EU Adopts New Rules for Occupational Pensions

The European Union has agreed on a proposal for a revised directive on occupational pension funds. The new Institutions for Occupational Retirement Provision (IORP) directive is intended to strengthen and replace the existing 2003 directive, which provided a legislative framework for workplace pensions, including minimum standards on funding, the types of investments pensions are allowed to make, and the allowance of cross-border pension plan management.

“Pension funds have a special responsibility in helping people save and plan for their retirement,” said Jonathan Hill, European commissioner for financial stability, financial services, and capital markets union. “This agreement will ensure high standards of governance, improve information for pension savers, and encourage more cross-border pension services.”

Features of the new directive include:

• Enhanced cross-border rules. The directive introduces a new procedure for the cross-border transfer of pension plans with a role given to both countries’ supervisory authorities, which will be based on a list of criteria.

• Improved governance. IORPs must identify the risks they are, or could be, exposed to that could impact their ability to meet their obligations. They must also draw up a risk assessment accordingly.

• Better and more comprehensible information to pension members through the annual Pension Benefit Statement (PBS). The PBS will outline information on the guarantees under the pension plan, benefit projections, information on the accrued entitlements, the contributions paid, and the costs deducted, as well as information on the funding level. The PBS is designed to allow pension plan members to make more informed decisions about their pensions while leaving member countries the flexibility to tailor its exact content and design to their market.

• Pension funds will have to consider the risk of environmental, social, and governance risks in their investment decisions, and document this in their three-yearly statement of investment policy principles.  

• The rule that cross-border IORPs should be fully funded at all times will continue to apply. However, should an IORP become underfunded, the supervisor must promptly intervene and require the pension fund to develop and implement measures “without delay” to protect members and beneficiaries.

Having been approved by the European Council, the text will now have to be formally approved by the European Parliament. After that, it will be published in the official journal and will officially enter into force, according to the European Commission. EU member states will have two years to transpose the text into their national legislation.