IORP II is the key European regulation for workplace pension funds, replacing the 2003 IORP Directive. IORP II entered into force in January 2019. Its scope is broad and includes Environmental, Social and corporate Governance (ESG) factors.
About IORP II
IORP II updates the 2003 IORP Directive. IORP II sets common standards at EU level for workplace private prefunded pension schemes in EU Member States. IORP II has four key objectives:
- Ensures sound workplace pensions and better protection for members and beneficiaries
- Ensures better information for members and beneficiaries (primarily through the Pension Benefit Statement)
- Removes certain obstacles to cross-border provision of services
- Encourages long-term investment in growth-, environment- and employment-enhancing activities
It should be noted that IORP II does not cover solvency capital requirements.
By 13 January 2023, the Commission will review IORP II.
IORP II focuses on increasing member protection by improving governance and transparency.
The three key requirements are:
- Conducting an own risk assessment on a regular basis and proportionate to the organisation and to the complexity of its activities
- Introduce a comprehensive communications framework with members of the pension plan mirroring the full life cycle of the employee’s pension relationship and to include an annual Pension Benefit Statement (PBS)
- Relaxing current investment rules. Member States are no longer allowed to restrict IORPs from investing in long-term instruments. In addition, Member States will not be allowed to set additional investment rules for IORPs with cross-border activities
Importantly, the Directive encourages IORPs to take into account Environmental, Social and Corporate Governance (ESG) factors by requiring:
- Members States to allow IORPs to take into account ESG factors and to invest for the long-term while meeting the Prudent Person Rule
- IORPs to take ESG factors into account as part of their governance and, in a proportionate manner, as part of their risk management
- IORPs to explicitly disclose how an investment policy takes ESG factors into account, in the Statement of Investment Principles (a document made public and reviewed at least every 3 years) and the information provided to prospective members.
Industry implications of IORP II
IORP II sets common standards to improve the protection of pension fund members by new governance requirements, new rules on IORPs own risk assessments, new requirements for a depositary and enhanced powers for supervisors.
The Directive is a minimum-harmonisation text which leaves room for national interpretation. This is primarily due to the fact that there is no level 2 text, although EIOPA EIOPA keeps issuing guidelines. On 13 November 2018, EIOPA published its guidance on Pension Benefit Statement (PBS) and in March 2019 on information to be provided to prospective and current members.
Depending on the level of implementation at national level, IORP II has implied some changes in the content and format of information for members, and consequently in IT systems that support production of existing documents. In May 2020, almost all countries had transposed the Directive.
As a result, IORP II has the potential to accelerate the consolidation of the occupational pension sector.
BNP Paribas Securities Services’ view
Data are perhaps the biggest challenge when implementing IORP II and in particular:
- the risk evaluation for pensions
- the annual PBS pension which must include pension benefit protections under a best estimate and unfavorable scenario
Regulatory initiatives adopted in the context of the Sustainable Finance Action Plan of the European Commission reinforce the harmonisation of the definition of sustainability risks, sustainable investment and disclosure obligation and, in that context, will create needs for additional data to be provided.
From 10 March 2021, the sustainability-related disclosure regulation will start to apply to IORPs. They will have to disclose on their website and in pre-contractual document their policy on consideration of sustainability risks, and if they are in the scope of application of NFRD, on consideration of adverse impacts on environmental and social matters and subsequently associated indicators.
Additional disclosures are also required for pension schemes with ESG characteristics or sustainable investments as objective in pre-contractual documents and on their attainment in periodic report.
In 2019 for the first time, the EIOPA stress test covered the analysis of ESG factors and has concluded that the preparedness of IORPs to integrate sustainability factors is widely dispersed and seems correlated to how advanced national frameworks were.
To follow-up on the findings of these stress tests, EIOPA will particularly make use of the improved European pensions statistics.
December 2016 – Directive published in the Official Journal of the EU
November 2018 – EIOPA published guidelines and principles on the PBS
January 2019 – Entry into effect of the IORP II Directive
March 2019 – EIOPA guidelines on information to be provided to prospective and current members
March 2021- Entry into application of the sustainability-related disclosure regulation
2022 – Expected stress test
January 2023 – Review of IORP II