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EUROPEAN COMMISSION

Directorate General Internal Market and Services

FINANCIAL INSTITUTIONS
Insurance and Pensions

30.03.2011

CALL FOR ADVICE FROM THE EUROPEAN INSURANCE AND


OCCUPATIONAL PENSIONS AUTHORITY (EIOPA) FOR THE
REVIEW OF DIRECTIVE 2003/41/EC (IORP II)

Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.

http://ec.europa.eu/internal_market/
TABLE OF CONTENTS

1. INTRODUCTION ....................................................................................................... 3

2. SCOPE OF THE IORP DIRECTIVE.......................................................................... 5

3. FACILITATING CROSS-BORDER ACTIVITY....................................................... 5

4. INTRODUCING RISK-BASED SUPERVISION FOR IORPS ................................. 6

5. SPECIFIC FEATURES FOR DC SCHEMES ............................................................ 9

6. QUANTITATIVE IMPACT STUDY AND DATA RELATED ISSUES ................ 10

7. FURTHER GUIDANCE ON THE REPORTING MODALITIES AND


DEADLINES............................................................................................................. 11

ANNEX

2
1. INTRODUCTION

1.1. Directive 2003/41/EC on the activities and supervision of institutions for


occupational retirement provision (IORP Directive) has been adopted in
2003. The aim of the directive is to create an internal market for
occupational retirement provision organised on a European scale. The
directive enables an employer in one Member State to sponsor an IORP
located in another Member State or, conversely, it enables an IORP located
in one Member State to be sponsored by one or more employers in different
Member States. The opening up of the borders has to be accompanied by
common standards to protect members and beneficiaries of occupational
pension schemes. The IORP Directive therefore also provides for prudential
regulation, but based on minimum harmonisation and mutual recognition.

1.2. This Call for Advice (CfA) seeks to obtain advice from the European
Insurance and Occupational Pensions Authority (EIOPA) on how to improve
the IORP Directive. The Commission has foreseen a review of the IORP
Directive for three main reasons. First, there are currently less than 80 IORPs
operating across different Member States, which represents a very small
proportion of the around 140,000 IORPs existing in the EU. The
Commission intends to propose measures that simplify the legal, regulatory
and administrative requirements for setting-up cross-border pension
schemes. Employers, IORPs and employees should be able to reap the full
benefits of the Single Market. Second, the recent economic and financial
crisis has forcefully demonstrated the need for risk-based supervision. This is
the case already for IORPs in some Member States, but not at the EU level.
Building on the know-how and technology existing in Member States, the
Commission intends to propose measures that would allow IORPs to benefit
from the risk-mitigating security mechanisms at their disposal. Third, while
not very prevalent at the time of adopting the IORP Directive in 2003, today
nearly 60 million Europeans rely on a defined contribution (DC) scheme for
an adequate retirement income. DC schemes shift the risks – in particular
market risk, longevity risk or inflation risk – to individual households.
International discussions have shown that this raises important new policy
issues. The Commission therefore seeks advice on how to modernise
prudential regulation for IORPs that operate DC schemes.

1.3. The Commission's proposal to review the IORP Directive will be


accompanied by an impact assessment study. This impact assessment will
take into account that supplementary occupational pension schemes are
generally proposed by employers to their employees on a voluntary basis.
The new supervisory system for IORPs should not undermine the supply or
the cost-efficiency of occupational retirement provision in the EU.

1.4. This CfA builds on extensive public consultation of a wide range of


stakeholders that the Commission carried out over the past years. The
Commission Services conducted a public consultation on the solvency rules
for IORPs in 2008 and 2009. A summary of this consultation was published

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on 16 March 2009.1 This was followed-up by a Public Hearing on 27 May
2009.2

1.5. Given the importance of pensions for the citizens in an ageing Europe, the
Commission subsequently decided to integrate issues relating to the solvency
rules for IORPs into the much broader consultation launched by the
Commission's July 2010 Green Paper on pensions.3 This decision was taken
to ensure that the regulation of the activities and the supervision of IORPs
are consistent with the overall economic, fiscal and social policy. The main
aim of public policy in the area of pensions is to ensure the sustainability of
public finances and an adequate retirement income. The Green Paper
consultation confirmed that completing the Single Market for occupational
retirement provision can make a significant contribution towards these
objectives. The Single Market can reduce the cost of financing pensions by
allowing for further efficiency gains through scale economies, innovation
and diversification. It can also enhance the safety of pension schemes
through effective and intelligent regulation. The best way for the Single
Market to support fiscal sustainability and pension adequacy is through the
facilitation of cross-border activity and the development of risk-based
supervision.

1.6. The European Parliament adopted its Report on the Green Paper on 16
February 2011. The Commission Services published a summary of all the
responses on 7 March 2011.4

1.7. The EIOPA advice should cover all the types of schemes operated by IORPs,
ranging from pure defined benefit (DB) schemes to pure defined contribution
(DC) schemes. A description of this spectrum of pension schemes is
contained in the EIOPA report on risk management.5 Pension schemes with a
minimum guarantee for the contributions paid and/or of the investment
returns are, depending on the Member States, considered to be DC, hybrid or
DB schemes.

1.8. This CfA has been informed by the significant work undertaken by the
EIOPA Occupational Pensions Committee (OPC) in support of supervisory
convergence since its creation in February 2004.

1.9. Against this background – and following the consultation of the Member
States through the European Insurance and Pensions Committee (EIOPC) in
March 2011 - the Commission Services request EIOPA to advise on the

1
http://ec.europa.eu/internal_market/consultations/docs/occupational_retirement_provision/feedback_state
ment_en.pdf
2
http://ec.europa.eu/internal_market/pensions/docs/hearing052009/summary_IORP_public_hearing_en.pdf
3
Green Paper - towards adequate, sustainable and safe European pension systems (COM(2010)365
final), 7.7.2010
4
http://ec.europa.eu/social/main.jsp?catId=700&langId=en&consultId=3&visib=0&furtherConsult=yes
5
Report on risk management rules applicable to IORPs (CEIOPS-OP-22-09), 6.11.2009.

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further development of EU legislation for the activities and supervision of
IORPs, in line with the mandate set out in this CfA. The remainder of this
CfA is structured as follows. Section 2 relates to the scope of the IORP
Directive. Section 3 focuses on the facilitation of cross-border activity.
Section 4 provides guidance for the main features for the risk-based
supervision of pension funds. Section 5 outlines specific features to manage
and supervise risks in pure DC schemes. Section 6 provides guidance for a
quantitative impact study and data related issues. Finally, Section 7 provides
further guidance on the reporting modalities and the deadline.

1.10. The Annex of this CfA sets out more detailed guidance and specific
instructions. It seeks to contribute to the EIOPA advice in two ways. First, it
provides for each topic detailed information about the current provisions in
the IORP Directive and, where relevant, the corresponding articles in
Directive 2009/138/EC (Solvency II). Second, it makes reference to the main
reports prepared by the EIOPA Occupational Pensions Committee (OPC)
over the past years.

