IPE: Leaked draft of IORP II Directive sets out to support long-term investment; reveals changes for cross-border schemes

04 March 2014

A leaked copy of the Commission's long-awaited proposal for revising the IORPD sets out to "strengthen the capacity of IORPs to invest in assets with a long-term economic profile" and falls "well within the scope of the Commission's agenda towards a stronger sector to support growth".

The proposal calls for fiscal consolidation and long-term sustainability to be implemented hand in hand with EU Member States’ structural reforms of their respective pension systems. It is also meant to be consistent with, and complementary to, other initiatives in the field of financial services, such as Solvency II, MiFID II and the Alternative Investment Fund Managers Directive (AIFMD).

The proposal sets out four specific objectives: (1) removing remaining prudential barriers to cross-border IORPs; (2) ensuring good governance and risk management; (3) providing clear and relevant information to members; and (4) ensuring supervisors have the necessary tools to effectively supervise IORPs.

The leaked draft states that the proposal does not consider the introduction of new solvency rules. "Solvency rules are not directly relevant for DC schemes", it says. "Moreover, the Quantitative Impact Study conducted by EIOPA indicated that more complete data on solvency aspects are necessary before a decision can be taken on those aspects."

The proposal describes itself as a “minimum harmonisation legal instrument” and states that national authorities may go further if necessary for the purposes of member and beneficiary protection. However, it states that the minimum standards within the IORP I Directive of 2003 are to be raised, with some parts of the new Directive being reinforced by Commission delegated and implementing acts.

One stated aim in the leaked draft is to “take into account positive externalities arising from scale economies, risk diversification and innovation inherent to cross-border activity”. Furthermore, it sets out to avoid regulatory arbitrage between different financial services sectors and Member States. Under the heading ‘Powers of interventions and duties of the competent authorities’, the text states that competent authorities may also restrict the free disposal of an institution’s assets when it has failed to establish sufficient technical provisions. Another article states that the competent authorities may also transfer the powers of persons running an institution located in their territories, wholly or partly, to a special representative who is fit to exercise these powers.

As for the expected date of the final version of IORP II, the Commission mentions March, without providing a firm date.

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In a further article on 4 March, IPE reports that the draft has seen the requirement for cross-border pension schemes to be fully funded removed, as it moves closer to its finalised form. The draft said the Commission would look to overhaul the current requirement for defined benefit (DB) schemes to be fully funded, should they operate in more than one EU Member State, essentially harmonising the definition of cross-border schemes throughout the union.

In line with this, the draft directive also includes further detail on what the Commission classes as prudential regulations. It defines the areas understood to belong to prudential regulation and takes away the legal uncertainties for institutions caused by different definitions among member states. The Commission is looking to iron out inconsistencies in what is considered prudential regulation, simplifying the operation of cross-border schemes.

The draft needs to be approved by the College of Commissioners before full publication. However, its passage into the final draft may be complicated. In its current form, it includes operational conditions, technical provisions and its funding, solvency margins, investment rules and management, conditions for governance and required regulatory information.

Within the funding and technical provisions, however, may be what some Member States consider social or labour law, currently a Member State competence.

While drawing on much of the work of the European Insurance and Occupational Pensions Authority (EIOPA), the legislation provides a lot of detail. It states its aims of ensuring that pension benefit statements have a common format across the EU, and that members be given the right information before enrolment, during accumulation and in decumulation. Benefit statements should be no longer than two A4 pages in length, while being comprehensible, and not making reference to other documents. They should also include data on balances, contributions and costs, with the latter broken down into administration, asset keeping and costs related to investment transactions. Pension projections should also be included in member statements and provide a target level of benefits per month – at estimated retirement, two years before estimated retirement and two years after estimated retirement. Pension schemes must provide members with detailed investment choices, as well as a chart of past performance on the investment.

The directive said EIOPA would develop a draft technical standard to determine the components of pension and benefit statements by the end of 2016. Overall, the draft directive follows general expectations from the European industry for a more stringent governance and transparency requirement from pension providers.

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