Commentators from all corners of the European pensions industry are in unanimous agreement on two important aspects of the draft directive on Institutions for Occupational Retirement Provision (IORP II), which was published by the European Commission in March to harmonise pensions governance and transparency requirements across member states.

Firstly they express relief that the original Pillar I requirements for additional funding and solvency have been removed, and secondly they praise the overall objective of achieving high standards of governance (Pillar II) and communications (Pillar III). But from then onwards compliments are in markedly short supply as the devil is invariably stressed to be in the detail.

Towers Watson chief pensions actuary in Germany, Alf Ghodes, says: ”The fundamental intentions of the European Commission and EIOPA (The European Insurance and Occupational Pensions Authority) make eminent sense but the execution appears to be hair-raising, particularly with regard to the Pillar III proposals.”

As the new directive only impacts on funded pension schemes, it has little relevance to the many countries with unfunded or state pensions systems. But it will potentially have a very significant effect on the UK, Ireland and the Netherlands. Contrary to popular belief, the implications for Germany are also substantial because, although best known for unfunded schemes, 30 per cent of its pensions liabilities fall under IORP II.

Full funding

The starting point for spokespeople from such countries is normally to express dismay at the unexpected last minute decision not to drop the requirement for cross-border pension schemes to be fully-funded at all times. A heavily leaked draft and a number of conversations and statements from officials had indicated that the requirement would disappear.

The move seems to go against the European Commission’s thrust to encourage cross-border schemes, and many countries have provided feedback that the need to be fully funded is a barrier.

When asked to explain the move, a European Commission spokesperson says: “The revision of IORP is not about funding, so it makes little sense to deal with just one aspect of funding. If one day we deal with funding, then that question can be dealt with then. And we don’t think it makes sense to encourage pension funds to weaken existing funding requirements.”

The other most commonly flagged cause for concern is the Pillar III requirement for EU-wide standard pensions benefit statements to be sent to all members. These involve a highly prescriptive content and format that requires a huge amount of information – it takes six pages of A4 to describe – to be crammed into two sides of A4.

Furthermore, this simplistic harmonised approach seems to take no account of the diversity of pensions schemes across the EU’s 28 member states, and most commentators feel it should be left up to national regulators to determine how good communications work.

Irish Association of Pension Funds (IAPF) CEO Jerry Moriarty says: “In Ireland we have to give people annual benefit statements and statements of reasonable projections but the directive seems to assume none of this stuff really happens. People have built IT systems around producing these documents and it will be expensive to change.”

PensionsEurope CEO Matti Leppälä says: “It will be very difficult as the requirement goes against the efforts of a lot of our members to give really understandable information. For example, the Dutch have tried to move away from this formalised approach and use a layered approach, and this would be a big setback for them. Also the Germans’ disclosure rules are very different from this consumer protection approach.”

Governance

Opinions are more muted about the Pillar II proposals because here, conversely, the devil is primarily in the lack of detail, and the situation is only likely to become clearer via delegated acts produced in 2015/16.

LCP partner Jonathan Camfield says: “At the moment it simply says that a risk evaluation for pensions will be required and I suspect that further information due on this could be connected with the ongoing research into the holistic balance sheet.

“I think that the higher governance requirements, including the need to have an internal auditor, will be a challenge for Irish and UK pension schemes but will not be so significant for the Dutch as they have fewer but larger schemes, so the cost of additional governance will not be such a problem.”

Hopefully the delegated acts will also in due course shed light on how requirements for smaller schemes will be proportionately less than those for larger ones. Experts point out that, although the European Commission indicates this will be the case, it is certainly hard to find evidence in the detail.

“It seems to treat all pension schemes as vast financial institutions”, Moriarty says. “In Ireland we have a lot of small schemes and, although countries can choose to make schemes with under 100 members exempt, even a scheme with 200 members can have very onerous costs.”

Trustee qualifications

One element of the Pillar II proposals containing less ambiguity, however, concerns the requirement for pension scheme trustees to have professional qualifications. This could be a particular problem for the UK and Ireland, which use a lot of lay trustees.

Punter Southall head of research Jane Beverley says: “There is always a possibility that the UK pensions regulator could argue that the toolkit that trustees are required to complete, or undertake an equivalent learning programme to, constitutes a professional qualification. But I would have thought that would be pushing the boundaries of what one could argue as it’s basically just a free online learning course.”

Impact

At the end of the day it is highly questionable whether the benefits of the draft IORP II Directive could outweigh the costs involved, particularly as there is a distinct lack of clarity as to what the costs are likely to be. An impact assessment accompanying the draft directive cited one-off costs to schemes/employers of €22 per member, together with annual costs of up to €0.8 per defined benefit (DB) scheme member and up to €3 per defined contribution (DC) scheme member. But PensionsEurope is adamant that this is not reliable.

Leppälä says: “The impact assessment is skewed towards German and Dutch pensions and lacking input from many other countries. There are big differences in the sizes of schemes and therefore in costs between different countries. This impact assessment has actually failed to meet with European Commission approval, so the numbers are basically unofficial.

“Figures will be much higher for some countries and could even be lower for some. The main concern is that costs will impact on benefit payments.”

Furthermore, some experts stress that, although minor amendments are likely to be made by the European Parliament and Council of Ministers, the chances of any really significant changes are limited.

Standard Life head of Solvency II regulatory development Bruce Porteous says: “The European Commission and EIOPA are very strongly supportive of these proposals, so smaller pension schemes will come under much more pressure and the sponsors may start walking away even quicker than now. We could see buyouts and risk and administrative responsibilities being transferred to insurance companies, with the switch from DB to DC schemes being accelerated and some smaller DC schemes also deciding to outsource pension arrangements.”

Change could, however, take a little longer than anticipated. Many commentators question whether the directive will be implemented by the intended date of 1 January 2017, pointing out that the European elections this May could slow things down. The European Parliament is not expected to start scrutinising the matter until well into the autumn – although the Council of Ministers could start earlier – and, if history can be relied on, it is likely to take nearly a year to get pensions acts through parliament in both England and Ireland.

Edmund Tirbutt is a freelance journalist

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