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Special Report

ESG: The metrics jigsaw


IORP governance

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  • If IORP ain’t broke, don’t fix it - EFRP

Suggestions to make the basis for a systematic set of codified rules to cover the governance of occupational pension schemes across the entire EU have emerged from a working group of pension stakeholders.

The ambitious project, which advocates closer harmonisation of governance systems, distils its proposals from existing national sets of rules. The 100-plus page OPSG Discussion Paper on Occupational Pension Scheme Governance, describes its output as “quite possibly, the most comprehensive analysis of scheme governance currently available in Europe”.

Some believe onerous changes could lessen the commitment of thousands of companies for their IORPs. Matti Leppälä, secretary general of PensionsEurope, says any tightening of governance standards as outlined in the paper would be too burdensome for many IORPs, especially the smaller ones. It may mean that they would be unable to continue as such, he adds.

Charles Cronin, the project leader of the study, agrees that many IORPs could be affected. However, he still favours tackling governance issues, as well as cutting back on the influence of vested interests.

The authors of the paper are all members of a sub-group of the Occupational Pension Stakeholder Group (OPSG) that is part of the European Insurance and Occupational Pension Authority. The OPSG itself describes its paper as non-exhaustive and its report is based on an analysis of two clusters of national entities. The subject nations are Belgium, Germany Luxembourg, the Netherlands, Portugal, Sweden and the UK.

It highlights various strengths and weaknesses in member states governance systems and suggests a generic model for Europe. The aim is to raise standards by reducing the possibility of poor governance systems.

The paper comments that of the estimated 140,000 IORPs in Europe, the overwhelming majority are very small. In other words, inefficient in terms of opportunity cost.

This cost is defined as what the retirement saver could achieve by buying an off-the-shelf retail retirement saving product. The governance structure should add value beyond this. Here, the paper finds that the Portuguese model could provide a template for small funds.  

Four different governance functions are identified in the paper. These are the non-executive role, representing both the employer and the beneficiaries; the executive role, covering strategy and operations; integrity, which is the actuary and audit functions; and finally services. The latter embraces investment management, benefit administration and payments, risk management, and so on.

Among numerous detailed criticisms of the present status quo, the paper is critical of situations in which non-executive roles are composed entirely of non-experts. The paper states that in such circumstances the scheme is vulnerable to being led by the interests of service providers.

Among six other recommendations, it suggests that at least two members of the non-executive body should be professionally qualified, one in asset management, and the other in liability management.

Commenting on the executive function, the OPSG authors make the point that in the Netherlands, the supervisors conduct regular tests on the competencies of the board (non-executive and executive). Here, the implication is that the practice would be all the better if widespread.

Also concerning the executive function, the paper suggests that EIOPA, in consultation with the other supervisory authorities, should set standards for fitness and propriety, qualifications, experience and personal integrity.

The stakeholders’ paper finds that when it comes to discipline enforcement, the UK model, “seems to provide the best practice”. Among recommendations is one that an IORP auditor should not be the same firm or individual that audits the financial statements of the employer.

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