Pension governance and disclosure is changing Are you ready for IORP II?
Introduction to IORP II Before formally exiting the EU in March 2019, the UK will need to implement the latest EU pensions directive which will impact the way UK pension schemes operate. Although the changes are not imminent, scheme trustees and company representatives should be aware of what is coming and reflect this in upcoming activities and strategic planning. IORP II is the name commonly given to an EU directive that came into force on 12 January 2017. It prescribes requirements on the financing, governance and supervision of IORPs (Institutions for Occupational Retirement Provision). Who does it affect? The directive applies to all IORPs based in EU. IORP is a term used by the EU and its agencies. IORP: An institution, irrespective of its legal form, operating on a funded basis, established separately from any sponsoring undertaking or trade for the purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or a contract. In a UK context, IORPs are funded occupational defined benefit and defined contribution schemes, but not personal pension schemes. When does it come into force? EU member states have until 13 January 2019 to bring in the local laws and administrative provisions needed to comply. Does it still apply to UK entities with Brexit approaching? Until we formally exit the EU, the UK must comply with EU requirements and the Department for Work and Pensions (DWP) has confirmed that it will honour this obligation. Post Brexit, it is possible that we will still be operating under IORP II for some time, especially if a Brexit transition period takes effect. 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 12
What s new in IORP II? The funding, investment and supervision elements of IORP II broadly refresh the current requirements (under the IORP I directive), with limited impact for the UK. However, there are some new requirements around governance and communications that go beyond typical current practice of UK schemes. IORPs will now be required to: Provide Pension Benefit Statements for all active and deferred members with prescribed information and details about payout options including benefit payment products. Have a sound remuneration policy for all persons who run the IORP and disclose all relevant information about their policy. Have three key functions - 1) risk management, 2) actuarial and 3) internal audit. Generally speaking, these should be carried out by individuals or firms that are separate to those performing that role for the sponsor. Have fit and proper persons running it this means that their qualifications, knowledge and experience are collectively adequate. Have an effective risk management system, covering prescribed areas including ALM, investment, liquidity and concentration risk. Consider ESG factors for investments (environmental, social and governance) and explicitly disclose them or state if not considered. Carry out and document their own-risk assessment every three years or when there s a big change in risk profile. Publicly disclose scheme accounts and Statements of Investment Principles. Significant layers of additional detail sit behind the points above and our IORP II specialists are available if you wish to know more. 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 23
How will this all be implemented? IORP II does allow scope for a proportionate approach to be applied, both by individual IORPs and local supervisors such as the UK Pensions Regulator. But even so, some of these changes are a clear step up from the UK norm and will impact all schemes except those currently operating the strongest governance and risk management processes. The DWP is currently considering the best way to achieve implementation. While nothing formal has emerged so far, our expectation is that: The policy intention will be to minimise the impact on UK schemes: Much is already required under UK law, or covered by ongoing initiatives (e.g. pensions dashboard, DB chair statement). The remainder can be added via legislative tweaks and regulatory codes, with a strong focus on proportionality and clear expectations for different scheme types. The new rules will gradually bed in: No scheme actions to be needed by the 13 January 2019 EU (Government regards the introduction of legislation as meeting the EU implementation deadline with subsequent roll out in practice through codes and guidance). In particular, no immediate need for deferred member statements nor to establish an internal audit function. Nonetheless, trustees and scheme sponsors should recognise that new rules are coming and have this in mind as they plan their activities and strategy. Timings Much remains unclear until DWP or TPR publicly outline their intentions. Our current expectation is for a process broadly as follows: IORP II deadline UK leaves the EU Sep 18 Dec 18 Mar 19 Jun 19 Sep 19 Dec 19 Mar 20 Jun 20 Sep 20 Dec 20 Legislation: Adjust existing pensions law, add new IORP IIenabling provisions. TPR Codes of Practice adapted, or new ones introduced, with implementation specifics. To be regulated on a comply or explain basis. Precise implementation deadlines for each element may vary, e.g. By first scheme year-end after a code comes in or In time for the next DB funding statement 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. 4
Contact us John Hodgson Director, Pension Advisory KPMG in the UK T: +44 7825 035356 E: john.hodgson@kpmg.co.uk Kevin Clark Associate Partner, Pension Audit KPMG in the UK T: +44 7802 844651 E: kevin.clark@kpmg.co.uk kpmg.com/uk The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. 2018 KPMG LLP, a UK limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. The KPMG name and logo are registered trademarks or trademarks of KPMG International. Designed by CREATE CRT102640