Top 1000: Faint praise for IORP II compromise

Agreement on the final draft of the IORP II Directive has finally been reached. Susanna Rust outlines the key points 

IORP II in summary

• Agreement has been reached on a new Directive for Institutions for Occupational Retirement Provision, updating the 2003 legislation.
• It is expected to come into force in late 2016, after a vote in the European Parliament in September.
• Member states will have two years to implement the law.
• Key features of the new law include the ruling out of harmonised solvency requirements, a compromise on funding of cross-border scheme, and a series of provisions encouraging and allowing investment based on ESG factors.

Major reform of EU occupational pensions legislation was achieved in 2016, with agreement reached on a final proposal for a new Institutions for Occupational Retirement Provision (IORP) Directive.

The revised law is expected to be adopted by the European Parliament on 12 September. It will then be submitted to the Council of the EU for adoption, published in the Official Journal and it will then enter into force.

Approval by MEPs will conclude a formal legislative process lasting some two-and-a-half years, having been kick-started when the European Commission published its proposal for new IORP rules in March 2014. 

In November 2014, it was the turn of the European Council, under Italy’s presidency, to adopt its version of the directive. 

The parliamentary Economic and Monetary Affairs Committee (ECON) then unveiled its final proposal in late January 2016, paving the way for negotiators from the Commission, the Council and Parliament to start working on a compromise. 

A deal was eventually struck in June 2016, although the first official confirmation only came on the last day of that month, with an announcement n held off until after the UK Brexit referendum on 23 June.

On 30 June, however, the last day of the Dutch presidency of the Council, both the European Parliament and the Council announced that an agreement had been reached on the final draft directive.

Development of the IORP II Directive

Member states have two years to transpose the new directive into national law  and regulation, which points to a deadline of late 2018 – earlier IORP II drafts envisaged 18 month for transposition. 

According to the Council, the updated directive is aimed at “facilitating the development of IORPs and better protecting pension scheme members and beneficiaries”.

“The directive will improve the governance and transparency of IORPs and facilitate their cross-border activity,” it said.

The directive has four objectives, according to the Council: 

• Clarifying cross-border activities of IORPs;
• Ensuring good governance and risk management;
• Providing clear and relevant information to members and beneficiaries;
• Ensuring supervisors have the necessary tools to supervise IORPs.

Not everyone is enamoured with the legislation, however.

James Walsh, EU and international policy lead at the UK’s Pensions and Lifetime Savings Association (PLSA), said the EU institutions succeeded in negotiating “a practicable piece of legislation”, but that “it is not clear how much extra value this directive will really add in terms of boosting the quality or security of pension provision”.

Meanwhile, Gert Kloosterboer, spokesman for the Dutch Pensions Federation, suggested the new directive was unnecessary for the Dutch occupational pensions industry.

“[It] is in our view mainly about communication with participants, transparency and governance,” he said. “This makes the impact for the Dutch pension sector rather insignificant because we consider ourselves to be a European frontrunner in these fields already.” 

Cross-border, solvency wins

The European Parliament, for its part, highlighted that the overhauled directive clarifies the cross-border transfer of pension fund portfolios and what happens in the event of underfunding when pension schemes engage in cross-border activity.

Brian Hayes, Irish MEP and the rapporteur for IORP II, said: “We have achieved the right balance between respect for difference [and] ambition for new cross-border activity. 

“In changing the rule on how cross-border schemes are established, on how pension schemes are transferred and how schemes can be funded, we have brought certainty to the process.”

Funding of cross-border schemes was a contentious issue during the trialogue. 

In the end, the negotiators reached what the PLSA has described as “an awkward compromise”. 

The PLSA describes it this way because the legislation contains a requirement for cross-border schemes to be fully funded at all times but also acknowledges that they may not be.

Article 15.3 states that: “If this condition is not met, the competent authority of the home member state shall promptly intervene and require the IORP to immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are adequately protected”.