2. SCOPE OF THE IORP DIRECTIVE

2.1. The IORP Directive deals only with occupational retirement provision.
However, not all occupational pension schemes are covered. Occupational
retirement provision, operating on a funded basis, is delivered through
different financing vehicles and under different legal regimes in Member
States. As regards book reserve schemes, it should be noted that Article 8 of
Directive 2008/94/EC requires Member States to protect employees’ rights,
in particular outstanding supplementary occupational pension claims, in the
event of the insolvency of their employer. Following the Green Paper
consultation, the Commission is currently assessing the need to review this
directive.

2.2. DC schemes existing in some Member States either do not fall under any EU
prudential regulation or Member States have chosen to subject them to
national legislation that is inspired from the provisions of EU prudential
regulation for similar financial products (e.g. the IORP Directive itself or the
UCITS Directive). The advice should include an assessment of the
provisions in the IORP Directive that could be extended to occupational DC
schemes that are currently not covered.

3. FACILITATING CROSS-BORDER ACTIVITY

3.1. The main purpose of the IORP Directive is to enable an employer in one
Member State to sponsor an IORP located in another Member State. The
legal definition of cross-border activity should be clear in this respect.

3.2. The IORP Directive provides that, in general terms, IORPs are subject to the
prudential supervision of the competent authorities from the home Member
State, while the social and labour law (SLL) of the host Member State is
applicable in this respect. The distinction between prudential legislation and
SLL should be clear and as consistent as possible across Member States.
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3.3. Even though the IORP Directive does not contain a definition of the term
ring-fencing, it refers to this concept at various instances. Legal clarity of
the concept at the EU level may enhance the effectiveness of ring-fencing
measures in protecting pension benefits in the case of cross-border activity of
IORPs and in stressed situations.

4. INTRODUCING RISK-BASED SUPERVISION FOR IORPS

4.1. The supervisory system should provide supervisors with the appropriate
tools and powers to assess the overall financial position of an IORP based on
an economic risk-based approach. The aim is to reflect the true risk
position of the IORP. The supervisory system should not only consist of
quantitative elements, but also cover qualitative aspects that influence the
risk-standing of the institution (managerial capacity, internal risk control and
risk monitoring processes, etc.).

4.2. The supervisory system should be designed in a way that encourages and
gives an incentive to the supervised institutions to measure and properly
manage their risks. In this regard, common EU principles on risk
management and supervisory review should be developed. Furthermore, the
supervisory requirements should cover the quantifiable risks to which a
supervised institution is exposed.

4.3. The supervisory system should be able to allow for interactions between
quantitative and qualitative supervision, as well as with the role of
disclosure. It should therefore be based on three pillars:

– The first pillar consists of quantitative requirements comprising of rules


for the calculation of technical provisions and other security mechanisms.
Where the IORP itself rather than the sponsoring undertaking covers risk,
the own fund requirements should reflect economic capital: a Solvency
Capital Requirement (SCR) and a Minimum Capital Requirement (MCR).
As a particular treatment of this, a similar approach should be adopted for
pension schemes where the risk is covered by the IORP and the
sponsoring undertaking. Where the risk is covered by the sponsoring
undertaking (not the IORP), it should be possible to restate the value of
assets in the IORP and the liabilities of the sponsoring undertaking into a
single balance sheet, including the possibility to recognise sponsor
covenants and claims in pension protection schemes as an asset similar to
reinsurance. Irrespective of the security mechanisms used, the level of
protection of the scheme members and beneficiaries should be similar.

– The second pillar consists of qualitative requirements, comprising of rules


on governance and the supervisory review process.

– The third pillar consists of transparency requirements, comprising of rules


on information disclosure to supervisory authorities and to
members/beneficiaries.

4.4. EIOPA's advice on the future regulation for IORPs should be provided on the
basis of the particular characteristics of occupational pension schemes in the
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EU. The aim of the Commission is to develop a sui generis risk-based
supervisory system for IORPs. EIOPA should therefore take the IORP
Directive as the starting point for the development of its advice. This
notwithstanding, the EIOPA advice should also endeavour to maintain
consistency across financial sectors. Pension schemes and pension products
containing similar risks should be subject to similar regulatory requirements.
The new supervisory system for IORPs should be constructed in a way that
avoids regulatory arbitrage between and within financial sectors.
Accordingly, the general layout of the supervisory system should, to the
extent necessary and possible, be compatible with the approach and rules
used for the supervision of life assurance undertakings subject to Directive
2009/138/EC (Solvency II). When reference is made to this directive, the
EIOPA advice should however carefully take into account lessons learnt
from the European regulatory discussions that took place after the adoption
of this directive in 2009. This relates, in particular, to the illiquidity risk
premium in the discount rate, to the need to better reflect long-term
guarantees and to possible simplifications.

4.5. The main features of Pillar 1 are the following:

(a) The valuation of assets, technical provisions and other liabilities of the
IORP should be market-consistent and based on sound economic
principles.

(b) Technical provisions need to be established in order for the IORP to


fulfil its obligations towards members and beneficiaries. An increased
level of harmonisation for technical provisions is a cornerstone of the
new supervisory system. In the case of non-hedgeable risks, the
calculation of technical provisions comprises of a best estimate of
future cash flows, discounted at a risk-free rate of interest, plus a risk
margin.

(c) In addition, Article 15(6) of the IORP Directive provides that "[w]ith a
view to further harmonisation of the rules regarding the calculation of
technical provisions which may be justified - in particular the interest
rates and other assumptions influencing the level of technical provisions
- the Commission, drawing on advice from EIOPA, shall, every 2 years
or at the request of a Member State, issue a report on the situation
concerning the development in cross-border activities." The advice from
EIOPA should therefore also support the Commission in its assessment
as to whether it "shall propose any necessary measures to prevent
possible distortions caused by different levels of interest rates and to
protect the interest of beneficiaries and members of any scheme."

(d) An IORP that itself, and not the sponsoring undertaking, underwrites
the liability to cover against biometric risk, or guarantees a given
investment performance or a given level of benefits, remains subject to
own fund requirements. The new supervisory system should provide
for a Solvency Capital Requirement (SCR) and a Minimum Capital
Requirement (MCR).

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(e) The amount of own funds eligible to cover the SCR and MCR should
be determined on the basis of three criteria: availability, classification
and eligibility.

(f) The SCR reflects a level of capital that enables an institution to absorb
significant unforeseen losses and that gives reasonable assurance to
members/beneficiaries. The SCR should be calculated in such a way
that the quantifiable risks to which an institution is exposed are taken
into account and based on the amount of economic capital
corresponding to a specific ruin probability and time horizon. The
appropriate ruin probability and time horizon to be used and the
implications for the calculation of the SCR on a going-concern basis
require analysis. The EIOPA advice should consider a suitable
calibration, including a Value at Risk measure with a 99.5% confidence
level over a one year period, that is consistent with the nature of IORPs.

