EU Deal for Better Rules on Pension Funds
While the EU institutions continue to address the outcome of the UK referendum on EU membership and prepare to manage its repercussions, the ordinary work on the ground continues, notably in relation to pending legislation under review.
Under the current Dutch Presidency of the Council of the EU, the European Parliament, the Council and the Commission have agreed on the details for the revision of the 2013 Directive on occupational pension funds (known as IORP ). The revised Directive, does not include any harmonised solvency rules for occupational pension funds, as is the case for insurance-based pensions.
The agreed rules cater for pension funds of all sizes and structures across the EU: IORPs with less than 100 members will have to meet basic governance requirements and ensure the safekeeping of assets, while very small IORPs with less than 15 members will have to comply with a further simplified set of rules.
Following today’s approval by the Council, the text will have to be formally approved by the European Parliament. After that, it will be published in the EU’s Official Journal (available in all EU languages) and will then enter into force. Member States will have 24 months to adapt their national legislation accordingly.
The new Directive will improve the way pension funds are governed, making it easier for pension funds to conduct cross-border business and provide clear information to pension scheme members and beneficiaries. These rules will make it easier for pension funds to invest in long-term assets, strengthening the role they can play in the Capital Markets Union.
Occupational pension funds in the EU benefit from the principles of free movement of capital and free provision of services. This allows, inter alia, for:
- pension funds to manage occupational pension schemes for companies established in another EU country;
- multinational companies with operations in different countries to have a single pension fund for all their subsidiaries throughout Europe;
- pension fund members and beneficiaries to be properly protected by rigorous prudential standards.
Under the new Directive, workplace pension funds and their members and beneficiaries will benefit from the following:
- Enhanced cross-border rules : the Directive will introduce a new procedure for the cross-border transfer of pension scheme portfolios with a role given to both countries’ supervisory authorities based on a list of criteria. Non-binding mediation by the European Insurance and Pension Authority ( EIOPA ) is possible if national authorities disagree.
- The principal rule that cross-border IORPs should be fully funded at all times will continue to apply. However, the new Directive seems to soften the conditions for when cross-border IORPs become underfunded.
- Improved governance : the key functions of pension funds such as the risk-management function, the internal audit function and the actuarial function (for Defined Benefit schemes) must be carried out by experienced persons who fulfill their duties in an objective, fair and independent way. IORPs must, furthermore, identify the risks they are or could be exposed to in the short and in the long term which may have an impact on their ability to meet their obligations and they must draw up an own risk assessment accordingly.
- Provision of better and more accessible information to pension scheme members through the annual Pension Benefit Statement (PBS). This document will set out information on the guarantees under the pension scheme, on the pension benefit projections, information on the accrued entitlements, the contributions paid and the costs deducted, as well as information on the funding level of the pension scheme. The PBS is designed to allow pension scheme members to take more informed decisions about their pensions while leaving Member States the flexibility to tailor its exact content and design to their market.
- Responsible investments : as a result of the agreement, pension funds will have to consider environmental, social and governance risks in their investment decisions and document this in their three-yearly statement of investment policy principles.
Interested organisations including multinationals, financial service providers, pension fund and their advisors should already start to examine the details of the new requirements and be vigilant throughout the national implementation process that the EU principles and rules are fully reflected nationally.
For more information contact Leonardo Sforza , Managing Director, Brussels, MSLGROUP.
Leonardo has 25 years of Brussels-based experience in addressing European Union policy issues and corporate strategies. Until March 2012 Leonardo was the Head of Research and EU Affairs at Aon Hewitt were he has been advising global multinationals and the European Commission on financial service institutions, human capital and governance. Before that Leonardo worked for several departments of the European Commission where he led numerous initiatives supporting job creation and business competitiveness in the service industry. Leonardo has been chairing since 2005 the scientific committee of the European Club for HR, and lecturing on European Community Law at Italian, French and North American Universities.