On January 13, 2019 the Institutions for Occupational Retirement Provision (or IORP) II will come into effect. Last April, the Dutch Minister of Social Affairs and Employment, Wouter Koolmees, presented the revised IORP directive to the Tweede Kamer, the Dutch House of Representatives, to amend the Dutch Pensions Act. The newly proposed directive includes several points that are still up for debate. However, the general outline of IORP II is clear. What will be the impact of the directive for the board of trustees?
01 Aug 2018
Following from IORP I regulation, the EU wants to further stimulate cross-border activities, promote risk-based supervision and improve the governance and transparency of pension funds with the implementation of IORP II. Once IORP II is implemented (EU wide), pension funds may have to adjust the governance set-up or strengthen the governance set-up to adhere to the additional emphasis on governance and transparency. A pension fund, after the implementation of IORP II, will be required to have a proportionate, effective system of governance in place which provides for “sound and prudent management of their activities”.
IORP II provides pension schemes with the opportunity to determine on a per scheme basis how the three ‘Key Functions’ (risk management, actuary and internal audit) are implemented. The scheme trustees have the freedom to implement these Key Functions within the board of trustees or to outsource one (or more) Key Function(s). However, within the directive outsourcing one or more Key Functions to an external provider must be done with great care, due diligence and within a strict governance framework.
Additional emphasis on strategic decision-making and self-assessment
IORP II also emphasises strategic decision-making and requires a robust structure for risk self-assessments. When outsourcing one of the Key Functions, lines of communication must be clearly defined between the outsourced Key Function and the board of trustees. In addition, the choice to outsource a Key Function to an external party must be supported with a risk self-assessment.
Not defining, or insufficiently defining the three Key Functions and their responsibilities can lead to a double implementation or create a blind spot, in effect causing an inefficient organisation of the complete risk management framework.
The activities related to the Key Functions are currently already implemented within the management structure of most pension funds, but, with the implementation of the IORP II, the ‘Key Functions’ will now have to be explicitly mentioned in a written governance framework of a fund.
In the (Dutch) IORP implementation, a distinction has been made between the holder of a Key Position and all stakeholders involved with the execution of the underlying risk management. However, the law/provision stipulates that the holder of the Key Position bears the final responsibility.
One of the main discussions with implementation of IORP into Dutch law is that the Dutch government is of the opinion that the function of Risk Management and Internal Audit cannot be outsourced. This means that each pension fund will need to appoint this role within the fund trustees to hold one of these two Key Positions. Strictly separated roles and activities, involving different people is of crucial importance in this respect. However, the internal appointment for the Risk Management and Internal Audit position means that larger pension funds will find it easier to fill these key positions in accordance to the directive than smaller funds.
Stricter UPO communication
In addition, IORP II leads to additional information on the Uniform Pension Statement (UPO, or Uniform Pensioenoverzicht, in Dutch). The additional requirements on information have a particularly strong impact on the presentation of the achievable pension under different scenarios, on the breakdown of the costs withheld (for available premium schemes) and on information on the contributions paid by the employer and employee. The current Pensions Act states that a UPO is issued to a participant on a yearly basis and to former participants once in 5 years. The new directive does not make a distinction for UPO to current and to former participants.
Pensioners should also be informed at an earlier stage when approaching a pension reduction. The current notice period is extended from one month to three months.
Only 5 more months until IORP II
In the coming period, it will become clearer how IORP II will be implemented into national legislation and thus what the effect of IORP II will be for pension funds. After summer recess, politicians in The Hague will quickly want to finalise the last rules and legislations of the directive, as January 2019 is just around the corner.