Sweeping reforms of European pension regulation are set to be announced imminently, including a concession on funding for cross-border IORPs and new requirements to assess the environmental, social and governance (ESG) risks of holdings.

After more than a year of negotiations between the European institutions, the European Commission has also dropped proposals for delegated acts on the proposed Pension Benefit Statement, while the risk evaluation for pensions (REP) is to be replaced by an own-risk assessment – details of which will be decided by national regulators.

The draft of the revised IORP (Institutions for Occupational Retirement Provision) Directive – dated 20 June and seen by IPE – is understood to be the finalised text, expected to be unveiled by the Commission on Monday (27 June) after protracted negotiations between the Commission, European Parliament and EU member states.

A source who has seen the compromise text told IPE: “It’s not perfect, but there’s something for everyone.”

No further comments or drafting suggestions are being allowed on the compromise text, according to a note sent by the Dutch presidency to those with access to the text.

“The Presidency considers this as a final package, a balanced compromise and the best result that could be achieved,” it said. “There is no room to push the things any further.”

Cross-border victory

In possibly the biggest single victory for the industry, the compromise agreement acknowledges the possibility of cross-border IORPs being underfunded, although the overarching requirement is still that they be fully funded at all times.

If this condition is not met, according to the text, the home member state’s regulator must “promptly” intervene and require the IORP to develop and implement measures “without delay” to protect beneficiaries and members.

Speaking at the PensionsEurope conference in Brussels on 23 June, Janwillem Bouma, chair of the association, suggested that this compromise had been struck.

“It seems the decision makers maintained the requirement for cross-border IORPs to be fully funded at all times, but that the possibility for a cross-border IORP to be underfunded is now mentioned,” he said. “PensionsEurope warmly welcomes this.”

However, he warned that an interpretation of the compromise would be possible only once a final text were available, a comment in keeping with a general pretence among lobbyists and EU lawmakers in recent days that a compromise had not yet been reached on the revised IORP Directive. 

A formal announcement is understood to have been held back due to the UK referendum on its membership of the European Union, which has resulted in a vote to leave.

Attempts to establish cross-border funds, or transfer assets from one member state to another, are also set to be eased.

Detailed rules about how such transfers must progress have been drawn up, including rules for negotiations with pension scheme members.

The European Insurance and Occupational Pensions Authority (EIOPA) has also been given a non-binding role as mediator, should a home member state’s regulator object to a move to another country.

As Bouma had also indicated at the conference in Brussels, the authorities in both the host and transferring countries must give their consent to cross-border transfers, based on a list of assessment criteria. 

While EIOPA has been granted a bigger role in overseeing cross-border transfers, member states have succeeded in their attempts to strip it of the ability to impose solvency requirements on the pensions sector.

All mentions of delegated acts, which allow the Commission to impose new rules after the final Directive has been passed by Parliament, have been removed, requiring all details to be agreed during the trialogue.

Still, Jonathan Hill, European commissioner for financial stability, had earlier reassured delegates at the PensionsEurope conference that the EU executive did not “have any more changes up our sleeve”.

“Once this legislation is agreed, that will be it,” he said. “There are no plans to harmonise solvency rules for occupational pensions, and there are no plans to introduce a standardised risk-assessment process.”

Meanwhile, the contentious Pension Benefit Statement – a matter of concern in the Netherlands, as the Commission proposal removed a member state’s ability to cater to its market – has been slimmed down, and national authorities have been given the ability to set the assumed rate of return in instances where benefits must be assessed.

Stranded assets

The responsible investment community also won a significant victory, and sees mention of stranded-asset risk included within the own-risk assessment, strengthening the references to environmental risks initially included in the Commission’s first draft.

Instead, pension funds will now be expected to consider the risk of climate change, environmental and social risks and risks related to the depreciation of assets due to regulatory change – a direct reference to the impact of a carbon price on resources yet to be exploited by oil, gas and coal companies.

The change is a victory for the responsible investment lobby, which has been calling on the institutions to include stricter assessment of climate risk.