EU Pensions New IORP Directive Overview of the proposals

EU Pensions New IORP Directive Overview of the proposals

The new EU Pensions ( IORP ) Directive On 27 March 2014, the European Commission issued its proposals for a new directive on the activities and supervisions of Institutions for Occupational Retirement Provisions (IORPs). This will affect occupational pension schemes across all Member States in the European Economic Area. The new directive will replace the previous IORP Directive which was adopted in 2003. The Commission s general objective is to facilitate the development of occupational retirement savings, and to reinforce IORPs role as institutional investors in the EU s economy. The proposal has four specific objectives: Remove remaining barriers for cross-border IORPs Ensure good governance and risk management Provide clear and relevant information to members and beneficiaries Ensure that supervisors have the necessary tools to effectively supervise IORPs This document summarises the main contents of the new proposals Contents Executive Summary 1 1. Financing & solvency requirements 2 2. Governance 3 3. Information for members, prospective members and beneficiaries 5 4. Cross-border IORPs 6 5. Prudential regulation and supervision 7 Contact 8 June 2014

Executive Summary As previously indicated by the Commission, the proposal does not contain any changes to the solvency requirements for IORPs The new governance rules impose new requirements that currently only the very largest IORPs across Member States appear to satisfy. The rules are likely to be particularly onerous for small to medium sized IORPs The system of governance can be proportionate to the nature, scale and complexity of the activities of the IORP, although it remains to be seen how the detailed requirements can be met by smaller IORPs in a proportionate way. This appears to be a concern of a number of Member States already IORPs will need to carry out regular but proportionate risk evaluations in line with methods to be developed by the European Insurance and Occupational Pension Authority (EIOPA) IORPs must put in place and disclose a remuneration policy for the key people that run the IORP and hold key functions Plan members must receive an annual pension benefit statement. This must contain specific information, and be no more than 2 pages long Cross-border plans shall still be required to be fully funded at all times. Under-funded cross-border schemes would be subject to intervention from the competent authorities of the home Member State There are new rules to make it easier to transfer assets and liabilities between IORPs in different countries IORPs that underwrite biometric risk, or provide investment guarantees, will have to follow more detailed requirements when calculating risk margins and regulatory own funds New supervisory review processes will give supervisors the power to review and evaluate strategies and procedures established by IORPs and to remedy any weaknesses and deficiencies identified Scope of Directive The Directive applies to IORPs. These are institutions which are established separately from sponsoring employers in order to provide funded retirement benefits to employees. This includes employer pension schemes (where benefits are defined in a contract or trust deed and rules), collectively-agreed arrangements, and certain arrangements for selfemployed persons. The Directive does not apply to: Institutions managing social security schemes Institutions operating on a pay-as-you-go basis Institutions where employees of the sponsor have no legal rights to benefits, and where the sponsoring undertaking can redeem assets at any time Companies using book-reserve schemes with a view to paying out retirement benefits to their employees Individual Member States can also choose to exclude the following from the Directive: IORPs with less than 100 members IORPs where retirement provision is made under statute and is guaranteed by a public authority Member states can also choose to apply the Directive to the occupational retirement provision business of life insurance undertakings. In this case, all assets and liabilities of the occupational pension business must be ring-fenced from the rest of the business, without any possibility of transfer. Next steps The Directive is subject to the approval of the EU Council and the European Parliament, and it is expected to come into force by 31 December 2016. By this date, Member States will need to bring into force laws, regulations and administrative requirements to comply with the new Directive. The Commission will, after consulting EIOPA, review and report on the application of the Directive four years after has come into force. The review will include an assessment of the solvency and financial requirements, including the calculating and funding of technical provisions. This could mean that any major changes to this Directive, if it is introduced by 2017, may then not occur until 2024 at the earliest (assuming that it would take at least three years for another Directive to be introduced). 1 June 2014

