1. IORP II (DIRECTIVE (EU) 2016/2341) ("IORP II" OR "DIRECTIVE")

IORP II is the name given to a revised EU pensions directive which will affect certain Irish pension schemes falling within the definition of an institution for occupational retirement provisions (IORP). These schemes are, broadly, funded employer sponsored pension schemes established separately from the employer. Most Irish group pension schemes fall within the definition of IORP, however, Member States may exclude schemes with less than 100 members from many of the Directive's provisions and many of its requirements are to be implemented in a manner which is proportionate to the size, nature, scale and complexity of activity of a scheme.

IORP II aims to improve pensions governance, risk management, transparency and information provision and seeks to facilitate EU cross-border IORP activity. The Directive does not seek to increase funding requirements although, notably, it does provide that the Pensions Authority "shall have the necessary powers to require schemes to remedy weaknesses or deficiencies identified in the supervisory review process". Member States are obliged to transpose IORP II into national law by 13 January 2019 on which date it will become effective. Irish legislation is targeted to be published before Christmas. A summary of some of the Directive's key requirements is set out below.

System of Governance

Schemes must have in place an effective system of governance including an adequate and transparent organisational structure with clear allocation and appropriate segregation of responsibilities. This system of governance shall include consideration of environmental, social and governance ("ESG") factors which are expected to be detailed in domestic legislation. A scheme must have an effective system for ensuring transmission of information.

1.2 Requirement for fit and proper management

Persons who run the IORP (e.g. the trustees), who carry out key functions and, where applicable, to whom a key function has been outsourced, must be "fit" and "proper":

  1. the requirement to be fit means that they must, collectively, have the qualifications, knowledge and experience to enable them to ensure sound and prudent management of the IORP and for those who carry out actuarial and audit functions, professional qualifications, knowledge and experience to properly carry out their key functions; and
  2. the requirement to be proper means that the person in question is of good repute and integrity.

1.3 Remuneration Policy

IORPs will be required to maintain a remuneration policy for all persons who effectively run the IORP and carry out key functions and for those whose professional activities have a material impact on the risk profile of the IORP. The policy should be in line with the activities, risk profile, objectives and long term interest, financial stability and performance of the IORP. The policy must be clear, transparent, effective and must be reviewed at least every three years.

1.4 Three Key Functions

Schemes will be required to put in place the following three key functions: (a) risk-management; (b) internal audit (to review internal controls and governance including outsourced activities); and (c) actuarial (where applicable). Schemes may allow one person or organisation to carry out more than one key function, (other than the internal audit function which must be independent). The person or organisation carrying out the key function (e.g. internal audit) must be different from the one carrying out the key function in the sponsoring employer. Those carrying out these functions will be required to report material findings and recommendations to the Pensions Authority (the "Authority") and will also have whistleblowing obligations.

  1. Risk Management Function
    Schemes will be required to adopt strategies, processes and reporting procedures to identify, measure, monitor, manage and report on potential and actual risks. This risk management system must cover areas such as: asset/liability management; investment; liquidity and concentration risk management; and environmental, social and governance risks. In a DC scheme, the risk management system must consider risks from the perspective of members and beneficiaries.
  2. Internal Audit Function
    In a manner proportionate to a scheme's size and internal organisation, the Directive requires schemes to have an internal audit function which shall include an evaluation of the adequacy and effectiveness of the internal control system and other elements of the system of governance including any outsourced activities.
  3. Actuarial Function
    An actuarial function must be put in place where an IORP: provides cover against biometric risks; guarantees investment performance; or provides a given level of benefits (e.g. a defined benefit pension scheme).

1.5 Own-Risk Assessment

Schemes will be obliged to carry out and document an "own-risk assessment" every three years and a risk evaluation every time there is a significant change to its risk profile.

1.6 Information to be given to prospective members, members and beneficiaries

There are new requirements to provide prospective scheme members, current members (including deferred members) and beneficiaries with certain scheme information which must be clear, concise, up-to-date and easily read. Schemes will be required to draw up a pension benefit statement containing key information for each member. This must be made available to members free of charge at least annually by electronic means, through a website or on paper and, on request, on paper in addition to electronic means.

1.7 Investment

IORP II requires a scheme's assets to be invested in the "best long-term interests" of members. The assets may be invested in instruments that have a long term investment horizon and not traded on regulated markets. Member States may take into consideration the potential long-term impact of investment decisions on ESG factors.

1.8 Cross-Border IORPs

Please refer to your usual Arthur Cox contact or one the Pensions team for information on the impact of IORP II on cross-border IORPs.

2. PENSIONS AUTHORITY GUIDANCE NOTE ON IORP II

The Authority has issued guidance on considerations for trustees arising from IORP II. The focus of this guidance is that trustees keep documentary evidence of their compliance with the new requirements. Trustees will be expected to keep records of the following activities:

  1. documented policies and procedures with regard to scheme governance; b. records of the rationale for various decisions;
  2. documented review of board of trustees membership at least once every three years;
  3. detailed minutes of all board meetings;
  4. documented conflicts of interest policy;
  5. documentary evidence of review and updates to all policies and procedures at least every three years;
  6. records of all due diligence undertaken with regard to trustees and key function holders and responses provided by such persons with regard to the fit and proper standards; and
  7. full details of appointees to Key Function Holder roles, including CV and rationale for their appointment and, where such roles are outsourced, the Authority should be advised in advance of any agreement in respect of such outsourcing.

