How will the new IORP II directive affect UK ocupational pension schemes, if at all? Jenna Gadhavi explores
The European Commission has revised the EU’s 2003 pensions directive, formally known as the Directive on Institutions for Occupational Retirement Provision (IORP). The new directive, nicknamed IORP II was finalised on 30th June, shortly after the EU referendum vote that resulted in the UK’s decision to leave the European Union.
The aim of the revision was to bring the text more closely in line with the insurance industry’s Solvency II, to update the directive and to encourage the development of cross-border pension schemes. IORP II largely focuses on the governance of pension schemes and on their communications with individual members.
During the process, the European Commission was forced to shelve controversial plans for a ‘holistic balance sheet’ approach to pension scheme funding. This was due to an alliance of five governments – the UK, Netherlands, Germany, Ireland and Belgium – opposing the plans, as did BusinessEurope, the European Trade Union Convention and PensionsEurope.
What does it mean for trustees?
In light of the UK’s EU referendum result, it is uncertain whether the new directive will apply to occupational pension schemes in the UK at all. The extent to which the UK will need to comply with IORP II is unlikely to be known until the terms of Brexit become much clearer, and will depend on both the timing and terms of the exit plan. It would be ironic though if Europe’s largest pension market turned out not to be covered by the IORP II legislation.
What we do know for certain is that once IORP II comes into force, member states will have 24 months to include it in their national legislation, which means it should apply by the tail end of 2018.
Because of this, Catherine Howorth, chief executive of charity ShareAction thinks there is a strong chance that UK schemes could still be affected. She said: “Since Article 50 is unlikely to be triggered this side of 2017, it would appear the UK will still be a member state within the formal timetable for transposition.”
“Since Article 50 is unlikely to be triggered this side of 2017, it would appear the UK will still be a member state within the formal timetable for transposition.”
For now, no immediate action is required by UK schemes. but they should be aware that, depending on exit terms, there is potential for UK legislation in certain areas to change.
Georgina Beechinor, senior associate at law firm Sackers doesn’t foresee any drastic changes. She said: “I don’t think in practice there are going to be major differences in the UK pensions, because a lot of the focus is on governance and of course the government and the Regulator have done so much in recent years in this area.”
Howorth believes that we should be looking to the Department for Work and Pensions (DWP) for guidance: “What is needed for UK pensions schemes, is an early public confirmation from the DWP that it has every intention of transposing IORP II into British law.
“The UK played a major role in the negotiations on the IORP text prior to the referendum. There’s no logical reason not to clarify as early as possible that we will make IORP II our own, giving British pension savers the benefit of the good governance and ESG risk management regime that will soon protect savers on the continent.”
The final, formal vote has been scheduled for 4th October. With all the key parties having reached agreement, this vote should face no serious opposition. Once passed, EU member states will have two years in which to implement IORP II into national law.
Howorth thinks it is important to look at the bigger picture – as she thinks the government’s response to IORP II could provide the UK with the early opportunity to signal the Brexit path we are choosing as a country.
She explained: “Does Brexit lead to an agenda of radical financial services deregulation or are we going our own way outside the EU whilst essentially staying in sync with the financial services norms that prevail across the continent? Around IORP II, the DWP now has an important opportunity to signal which of those two paths the UK prefers. Much is at stake for the UK’s millions of pension savers.”