1. Financing & solvency requirements There are no material changes to the solvency rules for IORPs: Home Member States shall require every IORP to have at all times sufficient and appropriate assets to cover the technical provisions in respect of the total range of pension schemes operated IORPs may be allowed, for a limited period of time, to have insufficient assets to cover the technical provisions. In this case, the IORP must adopt a concrete and realisable recovery plan in order to ensure assets can cover the technical provisions in due time. The recovery plan shall take account of the specific situation of the IORP including the asset/liability structure, risk profile, liquidity profile, the age profile of plan members, start-up schemes and schemes changing from non-funding or partial funding to full funding In the event of cross-border activity, IORPs will still be required to be fully funded at all times. Underfunded cross-border schemes would be subject to intervention from the competent authorities of the home Member State In relation to the calculation of technical provisions: All IORPs must calculate or update technical provisions every year (as required under local legislation). The calculation shall be certified by an actuary or other specialists (including auditors) on the basis of actuarial methods recognised in the home Member State Technical provisions must be carried out in a prudent manner. Economic and actuarial assumptions shall be chosen prudently taking account, if applicable, an appropriate margin for adverse deviation The maximum rates of interest shall be chosen prudently and determined in accordance with relevant rules in the home Member State. The maximum rate shall take account of the yield on assets held by the IORP and future investment returns, and/or the market yields of high-quality or government bonds Home member states may include more additional and more detailed requirements to ensure that the interest of members and beneficiaries are adequately protected IORPs where the IORP (and not the sponsoring undertaking) underwrites death, disability or longevity risks or provides investment guarantees continue to be subject to additional solvency requirements. Such IORPs must: hold additional assets above the technical provisions to serve as buffer ( regulatory own funds ) have an adequate available solvency margin at all times which is at least equal to the requirements in the Directive. The required solvency margin calculation is very detailed, but appears to be broadly 4% of mathematical provisions; plus 0.3% of total capital at risk. Adjustments can be made for liabilities that are re-insured and for short-term life insurance benefits Investment rules IORPs must continue to invest in accordance with the prudent persons rule, with assets invested in the best interests of members and beneficiaries, and in a manner appropriate to the nature and duration of the expected future retirement benefits. Member states may lay down more detailed rules for IORPs under their jurisdiction. However Member States cannot restrict IORPs from investing in long-term instruments that are not traded on regulated markets. Member States must continue to allow IORPs to be able to invest up to 70% of assets in equities and corporate bonds; and up to 30% of assets denominated in currencies other than those in which the liabilities are expressed. 2 June 2014

2. Governance IORPs will need to ensure that they comply with the laws, regulations and administrative provisions adopted by Member States pursuant to the IORP Directive. The administrative, management or supervisory body of the IORP will be ultimately responsible for this compliance. An IORP shall have at least two persons who effectively run the institution. IORPs will need to put in place an effective system of governance which provides for sound and prudent management of their activities. The system of governance shall be proportionate to the nature, scale and complexity of the IORP, and shall be subject to regular internal review. In addition, IORPs will need to put in place: an adequate transparent organisational structure with a clear allocation and appropriate segregation of responsibilities an effective system for ensuring transmission of information written policies (to be reviewed annually) in relation to risk management, internal audit and, where relevant, actuaries and outsourcing an effective internal control system (including administrative and accounting procedures; an internal control framework; and appropriate reporting arrangements) reasonable steps to ensure continuity and regularity in the performance of their activities, including the development of contingency plans procedures to ensure that all persons effectively running the IORP, and other key functions, have adequate professional qualifications, knowledge and experience, and are of good repute and integrity a remuneration policy setting out how remuneration is determined for those persons who effectively run the IORP or perform key functions (including outsourced functions). The policy shall promote sound and effective risk management and not encourage excessive risk-taking. IORPs will also be required to publicly disclose information on the remuneration policy a risk-management system comprising strategies, processes and reporting processes to measure, monitor, manage and report all the risks of the IORP; including risks related to: Outsourced functions Underwriting and reserving Asset-liability management Investment, in particular derivatives and similar commitments, and compliance with investment rules Liquidity and concentration risk management Operational risk management Insurance and other risk-mitigation techniques In accordance with the existing Directive, IORPs will still be required to produce: An annual report and accounts A statement of investment policy principles (which is reviewed every three years or immediately after any change to investment policy) Risk Evaluation for Pensions IORPs will need to identify and evaluate the risks it faces in the short and long term and to which it is or could be exposed. This will need to form an integral part of the operational strategy of the IORP. IORPs will produce a risk evaluation on a regular basis and without delay following any significant change in risk profile. The risk evaluation shall demonstrate: the effectiveness of the risk management system the overall funding needs (taking into account the specific risk profile, approved risk tolerance limits and the operational strategy of the IORP) the ability to comply with the requirements concerning technical provisions a qualitative assessment of the margin for adverse deviation included, if required under national law, in the technical provisions a description of the pension benefits or capital accumulation a qualitative assessment of the sponsor support accessible to the IORP (NB Sponsor support is not defined but, based on the definitions used by EIOPA, could include recovery plan contributions, contingent assets and parent guarantees; claims on the sponsor upon the termination of the IORP; subsidiary liabilities of the sponsor) a qualitative assessment of the operational risks for all schemes of the institution a qualitative assessment of new or emerging risks relating to climate change, use of resources and the environment The risk evaluation should be carried out using methods which are proportionate to the nature, scale and complexity of the risks involved. EIOPA is given a responsibility to draft a regulatory technical standard for the IORP risk evaluation by the end of 2016. The Commission will then have the power to adopt the draft standard. 3 June 2014

