2014 - 2019
EUROPEAN PARLIAMENT
Committee on Economic and Monetary Affairs
1.4.2015
WORKING DOCUMENT
on the proposal for a Directive of the European Parliament and of the Council
on the activities and supervision of institutions for occupational retirement
provision (recast)
Committee on Economic and Monetary Affairs
Rapporteur: Brian Hayes
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United in diversity
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I - Background
Introduction
The pension landscape is generally described using a simplified Pillar system, although the
Pillar system itself is not based on unanimous understanding.
Pillar 1: Statutory, publicly managed pension schemes and pay-as-you-go finance, usually
based on a payroll tax
Pillar 2: privately managed pension schemes which are provided as part of an employment
contract, generally funded
Pillar 3: personal pension plans in the form of savings and annuity schemes
Within Pillar 1, privately managed and funded pension schemes also exist, often referred to as
Pillar 1bis. Pension funds are observed in both Pillar 1bis and 2, although some also refer to
pension funds within a Pillar 3 context. However, IORPs are only part of the institutions
within Pillar 2. Thus, an IORP is a pension fund, but not all pension funds are IORPs. This
limitation also has implications for the scope of this Directive. Although the terms “IORP”
and “pension fund” are often used interchangeably in the same context, it should be noted that
they are not synonyms. The IORP Directive explicitly states that Member States have
complete freedom to organise their pension system. This implies that although the IORP
legislation needs to be in place, there is no requirement to have IORPs.
IORPs operate pension schemes and carry out directly related activities. They generally do
not sell insurance/pension products like insurance undertakings do. IORP activities imply, in
particular, the administration of members' rights and asset management. They are therefore to
be considered financial service providers working in the internal market. However, IORPs are
institutions which have an important social purpose due to the central role played by social
partners in the running of the IORP. These institutions should therefore not be treated as
purely financial service providers.
A pension scheme is a set of rules governing pension benefits, which is defined on the basis
of a contract or agreement between employer(s) and employee(s). A clear distinction between
the IORP and the pension scheme is not always made and may lead to situations where
national social and labour laws are applied not only to pension schemes, but also to IORPs.
Pension scheme members do not buy a product, as they do in other financial services areas. In
case of mandatory membership, they do not even have a free choice. This of course does not
imply that scheme members should not be informed about their rights (and obligations), but it
is important to realise that scheme members should not be seen or treated as ordinary
consumers. General financial services consumer protection considerations and rules are not
necessarily appropriate to be applied to the triangular relationship between IORP - scheme
member/employee – sponsoring undertaking/employer.
Pension systems are the responsibility of Member States. This remains unchanged under the
IORP Directive. Member States keep the full responsibility for the organisation of their
pension system, and thus the extent to which they accept IORPs can or should play a role in
the pension provisioning for their citizens.
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For certain areas of pension provisioning, EU coordination is important. However, it may not
be appropriate to apply a one-size-fits-all approach in relation to the IORP II Directive since
pension systems can vary significantly from Member State to Member State. The rapporteur
believes that one of the key objectives should be to focus on improving the Internal Market in
relation to IORPs and enabling increased access to workplace pensions. Globalisation will
only increase the pressure to modernise and develop more efficient pension systems.
Pensions: a sensitive subject
In the 1990s, several initiatives were taken to regulate the activities of IORPs, but either the
Commission withdrew the initiative, or it was annulled by the Court of Justice. Eventually, a
Directive was adopted in 2003. The objectives of that Directive were twofold:
1) To ensure full investment freedom of pension funds. The prominent provision in the
Directive reflecting this objective was Article 18 (now Article 20) which lays down
the prudent person investment principle. This is also the reason that the scope of the
IORP Directive does not include Pillar 2 pension funds that either are not funded
(pay-as you-go) or where members’ rights are not legally enforceable
(Unterstützungskassen in Germany), or already benefit from a full investment freedom
(companies with a book-reserve system). A Member State option was introduced to
apply investment restrictions analogous to those applicable to insurance undertakings,
but these are lifted under Solvency II.
2) To facilitate cross-border activities of IORPs. This principle was reflected in Article
20 (now Article 12), but some Member States implemented this provision in a very
restrictive way referring to the limitations laid down in national social and labour law.
As a result, most IORPs still work on a strictly national basis, be it voluntarily or
mandatory.
It should be realised that this Directive has the biggest impact on a small number of Member
States where there is a high amount of assets compared to GDP. For Member States that have
a low exposure to IORPs, there may be a much more limited or even negligible impact.
Figure 1: Total number of IORPs and assets managed, end-2011*
Number
Assets
(€ millions)
BE
226
15,910
BG
1
na
CY
IT
Number
Assets
(€ millions)
Number
Assets
(€ millions)
352
69,050
PT
197
12,650
1.651
na
RO
11
110
DK
26
7,060
LV
7
170
SI
9
1,835
DE
181
138,570
LU
19
970
SK
5
1,180
IE
68500
70,000
HU
1
na
FI
56
4,120
EL
9
60
NL
514
774,060
SE
86
30,900
ES
363
31,690
AT
17
14,760
UK
50.880
1,319,930
125,129
2,492,485
1
na PL
5
360 Total
FR
Source: IORP Impact Assessment (Commission Services, EIOPA, national sources).
