07 May 2014

IPE: The mission for pensions reform

The new proposal has four key aims: to ensure IORPs better protect members; to keep members better informed; to increase cross-border pension activity; and to encourage pension fund investment in long-term economic growth strategies.

The new Directive states a requirement for pension schemes to perform risk evaluations regularly, and specifies the need for this to be done immediately should a scheme’s risk profile change significantly. Embedded within all of this is an outline of what schemes need to do, which includes qualitative assessments on “the margin for adverse deviation” when calculating technical provisions. It also requires assessments on sponsor support, operational risks and emerging risks related to climate change, natural resources and the environment.

The flagship element of the Commission’s reform and harmonisation of member communications is the standard for a Pension Benefit Statement. Included in the Directive are strict requirements for all schemes to offer a two-page annual statement to members, dictating what information needs to be included. The new statement is to be no longer than two pages of A4. It will contain information on guarantees, balances, contributions, costs, projections, investments, past performance and supplementary details, such as where to obtain additional information.

A further element of the Directive focuses on easing cross-border pension provisions. The Commission says its aim is to ensure "institutions should be able to transfer pension schemes across borders". This falls into the need to facilitate IORP organisation on an EU scale. The proposal sets out that pension funds should be allowed to invest in other member states, following the rules of their home state, to reduce the cost of cross-border activity. It also aims to outlaw the imposition of additional investment requirements, sometimes set by regulators. The Directive has revamped its policy of scheme transfers, with member states told to fully allow EU pension schemes to be transferred between states, subject to standard authorisation, with strict requirements and timely actions.

Key to the Commission’s plans for long-term investing across the EU, the IORP Directive also includes snippets of support for pension funds. Key mainly to investors in Austria, Germany and Italy, the Commission has removed the right for member states to restrict investments in risk assets, particularly ones that promote economic growth. Some member states currently restrict allocations to just 10% of assets. However, new rules now set 70 per cent as the new minimum national regulators can impose. The move is meant, mainly, to allow pension funds to invest in infrastructure, a key focus for the Commission going forward.

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