Key functions and outsourcing IORPs will also need to create a number of functions which can be carried out by individuals or organisations who are independent. All persons carrying out key functions should be fit and proper, and key function holders should be subject to notification requirements of the competent authorities. These include: A risk management function to facilitate the implementation of the risk-management system An internal audit function to evaluate the adequacy and effectiveness of the internal control system and other elements of the system of governance, including outsourced functions An actuarial function to co-ordinate and oversee the calculation of technical provisions; assess the methodologies, models, assumptions and data used to calculate the technical provisions; express opinions on underwriting policies and adequacy of insurance arrangements; and contribute to the effective implementation of the risk management system For smaller or less complex IORPs, it should be possible for a single person or organisational unit to carry out more than one key function (other than for the internal audit function). The person or unit carrying out the function should be different from the one performing a similar key function for the sponsoring undertaking (unless agreed otherwise with the competent authorities). IORPs will be allowed to outsource the management of the IORP, in whole or in part, to other entities operating on behalf of the IORP. The IORP will need to ensure the proper functioning of the outsourced activities in both how the selection process and the on-going monitoring is carried out. Outsourcing of critical or important organisational functions or activities should not be carried out in a way that would lead to a material impairment of the quality of the system of governance, unduly increase the operational risk, impair the ability to monitor compliance, or undermine continuous and satisfactory service to members and beneficiaries. In cases where members and beneficiaries fully bear investment risk, IORPs will need to appoint a single depositary for the safe-keeping of assets and oversight functions. In cases where members do not bear investment risks, IORPs will not need to appoint depositories unless required to do so by local Member States. A depositary is liable to the IORP or to the members or beneficiaries for any loss suffered by them as a result of its failure to perform its obligation. The directive contains various rules on the activities of depositories including record-keeping. If a depositary is not appointed for oversight functions, IORPs shall implement procedures which ensure that oversight tasks are properly performed by the IORP (eg ensuring transactions are carried out in accordance with instructions and within usual time limits; ensuring income is applied in accordance with national laws and the IORPs rules). 4 June 2014