(g) The technical provisions and/or own fund requirements should take into
account additional risk-mitigating security mechanisms for pension
schemes. In particular, on the liabilities side, pension funds may have
the possibility to call on additional contributions from members and/or
sponsors, reduce or suppress the indexation of pension rights or reduce
the pension liabilities (i.e. the technical provisions themselves) in going
concern. On the asset side pension funds may have recourse to sponsor
covenants, contingent assets outside the balance sheet of the IORP, or to
reinsurance from a pension guarantee fund.

(h) The risks addressed in the capital requirements should include at least
underwriting risk, market risk, counterparty default risk and
operational risk. To the extent that these risks are not quantifiable they
will be taken into account in Pillar 2.

(i) The standard approach to calculate the SCR shall be to add the
following three items: a basic SCR, a capital requirement for
operational risk and an adjustment for the loss-absorbing capacity of
technical provisions and deferred taxes.

(j) The risk-based approach implies the recognition of internal models


(either partial or full) provided these improve the institution’s risk
management, better reflect its true risk profile than under the standard
approach. Institutions’ internal models may be used to replace the
standard approach to the SCR if the internal model has been validated
for this purpose. The validation criteria and the validation process
should be developed and harmonised. The possibility to extend this
option to group-wide internal models requires analysis.

(k) The MCR reflects a level of capital below which ultimate supervisory
action would be triggered. It is calculated in a more simple and robust
manner than the SCR as this kind of action may need authorisation by
national courts. The MCR shall be contained within an interval of 25%
to 45% of the institution's SCR.

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(l) Technical provisions should be fully funded. When the amount of assets
no longer covers the amount of technical provisions, or when the own
fund requirements are no longer met, IORPs should set up concrete and
realisable recovery plans. The recovery periods should be consistent
across Member States and prudentially sound.

4.6. The main features of Pillar 2 are the following:

(a) Robust governance and risk management requirements are a pre-


requisite for an efficient risk-based supervisory system.

(b) The supervisory review process should increase the level of


harmonisation of supervisory methods, tools and processes. In
particular, it should aim to identify institutions with financial,
organisational or other features susceptible to producing a higher risk
profile. Such institutions require funding or a higher capital than under
the SCR.

4.7. The main features of Pillar 3 are the following:

(a) Transparency enhances discipline and hence reinforces the provisions in


Pillars 1 and 2. There is a need to revisit the requirements to disclose
information to supervisory authorities and to the members/beneficiaries
of occupational pension schemes.

(b) Requirements to disclose to members/beneficiaries should, to the extent


possible, be compatible with requirements in other financial sectors, in
particular the UCITS IV Key Investor Information Document (KIID) in
the case of DC schemes.

5. SPECIFIC FEATURES FOR DC SCHEMES

5.1. Specific attention should be paid to defined contribution (DC) schemes that
do not offer a principal and/or investment guarantee. These schemes have
become much more prevalent in the EU since the adoption of the IORP
Directive in 2003. It is important to consider whether the IORP Directive
needs to be adjusted to better address the specific needs for the regulation
and supervision of DC schemes.

5.2. The main focus should be on the accumulation phase of DC schemes,


although where necessary advice concerning the decumulation phase should
also be considered.

5.3. Although relevant to all types of pension schemes, the areas where DC
schemes may require particular attention include at least the following:

– Governance: see general governance, fit and proper, risk


management and outsourcing in the Annex;

– Investment rules: supervision of asset allocations in multi-funds,


life-cycling investment approaches and default funds (see
investment rules in the Annex);
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– A comprehensive statement of investment principles: see reporting
to supervisors and information to members/beneficiaries in the
Annex;

– Investment risk and in particular liquidity risk, i.e. the risk that
investments could be insufficiently liquid to meet requirements to
pay out balances or benefits to members without incurring
avoidable losses. Regulation should ensure that the risk
management system of the pension fund is adequately structured
and well supervised (see risk management in the Annex);

– Operational risk, in particular administration risk such as


contributions and investment returns allocated to an incorrect
account; moreover in a DC scheme it is more likely that the
members/beneficiaries bear the cost of operational failures (see
security mechanisms, risk management and supervisory review
process in the Annex);

– Costs: Regulation should ensure that costs and fees are disclosed
fully and transparently (see information to members/beneficiaries
in the Annex). Other possible approaches to deal with high costs
include an "unreasonable test", capping fees, requiring competitive
bidding and centralisation (clearinghouses).

– Managing transition from accumulation to decumulation:


annuitisation, timing, programmed withdrawals. Regulation should
ensure that supervision can oversee how information is provided
and how competition is working during the transition (e.g.
comparison of annuity prices); see information to
members/beneficiaries in the Annex.

6. QUANTITATIVE IMPACT STUDY AND DATA RELATED ISSUES

6.1. EIOPA is also requested to run a Quantitative Impact Study (QIS) and
provide related data with a view to informing the impact assessment analysis
that will accompany the Commission's proposals to review the IORP
Directive.

6.2. The timetable for the QIS exercise is challenging. EIOPA may therefore wish
to focus on the impact of its advice on particular Member States and use, as
far as possible, approximations based on existing data. Simplifications
should be used when they are possible. EIOPA is also encouraged to work
with other stakeholders.

6.3. The aim of the QIS exercise is twofold. First, to provide all stakeholders
with detailed information on the quantitative impact of EIOPA's advice on
the prudential balance sheet of IORPs in comparison with the current
situation. The current situation is reflected in the requirements and practices
existing already both at the national and institution level (baseline scenario),
including legal obligations that stem directly from the existing IORP
Directive, obligations imposed through national laws or by supervisors, as
10
well as practices institutions voluntarily abide by for both internal and
external purposes ("business as usual" practices). Second, to collect
quantitative and qualitative data to support the analysis of different policy
options in the impact assessment of the Commission.

6.4. EIOPA should address at least the following main questions:

– Which items on the prudential balance sheet are impacted the


most?

– What is the effect on IORPs of the possible restatement of the


value of both assets and liabilities under the envisaged supervisory
framework?

– What is the relationship between the explicit requirements in the


envisaged supervisory system and the current explicit and implicit
requirements as regards technical provisions, own funds and/or
prudent valuation of assets and liabilities?

– Which elements are the most important sources of own funds for
IORPs?

– What is the impact on the funding level or capital surplus (capital


available on top of the regulatory requirement)?

– Where own funds are required, what is the impact on the solvency
ratio (coverage of SCR and MCR)?

– Will IORPs need to raise their funding level or raise additional


capital?

– Are internal models used by IORPs and can they reduce the
required level of funding or capital?

– How practical are the calculations involved?

6.5. EIOPA should also seek to provide an indication of the impact of its advice
on administrative costs, using as far as possible the approach set out in the
EU Standard Cost Model.

