Michel Barnier, the European Commissioner for the internal market, seems determined to end his period in office with a blizzard of activity ahead of this month’s European Par- liament elections. The (much watered down) draft directive for IORP II and a paper on long-term financing of the European economy were closely followed by a draft directive revising shareholder rights legislation, complete with a controversial proposal for a mandatory say-on-pay vote at EU listed companies.
The IORP II proposals contained few big surprises in this timely overhaul of legislation that is already over 10 years old, except for a last minute refusal to allow cross-border schemes the exemption from full funding rules that single-country IORPs enjoy. The Commission had planned to remove this restriction, a point evidenced by the fact that it had been removed from earlier drafts of the directive.
The new wording excludes cross-border schemes from the benefit of recovery periods and the hasty last minute U-turn suggests intervention from the insurance lobby. It is surprising that the Commission would opt for a measure that will hinder multi-country pension provision given the scarcity of cross-border schemes in existence. The full-funding requirement is an oft-cited hurdle.
Having decoupled the IORP II proposals from the holistic balance sheet project, which continues in the background at EIOPA, the Commission was free in its preamble to the draft legislation to wax lyrical that it will “enhance the capacity of the European economy to channel long-term savings to growth enhancing investment”.
Of course, European pension funds, particularly in the Netherlands, Ireland and the UK, had been investing for the long term for many years before the IORP Directive was even thought of. Ironically, anything resembling Solvency II would have been likely to curtail pension funds’ appetite for long-term investments.
Aside from its attempt to graft the long-term investment agenda to IORP II, a generous portion of the text is spent on issues relevant to defined contribution pensions, in a nod to the future direction of pension provision.
This makes IORP II something of a patchwork quilt of different agendas. But in sticking to a reasonably workmanlike text with mostly uncontentious proposals in the areas of governance, risk management, communication and supervision, the Commission ought to be in fairly safe territory. However, the mishmash of some fairly vague proposals, is coloured by suspicion that the Commission is somehow biased against occupational pensions, or that it doesn’t thoroughly understand them.
This has led to criticism in areas that ought to be uncontentious, such as communication. Here, the Dutch Pensions Federation has warned against communications overkill and the Commission would do well to listen to a country that is probably the most advanced in the world when it comes to getting the right information across to pension fund members in the right way.
So far, some of the most vocal criticism has focused on the lack of detail on potentially onerous requirements for risk evaluations, which are intended to take place following changes to the risk profile of the scheme. There are fears that there is wide scope for EIOPA to apply a considerable cost burden to pension funds, particularly for small and medium-sized schemes.
One of the next crucial decisions will be the appointment of a rapporteur from the European Parliament to steer the legislation through parliament. This person’s background will be of great interest to the pensions sector, as they will have considerable influence over the final text. And here is a health warning: the contents of the final, approved IORP II Directive may vary consider- ably from the legislative draft.