3. Information for members, prospective members and beneficiaries The IORP Directive sets out information which must be provided to members, prospective members and beneficiaries. This includes an annual Pension Benefit Statement. All such information shall be correct, understandable, not misleading, and presented in a way that is easy to read. In particular the information must be clear, succinct and comprehensible; avoid the use of jargon; and avoid technical terms when everyday language can be used instead. Pension Benefit Statement IORPs will need to provide an annual pension benefit statement to members. The statement must not exceed two pages of A4-sized paper, must not refer to other documents, and also be made available by electronic means The pension benefit statement will need to include IORP and member specific information, and include the following Information on any guarantees provided to members The current level of financing to protect accrued individual entitlements, and whether benefits can be reduced Total contributions paid by the employer and member over the last 12 months Details of any costs deducted from contributions (split by administration, investment, custody and other costs) Information on past performance of the pension scheme, any individual investment options, and wording on how this may not be a reliable guide to future performance Details on how to obtain further information, including transferring pension rights to other pension schemes and other individual calculations (eg level of benefits upon leaving employment) For schemes providing a target level of benefits (eg defined benefit schemes), the following information is required Accrued benefit entitlements Target benefits at retirement age; and also at two years before and two years after retirement age For schemes that do not provide a target level of benefits (eg defined contribution schemes), the following information is required: Total capital accumulated by the member (including the amount expressed as a monthly annuity) Expected capital at retirement, and also at two years before and two years after retirement age. The amounts need to be expressed as a capital lump sum, and also as a benefit per month Details of investment options (including a short description of up to five investment options); and how these may change with age (or any other rule) A graph, with an explanation, showing the risk and return profile of each investment option, and a statement to say how this could change over time Pension schemes will need to use best estimate assumptions when calculating the above amounts. These include best estimates for future investment returns, inflation, wages and annuity rates; but should not allow for any increases in contribution rates. Other information requirements Prospective scheme members should receive information on scheme features and investment options prior to joining Members within at least two years of retirement, or upon request, should receive information on retirement options (including advantages and disadvantages of each option), and, in cases where benefits are not provided as a life long annuity information on benefit payment options Pensioner members should receive information on benefits which are due and corresponding payment options, including information on any investment risks being borne by the member All scheme members (and their representatives) must be able to receive, upon request, annual accounts and annual reports; statements of investment principles; information on actuarial assumptions used for the pension benefit statement; detailed information on the target level of retirement benefits (if applicable) and the level of benefits upon leaving employment 5 June 2014

4. Cross-border IORPs In the event of cross-border activity, IORPs will still be required to be fully funded at all times. Under-funded cross-border schemes would be subject to intervention from the competent authorities of the home Member State The IORP Directive contains new rules and wording linked to the setting up and development of crossborder pension arrangement IORPs can carry out cross-border activity by accepting sponsorship by undertakings located within territories of any Member State. Cross-activity must be authorised by competent authorities in the home Member State. Any decision by authorities to ban cross-border activity must be supported by precise reasons The definition of sponsoring undertaking has been amended to include entities that provide a pension scheme. The reference to acting as an employer that pays contributions to an IORP is removed The definition of home Member State has been clarified, and is now the Member State where the IORP is authorised or registered and in which its main administration is located (ie where strategic decisions of the IORP s decision making body are made) The definition of host Member State is broadly unchanged and means the Member State whose Social and Labour Law is applicable to the relationship between the sponsoring undertaking and members or beneficiaries There are new definitions of transferring institution and receiving institution in order to accommodate the cross-border transfer of pension scheme Home Member States must inform Host Member States of any application to carry-out cross-border activity in countries. This information must be provided within 3 months and, if not, must give precise reasons. Any refusal or failure to act shall be subject to a right to apply to the courts in the home Member State IORPs carrying out cross-border activity shall not be subject to any information requirements imposed by the authorities of the host Member State Host member states shall not set additional investment rules for the part of the assets that correspond to cross-border activity There are new rules for the cross-border transfer of pension schemes: Member States shall allow IORPs authorised or registered in their territories to transfer all or part of their pension schemes to IORPs in other Member States Cross-border transfers of assets and liabilities must be subject to prior authorisation by a competent authority of the home Member State of the receiving institution. That decision shall be supported by precise reasons Any refusal or failure to act by the competent authority shall be subject to a right to apply in the courts of the receiving institution A general outline of any transfer shall made available to members and beneficiaries of the pension scheme concerned or, where applicable, to their representatives Unless national and social labour law provides otherwise, the transfer and its conditions must be approved by the members and beneficiaries concerned or, where applicable, their representatives. Information on the conditions of the transfer shall be made available at least four months before the submission of the application to the authorities of the home Member State 6 June 2014