7. FURTHER GUIDANCE ON THE REPORTING MODALITIES AND DEADLINES

7.1. The aim is to attain a level of harmonisation where EU legislation does not
need additional requirements at the national level. The Commission Services
intend to use the Lamfalussy approach to financial legislation, i.e. recast the
existing IORP Directive into a Level 1 Framework Directive and develop, at
a later stage, Level 2 implementing measures. This CfA only concerns advice
in relation to the Level 1 Framework Directive.

7.2. EIOPA should also consider whether its advice needs to be formulated in the
form of several policy options with an explanation of their respective merits.

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7.3. EIOPA should consider how the envisaged rules can be applied in a manner
that is proportionate to the nature, scale and complexity of the IORP.
Simplifications should be used whenever possible.

7.4. The EIOPA advice should incorporate - as far as possible - the principles and
guidelines on private pension funds developed by the OECD, the
International Organisation of Pension Supervisors (IOPS) and the Groupe
Consultatif Actuariel Européen / International Association of Actuaries
(IAA).

7.5. EIOPA is encouraged to consult stakeholders before submitting its advice


to the Commission. Given the tight timetable EIOPA should however take
into account that a number of aspects of the envisaged supervisory system
have already been consulted on by the Commission Services in 2008/2009
and in the 2010 Green Paper on pensions. References to the latter
consultation have been made in the Annex.

7.6. EIOPA should provide the Commission with its final advice, including the
results from the QIS exercise, by Friday, 16 December 2011. EIOPA is
encouraged to deliver its advice, including interim reports if necessary, in
regular stages.

7.7. In the interests of transparency, the Commission will publish this Call for
advice on its website.

EUROPEAN COMMISSION
Internal Market and Services DG

FINANCIAL INSTITUTIONS
Insurance and Pensions

30.03.2011

12
ANNEX

Call for Advice from EIOPA for the review of Directive 2003/41/EC
(IORP II)

13
TABLE OF CONTENTS

1. SCOPE OF THE IORP DIRECTIVE........................................................................ 15

2. DEFINITION OF CROSS BORDER ACTIVITY .................................................... 17

3. RING FENCING ....................................................................................................... 19

4. PRUDENTIAL REGULATION AND SOCIAL AND LABOUR LAW.................. 21

5. VALUATION OF ASSETS, LIABILITIES AND TECHNICAL


PROVISIONS............................................................................................................ 22

6. SECURITY MECHANISMS .................................................................................... 25

7. INVESTMENT RULES ............................................................................................ 29

8. OBJECTIVES AND PRO-CYCLICALITY ............................................................. 32

9. GENERAL PRINCIPLES OF SUPERVISION, SCOPE AND


TRANSPARENCY AND ACCOUNTABITY ......................................................... 34

10. GENERAL SUPERVISORY POWERS ................................................................... 35

11. SUPERVISORY REVIEW PROCESS AND CAPITAL ADD-ONS....................... 37

12. SUPERVISION OF OUTSOURCED FUNCTIONS AND ACTIVITIES................ 39

13. GENERAL GOVERNANCE REQUIREMENTS .................................................... 41

14. FIT AND PROPER ................................................................................................... 43

15. RISK MANAGEMENT ............................................................................................ 45

16. OWN RISK AND SOLVENCY ASSESSMENT ..................................................... 47

17. INTERNAL CONTROL SYSTEM........................................................................... 48

18. INTERNAL AUDIT .................................................................................................. 50

19. ACTUARIAL FUNCTION ....................................................................................... 52

20. OUTSOURCING ...................................................................................................... 54

21. CUSTODIAN/DEPOSITORY .................................................................................. 56

22. INFORMATION TO SUPERVISORS ..................................................................... 58

23. INFORMATION TO MEMBERS/BENEFICIARIES .............................................. 60

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8. SCOPE OF THE IORP DIRECTIVE

8.1. Introduction

The IORP Directive deals only with occupational retirement provision.


However, not all occupational pension schemes are covered. Occupational
retirement provision, operating on a funded basis, is delivered through
different financing vehicles and under different legal regimes in Member
States. As regards book reserve schemes, it should be noted that Article 8 of
Directive 2008/94/EC requires Member States to protect employees’ rights,
in particular outstanding supplementary occupational pension claims, in the
event of the insolvency of their employer. Following the Green Paper
consultation, the Commission is currently assessing the need to review this
directive.

DC schemes existing in some Member States either do not fall under any EU
prudential regulation or Member States have chosen to subject them to
national legislation that is inspired from the provisions of EU prudential
regulation for similar financial products (e.g. the IORP Directive itself or the
UCITS Directive). The advice should therefore include an assessment of the
provisions in the IORP Directive that could be extended to occupational DC
schemes that are currently not covered.

8.2. References

• International:

(2)OECD Core Principles on private pension funds

(3)IOPS guidelines for private pension funds

• European Insurance and Occupational Pensions Authority (EIOPA):

– Initial review of key aspects of the implementation of the IORP Directive


(CEIOPS-OP-03-08 final), OPC, 31 March 2008, Section 4.1.1 and
Annex 1.

– Commission Staff Working Document accompanying the Green Paper -


towards adequate, sustainable and safe European pension systems,
SEC(2010) 830 final, 7.7.2010: Table 1.

• European Commission:

(4)Green paper on pensions: summary of consultation responses (7.3.2011),


question 8

8.3. Background: preliminary proposal for principles for draft Directive

The scope of the IORP Directive is contained in Articles 2 to 4.

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8.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on the scope of the
IORP Directive, covering at least the following issues:

– The possibility to extend the scope of the IORP Directive to other


occupational pension funds that operate on a funded basis.

– The provisions that would need to be amended or added (if any) in order to
suit the needs for the supervision of those occupational pension funds.

– Other advise, if any.

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9. DEFINITION OF CROSS BORDER ACTIVITY

9.1. Introduction

The purpose of the IORP Directive is to create an internal market for


occupational retirement provision. It enables an undertaking located in one
Member State to sponsor an IORP located in another Member State and,
conversely, an IORP located in one Member State to accept sponsorship
from two or more undertakings in other Member States. This follows from
Article 20(1) of the Directive.

Three different approaches are used by Member States when defining cross-
border activity of IORPs: location of the sponsoring undertaking, nationality
of the social and labour law (SLL) and nationality of the scheme.

A related issue is that the definition of the "sponsoring undertaking" in


Article 6(c) of the IORP Directive may need to be clarified. There are
situations where company A in one Member State is taken over by or merged
with company B in another Member State. Company A becomes a branch of
company B. The question is whether the IORP sponsored by ex-company A
(now a branch of company B) needs to follow the procedure for cross-border
activity.

Because of the differing national approaches, situations can arise where two
(or more) Member States potentially involved in a cross-border activity come
to different conclusions whether or not the proposed activity is actually a
cross-border activity. This hampers IORPs' willingness to engage in cross-
border activities.