Note: *) or latest data available ; data are not available for all MSs.
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Figure 2 - IORP market in relation to the size of the economy, end-2011*
(in percentage of GDP)
Source: IORP Impact Assessment (Commission Services, national sources).
Note: *) or latest data available; data are not available for all MSs.
It should be recognised that a number of national parliaments have assessed the Commission's
proposal and have questioned the need for the new Directive. While respecting the views of
national parliaments, the rapporteur considers that the role of the European Parliament must
be focused on improving governance, transparency and application of IORPs.
Given the sensitivity of this issue to a small number of Member States, it should be
considered to limit the extent to which powers are conferred on the Commission or EIOPA to
adopt delegated/implementing acts and guidelines, and to ensure that any amendments are
adopted using the ordinary legislative procedure.
II - Current pension environment in the EU
Pension provision is becoming an increasingly important issue as the EU is facing significant
demographic changes. The old-age dependency ratio is projected to double from 26% to
52.5% in the EU up to 2060. Pensions also represent a very large and rising share of public
expenditure: more than 10% of GDP on average today, possibly rising to 12.5 % in 2060.
However, the situation in Member States differs enormously, although they face similar
demographic challenges.
Therefore, one of the Commission's recommendations has been to support the development of
complementary retirement savings to enhance retirement incomes. As it is a Member State
responsibility, Member States will have to find ways of improving the cost-effectiveness,
safety and equitable access to supplementary pension schemes. The IORP Directive can play
an important role to achieve this: there is still a large potential to realise further efficiency
gains.
There are some 125,000 IORPs operating in the EU, around 95% of which have less than 100
members - for these small schemes, Member States may decide not to apply the Directive.
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They hold assets worth €2.5 trillion on behalf of around 75 million Europeans, which
represents 20% of the EU’s working-age population. As of June 2012, only 84 IORPs were
actually providing cross-border services.
The financial and economic crisis had a significant impact on pension schemes (whether payas-you-go or funded) and it has highlighted the vulnerability of pension funds. Many pension
funds lost large amounts. However, it should be recognised that it is the long-term horizon of
pension funds, which allows them to run temporary deficits, without structurally being
insolvent. The fact that at the peak of the crisis (end 2011) pensioners overall continued to
receive pension payments, and that funding ratios are rising again, is therefore a good sign.
Furthermore, there is a need to improve the quality of financial products for individual
retirement savings not linked to employment, such as third pillar schemes and other financial
products. Improving consumer information and protection is necessary to enhance workers'
and investors' confidence in financial products for retirement savings.
Citizens working in another Member State not only need to preserve pension entitlements
accrued across borders. They also need to have a clear overview of their accrued pension
rights stemming from statutory and occupational pension schemes. This could be achieved
through the establishment of pension tracking services across the EU similar to those that
already exist in some Member States and work is underway in this area.
Another important development is the gradual shift from Defined Benefit schemes (DB),
where the member is assured of a certain pension pay-out, to Defined Contribution schemes
(DC), where the member takes all investment risk and where thus the pension is not fixed in
advance. Mixed schemes, with features of both DB and DC, are also observed. Changing
accounting rules, the need for more stable and predictable company earnings, the cost of pure
DB schemes, as well as the lessons learnt during the financial crisis have triggered this shift.
III - IORP II
Recital 6 of the IORP I Directive clearly states that the Directive represents a first step on the
way to an internal market for occupational retirements provision organised on a European
scale. The Directive also included some provisions to review the Directive, in particular in
relation to technical provisions (Article 15), investment rules (Article 18), the use of
depositories (Article 19), and adaptation of national supervisory systems.
The predecessor of EIOPA (CEIOPS), published a report in April 2008 in which it
recommends that clarification is provided in a number of areas in particular concerning
definitions around certain concepts of cross border activity. In April 2009 a Commission
report was published concluding that no further action was required at that moment in time.
The Commission sees five reasons why the IORP I Directive needs to be revised now:
1) Prudential barriers remain which makes it more expensive for employers to join an
IORP in another Member State.
2) The number of Europeans relying on Defined-Contribution (DC) schemes, which
shifts risks from IORPs and employers to individuals, has increased significantly.
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3) Recent financial and economic crises have shown that current minimum levels of
protection for scheme members and beneficiaries need improving.
4) Individuals do not receive essential information in a comprehensible manner, which
prevents them from making informed decisions about their retirement financing.
5) Supervisory powers are insufficient to ensure that IORPs comply with governance and
transparency requirements.
Prudential barriers remain which makes it more expensive for employers to join an IORP in
another Member State
Several definitions and procedures for cross-border activities were unclear, which hampered
the working of the internal market. Amendments have been proposed to clarify when a crossborder activity is carried out, how the activity to operate a pension scheme can be transferred
to an IORP in another Member State, and that host Member States are prohibited from
imposing additional information requirements. It is essential that amendments to the Directive
are clear improvements to the working of the Internal Market. This principle also applies to
points 2-5.