5. Prudential regulation and supervision The key changes are The Directive defines the areas that are understood to belong to prudential regulation (eg funding of technical provisions and solvency margins; investment rules and investment management; conditions of operations; conditions governing activities; and information to be provided to competent authorities). This takes away the legal uncertainty for IORPs caused by differences in national prudential regulations between Member States Member States must ensure that supervisory authorities have the power to take any measure necessary to ensure that IORPs comply with the Directive. Any decision to prohibit or restrict the activities of an IORP shall also be notified to EIOPA Supervisory authorities must have the power to develop tools to assess the ability of IORPs to cope with possible events or future changes in economic conditions. Supervisory authorities shall have the power to require IORPs to carry out similar tests Member states must introduce a supervisory review process which aims to identify IORPs with financial, organisational or other features susceptible to a higher risk profile. Supervisory authorities can review the strategies, processes and reporting procedures of an IORP, and assess how they can cope with adverse changes in economic conditions. Supervisory authorities will have the powers to require IORPs to remedy any weaknesses or deficiencies identified Supervisory authorities will need to conduct their tasks in a transparent and accountable manner There are new provisions and conditions for the exchange of information between authorities 7 June 2014

Contact For more information, please contact the following members of Aon Hewitt s European-wide IORP Directive team: European-wide specialists European policy Colin Haines +44 2070869280 colin.haines@aonhewitt.com Cross-border pensions Paul Bonser +44 2070869030 paul.bonser@aonhewitt.com Thierry Verkest +32 27300903 thierry.verkest@aonhewitt.com Sponsor support Aidan O'Mahony +44 2070869230 aidan.omahony@aonhewitt.com Investments Zuhiar Mohammed +44 2070869205 zuhair.mohammed@aonhewitt.com Tim Currell +44 1132915028 tim.currell@aonhewitt.com Defined Contribution Anne Swift +44 2070869322 anne.swift.2@aonhewitt.com Member communications Anne Oliver +44 1372733230 anne.oliver@aonhewitt.com Country Leads Austria Elisabeth Holecek +43 57800194 elisabeth.holecek@aonhewitt.com Belgium / Luxembourg Thierry Verkest +32 27300903 thierry.verkest@aonhewitt.com Cyprus Philippos Mannaris +357 22458011 phiippos.mannaris@aonhewitt.com Denmark / Iceland / Baltics Lisa Buckley +45 32697249 lisa.buckley1@aonhewitt.com Finland Henrik Lonnqvist +358 201266329 henrik.lonnqvist@aon.fi France Alain Boyadjian +33 147831325 alain.boyadjian@aonhewitt.com Germany Georg Thurnes +49 89889870 georg.thurnes@aonhewitt.com Greece / Southern & Eastern Europe George Kendouris +302 107472760 george.kendouris@aonhewitt.com Ireland Philip Shier +353 14183130 philip.shier@aonhewitt.com Italy Claudio Pinna +39 0677591862 claudio.pinna@aonhewitt.com Netherlands Frank Driessen +31 402654369 frank.driessen@aonhewitt.com Jacintha den Haag +31 104488106 jacintha.den.haag@aonhewitt.com Norway Beate Fahre +47 67112224 beate.fahre@aon.no Portugal Rui Silva +351 210001010 rui.silva@aon.pt Spain Angeles Almena +34 913405475 angeles.almena@aonhewitt.com Sweden Jonas Gyllenkrook +46 705 81 51 10 jonas.gyllenkrook@aon.se UK Kevin Wesbroom +44 2070869350 kevin.wesbroom@aonhewitt.com Martin Lowes +44 1727888215 martin.lowes@aonhewitt.com 8 June 2014

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