9.2. References

• European Insurance and Occupational Pensions Authority (EIOPA):

– Cross-border IORPs. Note to the Commission. (CEIOPS-DOC-98-10)

– Cross-border activity of IORPs. Practical issues paper. (CEIOPS-OP-37-09


(final))

• European Commission:

– Commission report on some key aspects concerning the IORP Directive,


COM(2009) 203 final, 30 April 2009.

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 5

9.3. Background: preliminary proposal for principles for draft Directive

The intention of the IORP Directive is to enable an undertaking in one


Member State to sponsor an IORP in another Member State.

17
9.4. Specific Call for Advice

The Commission Services would like EIOPA to advice on how the wording
of the IORP Directive needs to be amended in order to clarify that cross-
border activity arises only when the sponsoring undertaking and the IORP
are located in two different Member States.

18
10. RING FENCING

10.1. Introduction

The IORP Directive does not contain a definition of the term ring-fencing
but refers to the concept in Recital 38 and Articles 3, 4, 7, 8, 16(3), 18(7) and
21(5). Uncertainty exists about the legal conditions and practical
consequences of employing ring-fencing measures, since they are applied
differently by Member States.

Ring-fencing is a regulatory tool for compliance purposes and for the


protection of the rights of pension scheme members and beneficiaries.

A distinction can currently be made between administrative ring-fencing and


property protection rules in the context of stressed situations. Generally, the
consequences for the protection of pension benefits differ depending on the
combination of the legal form of the IORP, the various stress situations
directly or indirectly related to a pension scheme and different levels of
protection offered by patrimony protection rules and administrative ring-
fencing measures.

Therefore, legal clarity at EU level regarding the scope and legal


implications of ring-fencing measures may enhance the protection of pension
benefits in various situations.

10.2. References

• European Insurance and Occupational Pensions Authority (EIOPA):

– Initial review of key aspects of the implementation of the IORP Directive


(CEIOPS-OP-03-08), 31 March 2008.

– Report on Ring Fencing in Stress Situations (CEIOPS-OP-08-09 Rev6),


July 2010.

• Directive 2009/138/EC (Solvency II Framework Directive): Article 99

10.3. Background: preliminary proposal for principles for draft Directive

The scope and legal implications of ring-fencing measures in various cases


such as cross-border activity of IORPs and stress situations so as to protect
pension benefits need to be properly assessed in the light of Directive
2009/138/EC, which for example states that ring-fenced fund structures give
one class of policy holders greater rights to assets within their own fund.

10.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:

– The scope of ring-fencing measures needs to be clarified in the context of


cross-border activity of IORPs.

19
– The text of an article to be inserted into the Directive with the aim of
establishing the general principles which warrant ring-fencing measures in
the case of stress situations, including the legal implications and common
safeguards, which would improve adequate protection of pension benefits.

20
11. PRUDENTIAL REGULATION AND SOCIAL AND LABOUR LAW

11.1. Introduction

It is essential to establish at EU level the scope of prudential regulation so as


to make a proper distinction between prudential regulation and social and
labour law (SLL), whose scope is determined by Member States. A clear and
uniform scope of prudential regulation would render cross-border activity of
IORPs easier and less burdensome.

Directive 2010/78/EC (Omnibus I) introduced into the IORP Directive a


requirement to develop binding technical standards (BTS) for the reporting
of the scope of prudential regulation to EIOPA. However, the BTS solely
introduce a common format but do not aim to clarify the scope of prudential
regulation.

11.2. References

• European Insurance and Occupational Pensions Authority (EIOPA):

- Overview of legal requirements under the IORP Directive (2003/41/EC)


with which a guest IORP operating a pension scheme in a host Member State
must comply, October 2009.

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 5

• Directive 2009/138/EC (Solvency II Framework Directive): Article 30

11.3. Background: preliminary proposal for principles for draft Directive

The scope of prudential regulation may need to be specifiedin the IORP


Directive so as to distinguish clearly between prudential legislation and SLL.
Inspiration may be found in Article 30 of Directive 2009/138/EC, which
refers to the scope of supervision as executed by supervisory authorities in
the case of insurance legislation.

11.4. Specific Call for Advice

The EIOPA advice should address at least the following subject:

– The IORP Directive needs to determine the scope of prudential regulation,


as administered by the home Member State.

21
12. VALUATION OF ASSETS, LIABILITIES AND TECHNICAL PROVISIONS

12.1. Introduction

At the heart of a modern risk-based supervisory regime are market-consistent


valuation rules for assets and liabilities. Technical provisions are the most
important liabilities of pension funds.

The IORP Directive contains some references to valuation rules, but they
remain vague. Article 10 requires that IORPs give a "true and fair" view of
their assets and liabilities in accordance with national law. In most cases this
will be national GAAP (generally accepted accounting principles).

Given the importance of technical provisions, the rules in the IORP Directive
are somewhat more specific. Article 15 requires IORPs to establish an
adequate amount of liabilities corresponding to the financial commitments
arising out of the pension contracts (point 1). Where IORPs cover against
risk, they are required to establish technical provisions (point 2). The
minimum amount of these technical provisions is to be calculated on a
forward-looking going-concern basis, including a margin for adverse
deviation (point 4a). The directive does not require a risk-free discount rate.
It allows the use of asset-based rates, high-quality corporate bond yields and
government bond yields (point 4b). Biometric tables are scheme-specific
(point 4c).

Moreover, the home Member State may make the calculation of technical
provisions subject to additional and more detailed requirements (Article
15(5)).

The Directive also requires the Commission to issue a report at least every
two years on the need to harmonise technical provisions to facilitate the
development of cross-border activity (Article 16(6)). A first report was
issued on 30 April 2009 (see references). The second report will be delivered
in the context of the Commission proposal to review the IORP Directive. In
its Report on the Pensions Green Paper, the European Parliament
underlines Article 15(6) of the IORP Directive, which states that with regard
to the calculation of technical provisions, ‘the Commission shall propose any
necessary measures to prevent possible distortions caused by different levels
of interest rates and to protect the interest of beneficiaries and members of
any scheme’.

An EIOPA report (see references) has shown that IORPs use different
methods to calculate technical provisions. Some Member States provide for
the use of a market-consistent risk free discount rate and biometric tables
without additional prudence (e.g. for longevity risk). Some Member States
require IORPs to take account of future inflation and salary increases and
make an allowance for future expenses (e.g. cost for administration and asset
management). Risk margins are not calculated explicitly. While the EIOPA
report shows that Member States have adopted the principles set out in the
IORP Directive, it also underlines that there are stark differences in the
method to calculate technical provisions. A stylistic illustration in the
22
EIOPA report (pg. 24-26) shows that the differences in the discount rate used
and in the approaches to inflation/salary indexation (mandatory or not) have
a large impact on the level of technical provisions across Member States.

