About IORP II

IORP II updates the 2003 IORP (Institutions for Occupational Retirement Provision) Directive. IORP II regulates workplace private prefunded pension schemes in the second pillar of the national pension system in EU Member States.

The European Commission (EC) has four key objectives in mind, namely to:

  • Ensure sound workplace pensions and better protection for members and beneficiaries
  • Ensure better information for members and beneficiaries (primarily through the Pension Benefit Statement)
  • Remove certain obstacles to cross-border provision of services
  • Encourage long-term investment in growth-, environment-and employment-enhancing activities

It should be noted that IORP II does not cover solvency capital requirements.

Scope

IORP II focuses on increasing member protection by improving governance and transparency.

The three key requirements are:

  • Conducting an own risk assessment on a regular basis and proportionate to the organisation and to the complexity of its activities
  • Introduce a comprehensive communications framework with members of the pension plan mirroring the full life cycle of the employee’s pension relationship and to include an annual Pension Benefit Statement (PBS)
  • Relaxing current investment rules. Member States will no longer be allowed to restrict IORPs from investing in long-term instruments. In addition, Member States will not be allowed to set additional investment rules for IORPs with cross-border activities

Importantly the Directive encourages IORPs to take into account Environmental, Social and Corporate Governance (ESG) factors by requiring:

  • Members States to allow IORPs to take into account ESG factors and to invest for the long-term while meeting the prudent person rule
  • IORPs to take ESG factors into account as part of their governance and, in a proportionate manner, as part of their risk management
  • IORPs to explicitly disclose how an investment policy takes ESG factors into account, in the statement of investment principles (a document made public and reviewed at least every 3 years) and the information provided to prospective members

An IORP may meet these requirements by stating that ESG factors are not considered in its investment policy and that the costs of monitoring ESG are disproportionate to the nature, scale and complexity of the organisation’s activities.

Industry implications of IORP II

The proposed Directive is far less onerous than originally envisaged. Indeed, the Directive is a minimum harmonisation text which leaves room for national interpretation, primarily because there will be no level 2 text.

However IORP II does set common standards to improve the protection of pension fund members by new governance requirements, new rules on IORPs own risk assessments, new requirements for a depositary and enhanced powers for supervisors.

Data remains perhaps the biggest challenge when implementing IORP II and in particular:

  • the risk evaluation for pensions
  • the annual PBS pension which must include pension benefit protections under a best estimate and unfavorable scenario

Depending on the level of implementation at national level, this could imply some changes in the content and format of information for members and consequently in IT systems that support production of existing documents.

As a result, IORP II has the potential to accelerate the consolidation of the occupational pension sector.

BNP Paribas Securities Services’ view

We believe the final text has struck the right balance between the need for the pensions industry to further develop high standards with regard to governance, supervision, information and transparency.

Both the Council and the Parliament have taken on board industry concerns that unnecessary pressure might be borne by pensions funds if too much harmonisation were required. They agreed that IORP II should provide enough flexibility for Member States to efficiently adapt new standards to suit their specific national characteristics, in particular with regard to the key issues on the risk evaluation for pensions and the PBS.

It is worth noting that in parallel EIOPA keeps conducting stress tests. In its last report published in December 2017, EIOPA concluded that defined benefit/ hybrid IORPs have in aggregate insufficient assets to cover their liabilities. EIOPA’s next stress test in 2019 should further assess the impact of IORPs on financial stability due to potential risks drivers i.e. the search for yield or a flight to quality.

Key dates

27 March 2014 - The Commission publishes a text proposal

25 October 2016 - Final text voted in plenary session

14 December 2016 - Directive published in the OJEU

December 2017 - EIOPA report on stress-test

13 January 2019 - Entry into effect of the IORP II Directive

Download the regulatory memo:

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Great Expectations: ESG

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