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What does the new IORP II directive mean for you?

29th April, 2019

 

Ireland has been a little late to join the IORP II party. While most of our EU counterparts have by now implemented the new pensions directive, we’re not quite there yet – but it’s on the way.

The Department of Employment Affairs and Social Protection (DEASP) has signalled that the new EU directive on the activities and supervision of institutions for occupational retirement provision (IORP II) is soon to be transposed into Irish law. It’s a mouthful alright… but what does it mean for you?

IORPs are funded occupational Defined Benefit and Defined Contribution pension schemes. IORP II is an updated version of the existing IORP directive (implemented back in 2003) that is designed – broadly – to improve the management of pension schemes by implementing stricter rules around governance and communication.

 

Benefits of IORP II

For members of pension schemes, IORP II is designed to deliver benefits including:

  • Provide better protection through enhanced governance and risk management
  • Provide clear, relevant and more consistent communication about your pension scheme
  • Remove barriers to cross-border schemes
  • Ensure that trustees have the necessary powers and credentials to supervise schemes

The new directive is wide-ranging and contains no less than 67 Articles covering areas such as trustee qualifications (trustees must pass a “fit and proper” test), risk management, auditing and reporting, cross-border activities, solvency, supervision and investment.

We will provide a more detailed analysis once the Irish legislation has been implemented.

Small pension schemes

For members of small pension schemes (i.e. less than 100 members) and particularly one-member, self-administered schemes (including Davy Executive Pension Portfolio (EPP) holders), there is one Article within IORP II that requires special scrutiny.

Article 19 specifically relates to investments and contains a number of provisions including the following:

  • A scheme’s assets must be predominantly invested in regulated markets
  • Direct property investments will be restricted
  • Borrowing can only be used for liquidity purposes and only on a temporary basis (this will affect the scheme’s ability to borrow for direct property)
  • Environmental, Social and Governance (ESG) issues must be considered when making investments
  • Trustees have a duty of care to manage the scheme’s assets prudently

For Davy EPP members, the first three points above are worthy of special attention. Up to now, single-member pension schemes were exempt from many of these investment requirements. However, the DEASP has confirmed that the new legislation will not include any derogation for small pension schemes.

As mentioned previously the DEASP has indicated that the legislation for transposing the new directive into Irish law is at an advanced stage and is likely to be published soon. The new legislation will in turn update the Pensions Act 1990.

Existing investments unaffected

Crucially, the Department has also confirmed that IORP II will be prospective, not retrospective, so existing investments and borrowing arrangements – where applicable – can continue as they are. The investment rules and requirements laid down will only apply to pension schemes established after the directive has been transposed into law.

Of course, it is not only pension scheme members who are waiting to see how this all pans out. For affected parties, the new legislation unquestionably brings additional responsibilities and obligations, and pension providers are well advised to take the necessary steps to ensure they comply with the directive – or face possible sanctions.

Last October, the Pensions Authority published information designed to help trustees come to terms with their new responsibilities arising from the IORP II directive. The same body has said it will issue codes of practice to help trustees and pension providers to implement and comply with the new rules.

More information on the way

Ireland has indeed left it late to act on IORP II (the deadline for implementation was actually in mid-January) but it seems the government is now ready to act.

If you would like to know more about the new directive, please contact your Davy adviser for more information.

 

 

 

 

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