12.2. References

(5)International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 3 (measurement of plan liabilities)
and Core Principle 4 (valuation of assets).

– OECD Recommendation on Guidelines on Funding and Benefit Security in


Occupational Pension Plans, May 2007 (for the annotations to Core
Principle 3).

– OECD Recommendation on Guidelines on Pension Fund Asset


Management, January 2006 (for the annotations to Core Principle 4)

(6)European Insurance and Occupational Pensions Authority (EIOPA):

– Survey on fully funded, technical provisions and security mechanisms in


the European occupational pension sector (CEIOPS-OPSSC-01/08 final),
OPC Solvency Subcommittee, 31 March 2008: Section 5.

(7)European Commission:

– Commission report on some key aspects concerning the IORP Directive,


COM(2009) 203 final, 30 April 2009.

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 8 and 10

(8)Directive 2009/138/EC (Solvency II Framework Directive): Article 75


(valuation of assets and liabilities) and Articles 76-86 (technical
provisions).

12.3. Background: preliminary proposal for principles for draft Directive

Article 15 of the IORP Directive has to be amended in the light of the new
supervisory regime and in order to facilitate cross-border activity. The
following two articles of Directive 2009/138/EC could be applied, at least as
a starting point, mutatis mutandis, to the IORP Directive:

Article 75 of Directive 2009/138/EC contains high-level principles to value


assets and liabilities on a market-consistent basis, building, as much as
possible, on international accounting standards;

Articles 76-86 of Directive 2009/138/EC contain the rules relating to


technical provisions. In general terms, they consist of a best estimate
(probability-weighted average of future cash-flow) discounted by a risk-free
rate plus an explicit risk margin to take account of valuation uncertainty
(reflecting the cost of capital above the risk-free rate). The best estimate is to
23
be calculated gross (Article 77(2)); deductions of the amounts recoverable
from reinsurance contracts and special purpose vehicles are to be calculated
separately and must take account of counterparty default risk (Article 81).
Under certain circumstances approximations in the calculation of the best
estimate are allowed (Article 82).

12.4. Specific Call for Advice

The Commission Services would like EIOPA to advise, in close cooperation


with the actuarial profession, on detailed rules by which supervisors can
ensure that IORPs have proper rules to value assets, technical provisions and
other liabilities.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 75 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to the valuation of assets and liabilities;

– The consistency between the rules to establish prudential balance sheets of


IORPs and the rules for general accounting purposes, taking into account
where necessary the financial reporting rules (national or international)
applicable to the sponsoring undertaking.

– The material elements of Articles 76-86 of Directive 2009/138/EC that


should be amended or removed to adequately address the specificities of
IORPs in relation to the technical provisions. This should include advice on
the circumstances under with approximations in the calculation of the best
estimate should be allowed;

– The need to maintain Article 15(5) of Directive 2003/41/EC;

– The application of the rules to calculate technical provisions to the


calculation of the "adequate amount of liabilities" (in the meaning of
Article 15(1) of the IORP Directive) to be able to pay pension benefits as
and when they fall due. This should include advice on the feasibility to
treat sponsor covenants like reinsurance contracts (see Article 81 of
Directive 2009/138/EC) with due account for counterparty default risk;

– Other requirements for IORPs, if any.

24
13. SECURITY MECHANISMS

13.1. Introduction

Article 16 of the IORP Directive requires a level of assets to match the


technical provisions (full funding). Where IORPs cover risks themselves
(rather than the sponsoring undertaking), the IORP Directive requires assets
above technical provisions – i.e. regulatory own funds - as specified in
Article 17. The own fund requirements applicable are those that previously
applied to life insurance undertakings (i.e. Solvency I) to maintain a
regulatory consistency. Article 303 of the Solvency II Directive has
maintained the Solvency I regime for IORPs by inserting Articles 17a-d
directly into the IORP Directive. These articles deal in broad terms with the
eligible assets to cover the solvency margin (assets above technical
provisions) and the level of the required solvency margin.

An EIOPA report (see references) has shown that financial commitments


arising out of pension schemes, whether technical provisions or other
liabilities, can be secured in different ways. Some Member States have
chosen regulatory own funds (in the same way as a bank or an insurance
undertaking), while others rely on sponsor covenants and reinsurance in
pension protection funds.

The level of protection of the scheme members and beneficiaries should be


similar irrespective of the security mechanisms used.

What is important to establish precisely is who bears the risk and in which
way the pension schemes enable the IORP or the sponsoring undertaking to
reduce benefits on a going-concern basis. The EIOPA report on risk
management (see references) provides detailed information about eight types
of risk-sharing features, focusing in particular on which entity (IORP,
sponsor or member/beneficiary) takes on the risk (investment and biometric)
and if necessary provides support (either in terms of more contributions or
less benefits). The most common types of risk-sharing are pure DB schemes
in which either the sponsor or the IORP itself bears all the risk and pure DC
schemes in which the members/beneficiaries bear all the risk. In between
these extremes, there are pension schemes with a minimum guarantee on
asset returns during the accumulation phase (where the risk is borne by either
the IORP or the sponsor), while the risks during the payout phase are borne
by the member/beneficiary.

The EIOPA advice should also address recovery plans. Article 16(2) of the
IORP Directive allows underfunding subject to a concrete and realisable
recovery plan for a limited period of time. Article 16(3) suggests that for
cross-border activity the recovery period might be shorter. The strength and
especially the length of recovery plans can have a significant impact on the
effectiveness of supervision. Moreover, the EIOPA report (see references)
has highlighted that there are large differences between the rules set out in
Member States.

25
13.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 2 (capital requirements), Core
Principle 3 (funding rules).

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 3 (Funding and Solvency Risk
Control) and Good practice 5 (operational risk control).

– OECD Recommendation on Guidelines on Funding and Benefit Security in


Occupational Pension Plans, May 2007 (for the annotations to Core
Principle 3)

– IOPS paper on Managing and Supervising risks in defined contribution


pension systems, October 2010: pages 32-33 (operational risk)

• European Insurance and Occupational Pensions Authority (EIOPA):

– Survey on fully funded, technical provisions and security mechanisms in


the European occupational pension sector (CEIOPS-OPSSC-01/08 final),
OPC Solvency Subcommittee, 31 March 2008: Section 5.

– The EIOPA report on risk management: Section II.1

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 8 and 10

• Directive 2009/138/EC (Solvency II Framework Directive): Articles 87-99


(own funds), Articles 100-127 (SCR) and Article 304 (duration approach),
Article 128-131 (MCR).

• Other:

– EFRAG paper "The financial reporting of pensions", January 2008.

13.3. Background: preliminary proposal for principles for draft Directive

Article 17 of the IORP Directive has to be amended in the light of the new
supervisory regime and in order to facilitate cross-border activity. The following
articles of Directive 2009/138/EC could be applied, at least as a starting point,
mutatis mutandis, to the IORP Directive:

(9)Articles 87-99 of Directive 2009/138/EC contain the provisions on own


funds: basic own funds (including subordinated liabilities), ancillary own
funds (e.g. call for supplementary contributions) and their classification
into three tiers. This should include advice on the inclusion of contingent
assets such as a statutory subsidiary liability of the sponsor.

