Eversheds Sutherland Consulting
IORP II Transposed – Our initial observations
Ireland has transposed the IORP II Directive. Transposition has been effected under the European Union (Occupational Pension Schemes) Regulations 2021 (the "Regulations"), which includes a number of significant changes to the Pensions Act 1990 (the "Pensions Act").
Running to over 70 pages, there is a lot for trustees, sponsors and the wider pensions industry to digest. Helpfully, the Pensions Authority (the "Authority") was quick to release a statement confirming that it will be issuing further information and guidance, and setting out a timeline in relation to this.
In due course we will be providing clients with a series of focused briefings on key IORP II topics. In the meantime, we have set out below some of our initial observations on the Regulations.
At a high level, there are few real surprises with the Regulations largely reflecting the text of IORP II, and discretions given to Member States having been exercised as anticipated.
1. New supervisory powers for the Pensions Authority
The Authority is given new responsibilities for carrying out supervisory reviews and monitoring the financial condition of schemes. It also has the power to require trustees to carry out stress tests. There is a new requirement for trustees to produce annual compliance statements. The compliance statement for 2021 will need to be prepared by 31 January 2022.
Two significant developments are the Authority's new powers to issue an "Advisory Notice" to trustees, and to require trustees to prepare an "External Report". At a very high level:
An Advisory Notice allows the Authority to intervene where it is of the opinion that trustees are not acting in a manner which would ensure compliance with specific requirements, or if weaknesses or deficiencies have been identified as part of a supervisory review. Under an Advisory Notice, the Authority can direct that specific remedial actions be taken, and the timeframe for doing so. Trustees can make submissions to the Authority where it intends to issue an Advisory Notice, and may appeal an Advisory Notice to the High Court; and
An External Report can be required where the Authority is of the opinion that it does not have sufficient information to determine, of if it has grounds for concern in relation to, trustees' compliance with specific requirements. An External Report is to be carried out by an appropriate reviewer. This person may be nominated by the trustees, but must ultimately be approved by the Authority. The cost of an External Report must be borne by the scheme, and trustees are obliged to give such assistance as the reviewer may reasonably require.
The Regulations do not give the Authority any specific new powers to impose sanctions on trustees. This is somewhat surprising and it is possible additional enforcement or sanction powers will be given under future legislation.
2. System of Governance
The Regulations largely track, and do not expand on, the provisions of IORP II in relation to the requirements to have an effective system of governance, written policies, internal control systems, and continuity and contingency plans. Trustees are required to ensure a scheme's system of governance is proportionate to the size, nature, scale and complexity of the scheme or trust RAC concerned. A key focus for trustees in the short term will be determining what is proportionate for their scheme.
There is a new requirement for schemes to have at least two trustees or, in the case of a scheme with a sole corporate trustee, at least two directors. Schemes which do not currently satisfy these requirements have until 31 December 2021 to appoint an additional trustee or director.
The Regulations expressly state that trustees of existing schemes must have a remuneration policy in place by no later than 31 December 2021. No such deadline is specified for other required policies (risk management, internal audit and, where relevant, actuarial and outsourcing). Accordingly, the obligation to have these other policies is in force now.
3. Fitness and Probity of Trustees and Key Function Holders
The Regulations amend the Pensions Act to introduce new fitness and probity requirements for trustee boards and key function holders.
Trustee boards, and the directors of corporate trustees, will now be required to collectively possess adequate knowledge, qualifications and experience to enable them to ensure the "sound and prudent management" of their scheme.
In terms of experience, the Regulations require at least one trustee to have a minimum of two years' experience as a trustee of a scheme over the previous three years. This requirement was included in the proposals put forward by the Government in its Roadmap for Pensions Reform published in 2018.
The Regulations do not, as had been proposed in the Roadmap, require that at least one trustee have a mandatory minimum level seven trustee qualification. It is possible that such a requirement will be introduced under future legislation.
The new probity requirements for trustees are largely a reiteration of the existing restrictions on the persons who may act as a trustee. However, the Regulations have included some new and updated provisions, none of which are surprising. For example, a person who has been convicted of a money-laundering offence or who has been convicted of an offence in another country, which if carried out in Ireland would prohibit them from acting as a trustee, is now expressly precluded from acting as a trustee.
Key Function Holders
Key function holders are also subject to similar fitness and probity requirements. Again, these requirements track the wording of IORP II without introducing additional specifications or requirements.