The number of Europeans relying on Defined-Contribution (DC) schemes, which shifts risks
from IORPs and employers to individuals, has increased significantly
Governance and risk management requirements have been strengthened in the proposal. To
that end, specific requirements have been introduced for a risk management function (Article
26), an internal audit function (Article 27) and an actuarial function (Article 28).
In addition, the appointment of a depositary (Article 35) would become compulsory to cater
for operational risk in pure DC schemes. Given that the supply of depositaries is limited, any
cost involved is most likely passed on to the scheme member.
Furthermore, a Risk Evaluation for Pensions Report (Article 29) is foreseen to force IORPs to
take a more systematic and comprehensive risk management approach, in particular with a
view to strengthening the understanding of the IORP's funding position.
Recent financial and economic crises have shown that current minimum levels of protection
for scheme members and beneficiaries needs improving
In the initial discussions on an IORP II Directive, the Commission was seeking regulatory
alignment between IORPs and insurance undertakings, in particular with regard to capital
requirements and the disclosure regimes. It should be noted that IORP I does include capital
requirements, which are based on Solvency I for insurers.
In its reaction to both the Green Paper and the White Paper on Adequate, Safe and Sustainable
Pensions, the Parliament was very critical about the inclusion of enhanced solvency rules, in
particular if these would be a copy from Solvency II for insurers. The Commission has taken
the decision not to introduce new solvency rules for IORPs now, but to re-examine, with the
support of EIOPA, the issue once more complete data is available.
Individuals do not receive essential information in a comprehensible manner, which prevents
them from making informed decisions about their retirement financing
A standardised annual pension Benefit Statement (PBS, Articles 40-54) is proposed
containing personalised generic information about the pension scheme. It would be a twoPE554.712v02-00
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page document to be "fine-tuned" by the Commission in a Delegated Act, including
information on guarantees provided, balance, contributions and costs, pension projections,
investment profile and past performance. Although the general thrust to better inform scheme
members of the risks inherent in scheme membership can be supported, it is questionable
whether the level of detail provided in the Directive is appropriate and proportionate.
Supervisory powers are insufficient to ensure that IORPs comply with governance and
transparency requirements
The "tool box" that supervisors have at their disposal, is not the same throughout the Union.
The proposal includes further alignment of supervisory powers in the field of outsourcing
(Article 33) and the Supervisory Review Process (Article 63).
The rapporteur takes the view that after a period of implementation, application and
consolidation it is right that the IORP Directive is modernised and better made fit for purpose.
The objective is to facilitate the working of the internal market, whilst avoiding a one-sizefits-all approach.
Impact Assessment
In its Impact Assessment, the Commission acknowledges that a proposal to modernise the
governance, transparency and reporting aspects of the Directive is supported by Member
States where insurance is the main vehicle of occupational pension provision (e.g. FR, SE),
the insurance industry and EIOPA. Member States that have developed IORP markets (e.g.
UK, IE, NL, DE) could, in principle, agree to a revision of the Directive, as long as the
principle of proportionality is respected.
It should be acknowledged that the Commission’s own Impact Assessment Board (IAB)
analysed the file twice, but ‘could not issue a positive opinion’. Some objections raised by the
IAB would appear to be still valid, in particular regarding substantiating the problems with
evidence, presenting alternative options, explaining why the EU should act now, and critically
assessing the proportionality of some measures.
This may also explain why the Juncker Commission considered putting this proposal on the
Timmermans’s list for withdrawal as part of the 'better regulation' agenda. However, it was
communicated that if the Council would adopt a General Approach by the end of 2014, the
proposal would not be withdrawn.
IV - Council General Approach
The Council adopted its General Approach on 10 December 2014. The key points from the
Council position include the following amendments:
1) IORPs are pension institutions with a social purpose that provide financial services (recital
20). Recital 2a (new) clarifies that the Directive does not concern issues of national social and
labour law, which seems contradictory.
2) The strict separation of key functions is loosened, and the related definition deleted.
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3) The elements included in the Risk Evaluation for Pensions Report is extended, but the
scope seems to be more limited.
4) The obligation to appoint a depositary for DC schemes does not apply if all assets are
invested in UCITS or in alternative investment funds under the AIFMD, and when a
depositary has been appointed in accordance with these Directives.
5) A complete redraft of Article 13 on cross-border transfers.
6) The Member State option to apply a lower investment limit for certain investments has
been reintroduced (Article 20(6(a)).
7) Council accepts a Pension Benefit Statement, but has deleted and amended parts of the
content significantly.
8) No reference is made to financial stability in the supervisory objectives (Article 59).
9) The requirement to have stress-tests in the supervisory tool-box has become a Member
State option.
10) The definition of "Reinsurance" in the Solvency II Directive is amended to specify that
risk cover by a reinsurance undertaking to an IORP is also considered to be reinsurance,
where MS so allow.
11) Any empowerment to the Commission to adopt Delegated Acts has been deleted.
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