26
(10) Articles 100-127 of Directive 2009/138/EC contains the
provisions on the SCR to cover unexpected losses with the following main
features:

(1)Value-at-Risk of 99.5% over a one-year period in going-concern;

(2)the standard formula for the calculation of the SCR:

• risk modules for life underwriting risk, market risk,


including for equity risk the equity dampener in Article
106 and the duration approach in Article 304, and the
counterparty default risk;

• the operational risk module;

• Adjustment for the loss-absorbing capacity of technical


provisions (e.g. reduction in benefits to cover
unexpected losses when they arrive) and deferred taxes.

(3)internal models for the calculation of the SCR

(4)Articles 128-131 of Directive 2009/138/EC contain the provisions on the


MCR.

(5)Articles 136-142 of Directive 2009/138/EC contain the provisions for the


recovery plan and the finance scheme.

13.4. Specific Call for Advice

The Commission Services would like EIOPA to advise, in close cooperation with
the actuarial profession, on detailed rules by which supervisors can ensure that
IORPs have proper rules to protect pension liabilities.

The EIOPA advice should address at least the following subjects:

– Where the IORP itself covers risk (in the meaning of Article 17(1) of the
IORP Directive):

(6)The material elements of Article 87-99 of Directive 2009/138/EC


that should be amended or removed to adequately address the
specificities of IORPs in relation to own funds; the advice should
include an assessment as to whether there is an advantage to keep
a three-tier system;

(7)The adequacy of using subordinated debt as own funds in the light


of the borrowing restriction for IORPs contained in Article 18(2)
of the IORP Directive;

(8)The material elements of Articles 100-127 and 304 of Directive


2009/138/EC that should be amended or removed to adequately
address the specificities of IORPs in relation to the SCR
(including the duration approach for the equity risk sub-module).
Particular attention should be paid to the adjustment for the loss-
27
absorbing capacity of technical provisions and deferred taxes to
take into account the specificities of pension schemes;

(9)The material elements of Article 128-131 of Directive


2009/138/EC that should be amended or removed to adequately
address the specificities of IORPs in relation to the MCR.

(10) As a particular treatment of this, the extent to which a


similar approach can be adopted for pension schemes were the risk
is covered by the IORP and the sponsoring undertaking.

– Where the risk (in the meaning of Article 17(1) of the IORP Directive) is
covered by the sponsoring undertaking:

(11) The possibility to restate the value of assets in the IORP


and liabilities of the sponsoring undertakings into a single balance
sheet, including the possibility to recognise sponsor covenants and
claims in pension protection schemes as an asset similar to
reinsurance.

– The level of protection of the scheme members and beneficiaries provided by


the security mechanisms in the various systems.

– The treatment of operational risk where the investment risk is borne by the
scheme member or beneficiary;

– The material elements of Articles 136-142 of Directive 2009/138/EC that


should be amended or removed to adequately address the specificities of
IORPs in relation to the recovery plan and, where necessary, the finance
scheme; particular attention should be paid to (i) the length of the recovery
period allowed and (ii) the need to maintain a specific wording for cross-
border activity.

– Other requirements for IORPs, if any,

– Proportionality: e.g. simplifications in the standard SCR formula.

28
14. INVESTMENT RULES

14.1. Introduction

The investment rules in the IORP Directive are based on the prudent person
principle (Article 18) complemented with mandatory and optional
quantitative restrictions.

EIOPA has made a first assessment of the investment rules in Article 18 (see
references) which has shown that only a few Member States have
implemented a pure prudent person rule. There is a persistence of
quantitative investment limits (see also the annual surveys of the OECD
mentioned in the references). Moreover, there is a lack of common
understanding on the scope of the single issuer rule in Article 18(1)(e) and
the definition of "risk capital markets" in Article 18(5)(c). The need to
continue to monitor the operation of the investment rules also in the light of
any lessons to be learnt from the economic and financial crisis was taken up
in the Report from the Commission of April 2009 (see references).

In particular, there is a need to assess whether the investment rules contained


in the IORP directive are suitable for the regulation of DC schemes, which
expose the scheme members/beneficiaries to investment risk. In some
Member States, DC schemes allow for investment options with different
risk-return characteristics and for a default option if the scheme member
does not make an investment choice. Investment regulation takes the form of
a quantitative portfolio ceiling: different quantitative restrictions for specific
assets (e.g. equity) apply to the various fund options. Life-styling investment
approaches are common in some Member States.

At the level of the entire portfolio, Mexico has introduced investment


regulation in the form of a quantitative risk limit: it requires pension funds to
remain below a certain Value-at-Risk measure (95% over one day). If that
limit is breached the supervisor may require the pension fund to sell the
riskiest assets.

14.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 4.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 4 (investment/market risk
control).

– OECD Recommendation on Guidelines on Pension Fund Asset


Management, January 2006 (for the annotations to Core Principle 4)

– OECD/IOPS Good Practices on Alternative and Derivative Investments by


Pension Funds (forthcoming).

29
– OECD Survey of investment regulation of pension funds, October 2010.

• European Insurance and Occupational Pensions Authority (EIOPA)6:

– Initial review of key aspects of the implementation of the IORP Directive


(EIOPA-OP-03-08 final), OPC, 31 March 2008: Section 4.5 and
Appendix 9.

– Report on risk management rules applicable to IORPs (EIOPA-OP-22-09),


6.11.2009: page 9 (on life cycle options)

• European Commission:

– Report from the Commission on some key aspects concerning Directive


2003/41/EC on the activities and supervision of institutions for
occupational retirement provision (IORP Directive), COM(2009) 203
final, 30.4.2009

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 8 and 13

• Directive 2009/138/EC (Solvency II Framework Directive): Article 132


(prudent person principle) and Article 133 (freedom of investment).

14.3. Background: preliminary proposal for principles for draft Directive

Article 18 of the IORP Directive may need to be amended in the light of the
new supervisory regime and the more recent approach taken in Directive
2009/138/EC as regards the prudent person principle.

