UK Pensions - New cross-border and governance requirements: IORP II
Regulations to bring into force the cross-border and scheme governance provisions of the EU pensions directive (known as IORP II) were issued yesterday and come into force on 13 January 2019. Schemes will need to comply with the new duty to establish an effective system of governance. They will also need to carry out and document an own risk assessment. However, these governance requirements closely align with the Regulator’s existing guidance and Codes of Practice, so significant change should not be required.
Detailed guidance on how to comply with the new requirements will not be issued by the Pensions Regulator until early 2019, so trustees may wish to wait for this before taking any action.
IORP II must be implemented into member states’ domestic legislation by 13 January 2019.
Subject to the on-going UK-EU negotiations, and until the UK leaves the EU, the UK government’s position is that the UK remains a full member of the EU, and all the rights and obligations of EU membership remain in force. Therefore, the government has issued regulations to implement IORP II. IORP II focuses on the governance of pension schemes and on their communications with individual members. Many of the key elements of IORP II are already required under UK law or expected by the Regulator under its Codes of Practice and guidance, enabling IORP II to be transposed with limited legislation
The regulations will require trustees to have an effective system of governance that is proportionate to the size, complexity and risk profile of their scheme. As part of looking at their system of governance, schemes will be required to carry out and document an own risk assessment.
The government has said it does not expect schemes to need to make drastic changes to their systems. It recognises that many schemes already have effective governance systems in place and it envisages that schemes will just need to formally document their existing practices to comply.
The governance elements of IORP II closely align with the expectations outlined in the Regulator’s 21st Century Trusteeship materials and in Codes of Practice 9 (Internal Controls), 13 (DC schemes), 15 (Master Trusts) and 3 (DB schemes).
The Regulator will be undertaking a formal consultation to review and update its Codes of Practice to reflect the requirements of IORP II as soon as practicable. The Codes will give practical guidance to trustees to explain how schemes need to comply with the new duty to establish an effective system of governance, and how to carry out and document an own risk assessment. We expect to see a consultation in early 2019.
IORP II makes some changes to the existing authorisation process for cross-border schemes, including reducing the time within which the Regulator must communicate with regulators in other member states.
IORP II also introduces a new authorisation process for schemes wishing to make bulk transfers to schemes located in another EEA state. This includes ensuring that the cross-border transfer is approved by a majority of members, a majority of the beneficiaries or (where applicable) a majority of their representatives.
In all other respects, the substance of the regulations effectively remains unchanged.
Is any action required?
Schemes will need to comply with the new duty to establish an effective system of governance. They will also need to carry out and document an own risk assessment. However, detailed guidance on how to comply with the new requirements will not be issued by the Regulator until early 2019, so trustees may wish to wait for this before taking any action.
In the meantime, schemes may find it useful to review their current governance systems and document their existing processes.