European Pensions Directive agreed
After a long passage that started in earnest in 2014, the IORP II Directive (see Pensions Bulletin 2016/04) has been agreed between the EU institutions.
The new Directive is intended to improve the way pension schemes are governed, make it easier for them to conduct cross-border business and provide clear information to members and beneficiaries. It replaces the existing 2003 IORP Directive. Importantly, it does not include any harmonised solvency rules for DB schemes.
There are four main themes to the new Directive as follows:
- Cross-border matters – the possibility of cross-border IORPs being underfunded is acknowledged, in which case the regulator must promptly intervene and require the scheme to develop and implement measures without delay to adequately protect members and beneficiaries
- Governance – there is a new requirement for schemes to have a system of governance. This encompasses internal controls, written policies and business continuity planning. The concept of “key functions” of pension scheme governance is also introduced for risk management, internal audit and actuarial (for DB schemes). A new documentation requirement – the “own risk assessment” – is also introduced under which schemes must 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
- Provision of better and more comprehensible information to members through the annual Pension Benefit Statement (PBS) – this document will set out information on the guarantees under the 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 scheme. The PBS is designed to allow 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 investment – pension schemes will have to consider the risk of environmental, social and governance risks in their investment decisions and document this in their three-yearly statement of investment policy principles
The Directive has not been adopted as EU law as this does not occur until it is published in the Official Journal of the EU. This is not expected to happen until the autumn, following translation into all the official languages of the EU. The Directive is required to be implemented by Member States 24 months after this date.
Comment
So, although late 2018 is the likely UK implementation date, this assumes that the UK is required to implement it at all following the Referendum result. This is now uncertain (see Pensions Bulletin 2016/26), but it may be best to plan on the basis that the Directive will be implemented.
Pensions Regulator sets out its stall on possible changes to the DB regulatory regime
In what may prove to be a significant development, the Pensions Regulator has written to the Work & Pensions Committee making some suggestions as to how it may wish the DB regulatory regime to change in the light of the BHS inquiry and taking into account broader concerns in the DB landscape. Arranging its thoughts under four themes it makes the following suggestions:
- Information Gathering – in its view, existing mechanisms are on occasion inflexible and pose some challenges to operate and enforce in practice. So the Regulator is looking to being given the power to operate a more flexible information gathering regime, along with a general duty on parties to co-operate with the Regulator. This could include compelling parties to submit to an interview
- Clearance and anti-avoidance – the Regulator sees a case for it being required to be involved ahead of certain corporate transactions, for example where there is significant underfunding and/or the transaction puts the security of the scheme at risk. It also thinks that it is worth exploring whether the duty and requirements for sponsoring employers to co-operate with and provide information to trustees should be strengthened so that the trustees’ role as the first line of defence for scheme members is enhanced
- Scheme funding and triennial valuations – the Regulator suggests that it could be given a more supervisory-type role, such as in the approval of and setting limits to recovery plans for high risk schemes and ensuring that the scheme is being treated fairly by the employer. Higher risk schemes could also be subject to more regular monitoring and supplying of information, whilst the burden for well-run / funded schemes could be reduced. Given developments in tools and technology, the 15 month submission deadline for actuarial valuations could be shortened for all schemes
- Scheme Governance – the chair’s statement regarding governance of DC schemes could be extended to DB and public service pension schemes as a way to encourage good governance across all pension schemes. The Regulator also states that it has been in discussion with the DWP and the PPF on the possibility of encouraging DB schemes to consolidate as it believes that this may yield significant benefits for a number of stakeholders
Comment
There are some interesting thoughts in this letter – and a departure from the initial evidence given to the BHS inquiry by the Regulator. There is now acknowledgement that the DB regulatory regime would benefit from some adjustments, with a particular focus on the high risk schemes. There are cost implications to the Regulator’s proposals, but perhaps if they had been in place it would have been alert at an earlier stage to the deteriorating finances of the BHS schemes and may have made the sale of BHS to Retail Acquisitions Ltd that much more difficult.
Pensions Regulator issues first Chair’s governance statement fine
The requirement for the chair of trustees of DC schemes to provide an annual governance statement within seven months of the end of the scheme year, or face a mandatory fine, has been cast into sharp relief by the Pensions Regulator publicising its first case of such a transgression along with a regulatory intervention report.
The trustee of Abbey Manor Group Pension Scheme received the minimum mandatory fine of £500 after it notified the Pensions Regulator of the breach which it had also rectified. A fine of up to £2,000 could have been levied, but it seems that it was not appropriate in this case and in any event the Pensions Regulator has yet to publish the results of its consultation on compliance and enforcement policy for occupational pension schemes offering DC benefits which included mention of fines in this area (see Pensions Bulletin 2016/12).
Comment
Mandatory fines are a rare thing in the pensions world. It is unlikely that this will be the last in relation to the annual governance statement. The requirement has only been in force since 6 April 2015 so there may be a number of DC occupational schemes that have yet to publish their scheme annual report containing this information.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
