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IORP II – the dog eventually barked

On 23 October the DWP laid regulations to transpose much of the European pensions directive, “IORP II”.

IORP II has been spoken about in hushed tones for years. At one point it was going to bankrupt UK plc by imposing the thick end of a trillion pounds in additional DB pension liabilities. Thankfully, the misguided effort to force DB pension schemes to be financed like insurance companies was headed off but the directive still has some quite chunky provisions, especially about scheme governance.

Hot potato

The directive was adopted as EU law on 14 December 2016 and requires EU member states – not individual occupational pension schemes –  to implement it by 13 January 2019. When the UK implemented IORP I in the Pensions Act 2004, which gave us the current scheme funding regime among other things, large swathes of the directive were copied and pasted into the UK statute book. This time the DWP are taking a more “proportionate” approach, including generous transition timetables for schemes – so there are no immediate actions to worry about.

Two tiers

This week’s regulations are short, sweet(ish) and focus on governance. They require trustees to establish an “effective system of governance” including internal controls. This must be “proportionate to the size, nature, scale and complexity of the activities” of the scheme.

Much of the other parts of the directive – 84 pages – are left to be quasi-legislated for in a Pensions Regulator Code of Practice. This will be consulted on next year and the package of governance arrangements are likely to become requirements in 2020 – when a lot of other changes to pension regulation are due to come in.

Risk management

The Code will include a lot about how trustees are expected to manage risk and evaluate how the system of governance is working. Most of the content of the directive goes with the grain of what the Regulator is already trying to achieve with its integrated risk management programme.

As the Code develops over the next year or so we expect it to include some features which will prompt a material step-up in governance standards for both DB and DC schemes.

So, be aware that IORP II is coming, and make sure that whatever it is that you are doing about risk management is future-proofed for it (where appropriate and possible).

Disclosure

Finally, it’s worth noting that the DWP are currently putting off a decision about the IORP II requirement for all schemes to issue annual benefit statements to deferred and active members.  Possibly they are hoping that the introduction of the pensions dashboard (whenever that may arrive) will do the trick. In the meantime, it appears they are running the risk that the European Commission is not satisfied with the UK’s implementation of the requirements. But perhaps this is not a surprise in the context of the increasingly fraught Brexit negotiations.