The Authority also advises that trustees should consider the production of a "Board Manual" which documents the role and responsibilities of the trustee board, the policies and procedures the trustee board has in place and a schedule of review dates.

The Authority will publish further guidance to trustees once the legislation giving effect to IORP II is published.

3. PENSIONS CONSULTATIONS

3.1 Automatic Enrolment Retirement Savings

The Government is in the process of developing an Automatic Enrolment ("AE") supplementary retirement savings system. The Government launched "A Strawman Public Consultation Process for Automatic Enrolment Retirement Savings System for Ireland".

The current proposed key features of AE are:

  1. employees will be automatically included in the new system once aged between 23-60, earn over €20,000 and are not already contributing to supplementary pensions;
  2. there will be an opt-in option for those who do not meet the eligibility criteria (e.g. those under the age of 23 or self-employed persons);
  3. members could opt-out of the AE at the end of a minimum membership period (suggested to be 7 or 8 months after first joining);
  4. employees contribute 1% of their gross earnings initially, increasing on a phased basis by 1% annually (up to 6% by year six of AE);
  5. participation in AE would be incentivised by the State for employees – the illustrative approach in the Strawman suggests a contribution equivalent to €1 for every €3 saved by the member;
  6. employers will match contributions up to an eventual maximum of 6% of member's earning (to a ceiling of €75,000, increasing at 1% a year to a maximum of 6% from year 6);
  7. employer contributions would continue to be deductible for corporation tax purposes.

3.2 Regulation of Defined Contribution Master Trusts, Pensions Authority Consultation Document

The Authority issued a consultation paper focussing on the regulation of defined contribution master trusts. In its paper the Authority considers what additional obligations should be placed on master trusts to reflect the particular risks which apply (in comparison to single employer schemes).

Key areas for consideration include:

  • trustee formation and business plans;
  • capitalisation and wind up;
  • conflicts of interest and communications; and
  • reporting duties to the Authority.

3.3 Consultation on Supplementary Pensions Reform: Roadmap for Pensions Reform 2018-2023

The Department of Finance issued public consultation documents on the reform of supplementary pensions in Ireland. This focused on the rationalisation of pension products available in the State and the effectiveness of the current pensions tax regime. It is expected that the Department will publish information on the outcome of the consultation by the end of the year.

4. PUBLIC SERVICE SUPERANNUATION (AGE OF RETIREMENT) BILL 2018 (THE "BILL")

The Bill was published in July 2018 as part of the Government's plans for "Public Service Pensions Reform" identified in its Roadmap for Pensions Reform. It aims to:

  1. increase the age of retirement to age 70 for certain public servants on a voluntary basis; and
  2. ensure that additional service by a public servant, up to the age of 70 or to a higher age prescribed by Ministerial Order (see further below), can benefit from pension accrual, subject to a maximum of 40 years' service.

This Bill also provides for the new compulsory retirement age to be increased further by Ministerial Order (but no higher than age 75), subject to certain criteria, which include:

  1. the likely effect of the order on recruitment, promotion and retention of staff in the public service;
  2. the pensionable age applicable at the time of making the order;
  3. any evidence of an increase in normal life expectancy in Ireland; and
  4. the likely cost (if any) to the Exchequer that would result from the order.

5. EIOPA AND ECB REPORTING REQUIREMENTS

New reporting requirements for pension schemes have been introduced by the European Insurance and Occupational Pensions Authority ("EIOPA") and the European Central Bank ("ECB"), by regulation published in the Official Journal of the European Union on 26 January 2018. This regulation came into force on 15 February 2018 and the first annual reporting deadline is Q4 of 2019. This regulation requires pension funds to report, on a quarterly and annual basis, detailed data on assets, liabilities and members.

There will be reduced reporting requirements for pension funds based on their assets or size of membership. The reporting requirements will apply as of the third quarter of 2019 for quarterly reporting and as of 2019 for annual reporting, taking into account the transitional period and proportionate approach for smaller IORPS. The Central Bank of Ireland ("CBI") is responsible for the collection, compilation and transmission of statistical data.

Further information is available from the Pensions Authority website and the CBI website and trustees should discuss these reporting requirements with scheme administrators.

6. CENTRAL BANK STATEMENT ON PENSION SCHEME ARRANGEMENT CLEARING AND TRADING OBLIGATION

Trustees of pension funds were exempted from the European Market Infrastructure Regulation ("EMIR") (most recently until 16 August 2018) and from the requirement for financial counterparties to report any new OTCs that they enter into with the trade repository within one business day of entering the contract.

The European Securities Markets Supervisory Authority ("ESMA") recently issued a statement that while there is no possibility under EMIR for a further extension of this temporary exemption, a further extension is being considered as part of the current REFIT (Regulatory Fitness and Performance Programme) negotiations. ESMA has indicated that it expects national competent authorities (in Ireland, the CBI) not to prioritise their supervisory actions towards entities that are expected to be exempted again in a relatively short period of time and to generally apply their risk-based supervisory powers in their day-to-day enforcement of applicable legislation in a proportionate manner. The CBI has indicated that it welcomes this statement by ESMA.

This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.