The Regulations prohibit trustees from appointing persons to key functions unless satisfied that those persons have the necessary knowledge, experience and qualifications to enable them to carry out the relevant key function. Key function holders must also satisfy the same probity requirements applicable to trustees. There are no specific requirements as to the level of qualification required to be held by a key function holder. This would seem to be a matter for the trustees to assess absent any further clarification or guidance.
4. Pension benefit statement
The Regulations impose a requirement for trustees to make available an annual pensions benefit statement to all members, including deferred members.
These statements must be made available free of charge, and can be provided electronically (including via a website) or on paper. This provides trustees with the maximum flexibility available under IORP II in relation to the medium by which pension benefit statements are delivered, which is welcome. In particular, availability through a website or other portal is authorised. A paper copy of the Pension Benefit Statement does need to be provided to a member on request.
For existing schemes, the first pensions benefit statement must be made available no later than 31 December 2022. It appears that, for now at least, these new requirements apply in addition to the existing benefit statement requirements.
5. ESG
The Regulations apply a fairly minimalist approach in relation to incorporation of environmental social and governance ("ESG") factors into investment decisions. In the five years since IORP II was enacted, consideration of ESG factors at some level by trustees has become completely mainstream. Accordingly, the requirements introduced by the Regulations are unlikely to have a huge impact on many schemes.
Trustees are now explicitly required to invest in accordance with the prudent person rule, and in doing so "may take into account the potential long-term impact of investment decisions on environmental, social and governance factors".
This deals with the impact of a scheme's investment decisions on external ESG factors (per Article 19 of IORP II), rather than the impact of ESG factors on a board of trustees' decisions at to what to invest in (per Article 21 of IORP II). Any consideration of such external impacts is discretionary only.
The requirements already imposed on pension trustees under the Sustainability-Related Disclosures in the Financial Services Sector Regulation ("SFDR") in relation to considering adverse impacts of their investment decisions are more specific and developed than the above provision. For more information on how SFDR impacts on pension schemes, see our recent briefing.
The system of governance adopted by trustees under the Regulations is also required to include consideration of ESG factors related to investment assets in investment decisions, per Article 21. It seems that the system of governance will therefore have to include at least a consideration of the extent to which ESG factors should be taken into account in trustee investment decision making. Again, SFDR already deals with this area as, under SFDR, trustees are required to disclose the extent to which they take account of sustainability risks in their investment decision making.
6. Small schemes and one-member arrangements
Member States were given a discretion under IORP II to exclude schemes with less than 100 members from many of the new requirements. As had been well signalled, Ireland has not exercised that discretion. Instead, the new requirements introduced under the Regulations will apply, subject to certain transitional arrangements, to all funded occupational pension schemes and trust RACs irrespective of size.
While there is no general exemption for small schemes, a five-year transition period will apply to existing one-member arrangements. During this transition period, one-member arrangements will be excluded from the vast majority of the new requirements. Full investment rules will apply to one-member arrangements immediately, except in respect of existing investments made prior to the Regulations coming into operation.
7. Depositary requirements
The Regulations do not require trustees to appoint a separate depository to safeguard the scheme assets. This was a potential option available to Ireland under IORP II, and it is a welcome development that it has not been imposed.
However, where trustees do use a depositary to safe-keep scheme assets, the Pensions Act now imposes a number of minimum requirements on that depositary, in line with the requirements applicable in the regulated funds sector.
Where trustees don't use a depositary, new duties are imposed on such trustees under the Regulations to ensure financial instruments held by them are safely kept and to address any conflicts of interest in relation to such trustees performing tasks relating to the safekeeping of scheme assets.
8. Interaction with existing pension regulations
The Regulations do not amend or revoke any existing regulations made under the Pensions Act. However, there are provisions within the Regulations which overlap with existing requirements under, for example, the Investment Regulations and Disclosure Regulations. It can be expected that in due course changes will be made to address this.
Next steps for trustees
The Authority has indicated that it will be publishing information on key themes of transposition, including the Authority's approach to overseeing compliance, in the week commencing 10 May 2021. We expect this may provide some additional guidance on the areas requiring the most immediate focus.
In the meantime, trustees who have previously developed an IORP II implementation plan or undertaken a gap analysis might usefully start reviewing and updating this in light of the Regulations. We can assist with the legal aspects of such reviews, and assist trustees who are now commencing work on their implementation plan or gap analysis exercise.
Peter Fahy, Partner and Head of Pensions - PeterFahy@eversheds-sutherland.ie
Lorcan Keenan, Partner in our Pensions Group - LorcanKeenan@eversheds-sutherland.ie
David McKeating, Associate in our Pensions Group - DavidMcKeating@eversheds-sutherland.ie
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