The final agreement on cross-border funding is arguably the biggest single victory for the industry and was “warmly welcomed” by PensionsEurope, the European workplace pensions association.

Its counterpart for the insurance industry, however, warned that the agreement “entails a risk of regulatory arbitrage”, and that member states need to guard against this when implementing the directive. 

Also relating to cross-border activity, the directive introduces a new procedure for the transfer of pension scheme portfolios, with both the host and receiving pension fund’s supervisory authority involved. 

The transferring IORP’s regulator has to give its consent, and the other its authorisation, with the European and Insurance Occupational Pensions Authority (EIOPA) allowed to mediate if there is disagreement between the two regulators; the latter’s mediation is not binding, however. 

An important victory for occupational pension providers is that proposals for delegated acts on the proposed Pension Benefit Statement were dropped. The industry saw this as leaving the door open for the Commission or EIOPA to introduce new solvency requirements. 

The Commission has been clear that solvency requirements are not on the cards, however. Addressing a PensionsEurope conference the day before the Brexit referendum, Jonathan Hill, then commissioner for financial stability, financial services and Capital Markets Union, reassured delegates that, “once this legislation is agreed, that will be it. We don’t have any more changes up our sleeve. There are no plans to harmonise solvency rules for occupational pensions, and there are no plans to introduce a standardised risk-assessment process.” 

The updated law itself contains what the PLSA described as a strong statement ruling out any solvency-based funding regime for pensions. 

This is a reference to recital 60a of the draft directive, which states: “The further development at Union level of solvency models, such as the holistic balance sheet (HBS), is not realistic in practical terms and not effective in terms of costs and benefits, particularly given the diversity of IORPs within and across member states. 

“No quantitative capital requirements – such as Solvency II or HBS models derived therefrom – should therefore be developed at the Union level with regard to IORPs, as they could potentially decrease the willingness of employers to provide occupational pension schemes.”

ESG underpinned

A key feature of IORP II is the directive’s provisions on the consideration of environmental, social and governance (ESG) factors as part of pension providers’ investment.

One of these provisions relates to a new own risk assessment, which has to be compiled by schemes at least every three years or following any significant change to their risk profile. The law states that where ESG factors are considered in investment decisions, the risk assessment must cover “new or emerging” risks, “including risks related to climate change, use of resources and the environment, social risks and risks related to the depreciation of assets due to regulatory change”.

“An important victory for occupational pension providers is that proposals for delegated acts on the proposed Pension Benefit Statement were dropped. The industry saw this as leaving the door open for the Commission or EIOPA to introduce new solvency requirements”

The latter is a reference to “stranded assets”, a concept that has transformed thinking about responsible investment in the context of efforts to limit climate change. 

Another IORP II provision relating to ESG is an article on investment rules (article 20.1.aa in the final draft directive), which states that member states should allow IORPs to take into account ESG factors as part of the prudent person rule.

In addition, the recital cites the UN-backed Principles for Responsible Investment (PRI) as a benchmark for EU member states’ ESG reporting requirements for IORPs. 

The wholly new paragraph argues that ESG factors contained within the PRI’s six principles are important “for the investment policy and risk management systems of IORPs”.

“The relevance and materiality of environmental, social and governance factors to a scheme’s investments and how they are taken into account should be part of the information provided by the scheme under this directive,” the text adds.

ShareAction, a UK-based responsible investment campaign organisation, notes that the inclusion of these statements and requirements comes after the European Parliament and the Council initially resisted efforts to include ESG issues in the law. The Parliament and Commission had initially dropped a Commission-formulated requirement for IORPs to evaluate risks relating to “climate change, use of resources and the environment”. 

Another key point of the directive is its stance on the use of depositories by pension schemes, over which there was disagreement during the trialogue. The directive states that member states “may” require defined contribution schemes to appoint a depository. 

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.

The directive also provides for the Commission to establish a high-level group of experts to enhance second-pillar retirement savings in member states.

