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Draft IORP II reveals changes for cross-border schemes, prudential regulation

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The leaked draft of the IORP II Directive has seen the requirement for cross-border pension schemes to be fully funded removed, as it moves closer to its finalised form.

The draft, which also revealed European Commission support for long-term investing, needs to be approved by the College of Commissioners before full publication.

It said the Commission would look to overhaul the current requirement for defined benefit (DB) schemes to be fully funded, should they operate in more than one EU member state, essentially harmonising the definition of cross-border schemes throughout the union.

This is part of a plan to create a more open EU market for both DB and defined contribution (DC) pension schemes.

This was stated as an aim by Klaus Wiedner, who heads the insurance and pension policy unti within internal markets, who confirmed to IPE in November 2013, that a criticism of the previous draft was its failure to facilitate cross-border pensions.

In line with this, the draft directive also includes further detail on what the Commission classes as prudential regulations.

It defines the areas understood to belong to prudential regulation and takes away the legal uncertainties for institutions caused by different definitions among member states.

The Commission is looking to iron out inconsistencies in what is considered prudential regulation, simplifying the operation of cross-border schemes.

However, its passage into the final draft may be complicated.

In its current form, it includes operational conditions, technical provisions and its funding, solvency margins, investment rules and management, conditions for governance and required regulatory information.

Within the funding and technical provisions, however, may be what some member states consider social or labour law, currently a member state competence.

This could disrupt the harmonisation of prudential regulations in its current form, with protective arguments enacted to keep certain laws within a member state’s jurisdiction.

In other aspects of the draft directive, the legislation lists heavy requirements for schemes to produce risk evaluations immediately following any significant change in risk profile.

The newly evaluated risk register must be reported and include the effectiveness of risk management, funding requirements in relation to risk, the scheme’s ability to comply with technical provisions and qualitative assessments on adverse deviation, sponsor support and operational risks.

Articles within the draft directive legislate for schemes the requirement for all individuals armed with running schemes to be “fit and proper”, along with national regulators ensuring schemes have “sound” remuneration policies, which promote effective risk management.

Moving towards a ramped up governance structure, the directive also requires member states to ensure that schemes create risk-management systems that include underwriting and reserving, liability management, derivatives, concentration management and insurance or other risk-mitigation techniques.

The new directive also provides significantly detailed requirements for statements provided to members.

While drawing on much of the work of the European Insurance and Occupational Pensions Authority (EIOPA), the legislation provides a lot of detail.

It states its aims of ensuring that pension benefit statements have a common format across the EU, and that members be given the right information before enrolment, during accumulation and in decumulation.

Benefit statements should be no longer than two A4 pages in length, while being comprehensible, and not making reference to other documents.

They should also include data on balances, contributions and costs, with the latter broken down into administration, asset keeping and costs related to investment transactions.

Pension projections should also be included in member statements and provide a target level of benefits per month – at estimated retirement, two years before estimated retirement and two years after estimated retirement.

Additionally, statements should also carry information relating to member guarantees, including current level of financing of individual entitlements and any benefit reduction mechanisms.

Pension schemes must provide members with detailed narratives on investment choices, as well as a chart demonstrating past performance on the investment.

The directive said EIOPA would develop a draft technical standard to determine the components of pension and benefit statements by the end of 2016.

Overall, the draft directive follows general expectations from the European industry for a more stringent governance and transparency requirement from pension providers.

Before final publication, the directive will require approval from the College of Commissioners, with meetings expected in the coming weeks.

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