European Pensions looks at the key points from EIOPA’s technical advice on the review of the IORP II Directive

Proportionality

In regard to proportionality, EIOPA has proposed increasing the 100-member threshold for small IORPs, to bring the directive more in line with the Solvency II Directive. Therefore, it recommends increasing the threshold to both 1,000 members and beneficiaries and €25m in assets, including a grandfathering clause for IORPs with less than 100 members that currently make use of the exemption.

“Increasing the threshold would provide member states more leeway to exempt small IORPs from certain requirements, if they consider that to be appropriate in view of the risk profile of their small IORPs, but also from the requirements in the Sustainable Finance Disclosure Regulation (SFDR) and the non-simplified ICT risk management provisions in the Digital Operational Resilience Act (DORA). EIOPA advises to consider a higher threshold, i.e. an asset condition of €50m instead of €25m, for the purpose of the small IORP thresholds in DORA and SFDR during their future reviews,” the authority stated.

On the subject of low-risk profile IORPs, EIOPA advises against introducing them into the IORP II Directive, as it argues that the directive already allows member states to apply a proportionate approach through the small-IORP exemption and principle-based rather than precise requirements.

“Indeed, member states have the possibility to apply the concept of low-risk profile IORPs at national level within the boundaries of the IORP II Directive. To promote risk-based supervision and to enhance supervisory convergence, EIOPA will consider including in its future work programmes the application of proportionality by national competent authorities (NCAs) using the convergence tools at its disposal.”

Furthermore, EIOPA advises that governance and prudential standards are applied in a manner that is proportionate to the risk profile of IORPs – and not to their size. Therefore, the advice recommends that the proportionality formulations in the IORP II Directive should be restricted to the ‘nature, scale and complexity of the activities of the IORP’.

Liquidity risk

On liquidity risk, EIOPA referenced the events in the UK in autumn 2022, which suggests that IORPs with derivative hedging positions are exposed to substantial liquidity risks. Therefore, it intends to issue guidelines or an opinion on the supervision of liquidity risk in relation to IORPs with material liquidity risk.

Conditions of operation and conflicts of interest

EIOPA advises to strengthen the IORPs’ conditions of operation in order to ensure the proper functioning of the internal market, in the absence of harmonised rules on the registration or authorisation of IORPs.

The advice also recommends that NCAs carry out a prudential assessment during the registration or authorisation process and assess the operational viability and sustainability of IORPs as part of the supervisory review process. Most IORPs tend to outsource their activities to service providers. In a context where increasingly members are bearing risk and costs, EIOPA advises to enhance the requirements on the management and prevention of conflicts of interest arising from the relationship between IORPs and service providers to prevent detriment to members and beneficiaries.

Effective use of data

Here EIOPA recommends including an empowerment in the IORP II Directive enabling NCAs to be able collect quantitative data from IORPs on a regular basis. Although the directive, in its current form, empowers NCAs to collect data necessary for their supervision, regular quantitative reporting is not explicitly mentioned.
Consequently, NCAs are not always afforded the power at national level to independently decide on the content and deadlines of such regular quantitative data reporting of IORPs to the NCA. In addition, some NCAs have indicated that the absence of a legal reference in the IORP II Directive complicates providing data to EIOPA needed for EIOPA to fulfil its tasks and duties.

Standardised risk assessment

The IORP II Directive takes a minimum harmonisation approach, resulting in a wide variety of national valuation standards and funding requirements. In the advice, EIOPA reiterates its previous opinion to the EU institutions on a common framework for risk assessment and transparency for IORPs. That opinion recommends that harmonised solvency rules should not be included in the IORP II Directive at this point in time, but that a standardised risk assessment should be introduced based on a market-consistent balance sheet and common stress scenarios.

Cross-border activities and transfers

Those working in the cross-border sector of pensions have long argued that the IORP II Directive is more of a hindrance than a help in facilitating cross-border pensions. To try to improve on this EIOPA recommends a uniform EU definition of the majority of members and beneficiaries or their representatives needed to approve a cross-border transfer, as well as some simplifications of the notification procedures for cross-border activity of defined contributions IORPs.
Beyond the IORP II Directive, the Commission is also advised to explore other possibilities to genuinely develop the internal market for occupational pension provision.

Information to members and beneficiaries and other business conduct requirements

This advice aims to further develop the requirements on information to members and beneficiaries in order to reflect relevant trends, such as digitalisation and the shift to DC, insights from behavioural research and analysis conducted by EIOPA in previous reports since the introduction of the IORP II Directive.

This includes advice regarding the structure and contents of the Pension Benefit Statement, the appropriate presentation of information in a digital context and how to provide additional transparency on costs and charges. EIOPA also recommends to further develop the requirements on projections given the importance of the information on estimated future benefits for retirement planning.

Taking into account business conduct requirements in other EU frameworks applying to investments products, including pension products, as well as requirements in some Member States, and in the context of the shift to DC, EIOPA advises to introduce requirements concerning the appropriate structuring and implementation of the pension scheme by IORPs, as well as to provide that IORPs have a duty of care towards their members and beneficiaries.

Shift from DB to DC

The European pensions landscape is in the process of transitioning from a mix of DB to DC products towards one dominated by DC. The call for advice asks EIOPA to explore the need for and possible ways to adapt the regulatory framework to the shift, noting the particular risks that exist for members and beneficiaries of DC schemes.

EIOPA identifies the main risks that individual members face as they build up their own pension pot, such as: retirement income risk, investment risk, applicable costs and charges, administration and governance risks and the knowledge gap.

In order to address these risks, and based on past work developed by EIOPA around DC pensions, this advice contains recommendations on long-term risk assessments of IORPs with defined contributions schemes, as well as on the reporting of costs and charges, on complaints procedures, on the contribution of members and beneficiaries in the decision-making of their IORP and on the fitness of those who run IORPs with defined contributions schemes.

Sustainability

According to the prudent person rule, IORPs are currently not required to integrate sustainability factors in their investment decisions. The advice recommends introducing provisions on sustainability factors similar to insurers.

The aforementioned advice relates in particular to the reflection of sustainability risks in the investment decisions of IORPs, the potential long-term impact of IORPs’ investment strategy and decisions on sustainability factors, the consideration of the sustainability preferences of members and beneficiaries in the investment decisions of IORPs and the stewardship of IORPs by engaging with investees to support the transition towards more sustainable business activity.

This advice also suggests raising awareness of to what extent Member States can take active steps to reduce the gender pension gap that will have an impact on the social aspect of sustainability.

Diversity and inclusion

In order to improve the diversity of the management board of IORPs, EIOPA recommends in particular a policy of IORPs to promote diversity and inclusion in the management body, a target for the representation of the underrepresented gender in the management body, gender neutrality of remuneration policies and reporting by IORPs on diversity and inclusion.

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