Mixed views after agreement on cross-border funding 


Janwillem Bouma

In particular, PensionsEurope is pleased that the updated legislation does not contain new solvency capital requirements for IORPs. As also EIOPA has noted, they could have significant negative impacts on IORPs, sponsors and members. Pensions-Europe welcomes that the IORP II Directive recognises that the IORPs are first and foremost institutions with a social purpose. Considering the diversity of occupational pension systems across the EU and the central role played by national social and labour law, we are happy the member states retain flexibility to implement the IORP II Directive, and furthermore, the delegated acts that would give many regulatory competences to the EU level are not included in the legislation.

Janwillem Bouma, chair

European Association of Paritarian Institutions

Bruno Gabellieri


IORPs are institutions strongly embedded within national social systems and primarily governed by social and labour law. We welcome that the new legislation recognises the social purpose of IORPs, which is reflected in their triangular relationship with employees and employers. The new rules also properly recognise the role of social partners in the overall management of the IORPs and support their co-operation with member states.

Bruno Gabellieri, secretary general

European Commission

Jonathan Hill

This agreement will ensure high standards of governance, improve information for pension savers and encourage more cross-border pension services. I would like to congratulate the Dutch presidency and MEP Brian Hayes for this work in delivering a sensible, proportionate package of measures. This marks the end of the work we plan to do on pension funds.

Jonathan Hill, former European commissioner for financial services

European Parliament

Brian Hayes


We have achieved the right balance between respect for difference [and] ambition for new cross-border activity.  In changing the rule on how cross-border schemes are established, on how pension schemes are transferred and how schemes can be funded, we have brought certainty to the process.

Brian Hayes, MEP and IORP II rapporteur

Insurance Europe

Nicolas Jeanmart

The trialogue agreement is concerning because it does not ensure a consistent regulatory response to cases of underfunding of IORPs’ cross-border activities, entailing a risk of regulatory arbitrage. It is therefore vitally importance that member states make the right decisions when implementing the directive to protect EU occupational pension schemes.

Nicolas Jeanmart, head of personal insurance, general insurance & macroeconomics

Pensions & Lifetime Savings Association, UK

James Walsh


The EU institutions have done well to turn an over-prescriptive and complex set of proposals into a practicable piece of legislation. There will still be some new burdens on pension schemes. The Own Risk Assessment is a good example. And it is not clear how much extra value this directive will really add in terms of boosting the quality or security of pension provision. The question now is whether UK schemes will have to implement the new directive. That is one of the many matters to be settled in the article 50 negotiations on the terms of our exit from the EU.

James Walsh, EU and international policy lead 

Pensioen Federatie, Netherlands

The IORP Directive is mainly about communication with participants, transparency and governance. This makes the impact for the Dutch pension sector rather insignificant because we consider ourselves to be a European frontrunner in these fields already. This is also why we can live quite well with the new directive, but, at the same time, we feel we did not really need it in our country. For other European countries, however, it can be a welcome step towards better protection of participants’ interests. We feel satisfied that we have been able to make a strong contribution to adjust the initial plans for the directive into its final outcome, which is very much in line with existing Dutch legislation.

Gert Kloosterboer, spokesman


Camilla de Ste Croix

We are delighted that the IORP’s text not only requires pension funds to consider environmental issues, as the commission proposed, but also social and governance issues. We saw this directive as a key litmus test on EU policymakers’ appetite for action on building a sustainable economy and Capital Markets Union following the Paris agreement. We hope and expect this outcome will have a positive effect on the development of responsible investment in the EU and beyond.

Camilla de Ste Croix, senior policy officer

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2572

    Asset class: High Yield Bonds.
    Asset region: Global.
    Size: $200m.
    Closing date: 2019-11-27.

  • QN-2573

    Asset class: Real Estate.
    Asset region: Global.
    Size: CHF 150m.
    Closing date: 2019-12-06.

Begin Your Search Here