14.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules by which
supervisors can ensure that IORPs have proper investment rules.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 132(2) of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to risk assessments;

– The application of the quantitative restriction on investment in the sponsoring


undertaking in Article 18(1)(f) of the IORP Directive when the IORP is
sponsored by two or more undertakings;

– The necessity from a prudential perspective to maintain Article 18(5) first and
second sub-paragraphs of the IORP Directive enabling Member States to lay
down more detailed investment rules;

6
http://www.EIOPA.org/

30
– The necessity from a prudential perspective to maintain Article 18(5)(b) of
the IORP Directive enabling IORPs to invest up to 30% in foreign
currencies;

– The necessity from a prudential perspective to maintain Article 18(5)(c) of


the IORP Directive enabling IORPs to invest in risk capital markets;

– The necessity from a prudential perspective to maintain Article 18(6) of the


IORP Directive enabling Member States to lay down more stringent
investment rules on an individual basis;

– The necessity from a prudential perspective to maintain Article 18(7) of the


IORP Directive enabling, in the event of cross-border activity, the host
Member States to require IORPs in the home Member State to comply with
stricter investment rules as regards assets traded in regulated versus non-
regulated markets, exposure to a single issuer or group and currency risk;

– The adequacy of the investment rules in Article 18(5)(a) of the IORP


Directive where the pension scheme members bear the investment risk. This
should include advice on at least:

(12) The material elements of Article 132(3) first to third


subparagraphs of Directive 2009/138/EC that should be amended
or removed to adequately address the specificities of IORPs in
relation to retirement products where the members bear the
investment risk;

(13) The involvement of the supervisory authorities where


pension schemes provide for multi-funds (relative weights of
different asset classes in the investment portfolio are decided by
the scheme members rather than by the IORP itself), default
options (where members in a multi-fund do not make a choice), or
life-styling (the relative share of risky assets decreases over time).
The supervisory involvement may for example comprise of
verifying compliance with specific investment rules for assets such
as quantitative restrictions for different investment options, the
default fund and life-styling.

(14) The usefulness from a supervisory perspective of a Value-


at-Risk type upper limit on the entire portfolio below which the
supervisor may require the pension fund to take action (e.g. sell
the riskiest assets).

– The necessity from a prudential perspective to introduce specific investment


rules for pension schemes where the members and/or beneficiaries bear risks
other than investment risk, in particular biometric risk and inflation risk.

– Other requirements for IORPs, if any.

31
15. OBJECTIVES AND PRO-CYCLICALITY

15.1. Introduction

The current IORP Directive does not contain references to the main objective
of supervision and the potential pro-cyclicality of supervisors' actions.

Article 27 of Directive 2009/138/EC states that supervisory authorities are


provided with the necessary means, and have the relevant expertise, capacity,
and mandate to achieve the main objective of supervision, namely the
protection of policy holders and beneficiaries.

Article 28 of Directive 2009/138/EC states that supervisory authorities shall


take into account the potential pro-cyclical effects of their actions in times of
exceptional movements in the financial markets. Directive 2009/138/EC
provides for an SCR (soft target) and an MCR (hard target) which enables
supervisors to follow a gradual ladder of intervention. Pro-cyclical effects
are avoided by two mechanisms: 1) the equity dampener in the quantitative
pillar implies that insurance companies build up more capital (reflecting
movements in equity prices) in good times; 2) the dampener in the
qualitative pillar enables supervisors to extend recovery periods to avoid that
insurance undertakings are unduly forced to raise additional capital or sell
their investments as a result of unsustained adverse movements in financial
markets.

15.2. References

(15) International:

(16) The Impact of the Financial Crisis on Defined Benefit


Plans and the Need for Counter-Cyclical Funding Regulations,
OECD Working Papers on Finance, Insurance and Private
Pensions, No. 3, July 2010.

(17) European Commission:

(18) Green paper on pensions: summary of consultation


responses (7.3.2011), question 10

(19) Directive 2009/138/EC (Solvency II Framework Directive):


Article 27 (Main objective of supervision), Article 28 (Financial stability
and pro-cyclicality); for pro-cyclicality: recital 61 and the related Articles
for the pillar 1 and 2 dampeners.

15.3. Background: preliminary proposal for principles for draft Directive

Articles 27 and 28 of Directive 2009/138/EC could be applied, at least as a


starting point mutatis mutandis to the IORP Directive.

15.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:


32
– The inclusion of the main objective of supervision into the IORP Directive;

– The inclusion of the principle to take into account the potential pro-
cyclicality into the IORP Directive.

33
16. GENERAL PRINCIPLES OF SUPERVISION, SCOPE AND TRANSPARENCY AND
ACCOUNTABITY

16.1. Introduction

Effective pension fund regulation should be based on supervision that is


prospective and risk-based, proportionate as well as transparent and
accountable. These principles are currently not required by the IORP
Directive.

16.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 7 (supervision)

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 2 (management oversight and
culture).

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 29


(general principles of supervision), Article 31 (transparency and
accountability).

16.3. Background: preliminary proposal for principles for draft Directive

Articles 29 and 31 of Directive 2009/138/EC could be applied, at least as a


starting point mutatis mutandis to the IORP Directive.

16.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:

– The material elements of Article 29 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to the general principles of supervision;

– The material elements of Article 31 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to transparency and accountability;

– Other rules for IORPs, if any.

34
17. GENERAL SUPERVISORY POWERS

17.1. Introduction

The IORP Directive already contains some provisions on the general


supervisory powers of pension fund supervisory authorities: Article 14(2)
first paragraph enables supervisors to take measures against the IORP or its
management; Article 13(a) and (c) provide access to information; Article
13(d) enables supervisors to carry-out on-site inspections. A recent EIOPA
report (see references) mentions that on-site inspections are an important
instrument to supervisory compliance with general governance requirements,
risk management rules and internal control. The IORP Directive also has
provisions concerning preventive and corrective measures (see Article 14(2)
second paragraph and 14(4)). As regards outsourcing, the IORP Directive
also provides for supervisory powers in relation to on-site inspections as
mentioned in Article 13(d). But for outsourcing in general a recent EIOPA
report (see references) has concluded that the wording of Article 13(b) is not
sufficiently clear. This will be dealt with in other sections of this Annex.

The IORP Directive does however not contain provisions to enable


supervisors to require stress tests or to impose administrative sanctions on
IORPs.

As regards cross-border activity, Article 20(10) of the IORP Directive


provides that the host Member State may take action against an IORP in a
home Member State if its social and labour law is not respected.

17.2. References

• European Insurance and Occupational Pensions Authorities (EIOPA):

– Report on management oversight and internal control rules applicable to


IORPs (EIOPA-OP-37-10 Rev1), OPC, 9 June 2010: section II.2

• Directive 2009/138/EC (Solvency II Framework Directive): Article 34


(general supervisory powers).

• Commission Communication on Reinforcing sanctioning regimes in the


financial services sector (COM(2010) 716 final of 8 December 2010)
(sanctions)

• Proposal for a Regulation of the European Parliament and of the Council on


amending Regulation (EC) No 1060/2009 on credit rating agencies
(COM(2010) 289 final).

17.3. Background: preliminary proposal for principles for draft Directive

• Article 34(4) of Directive 2009/138/EC enables supervisors to require stress


tests. This article could be applied, at least as a starting point mutatis
mutandis to the IORP Directive.

35
• The Commission Communication on Reinforcing sanctioning regimes in the
financial services sector (COM(2010) 716 final of 8 December 2010) sets out
how further convergence could be reached in the sanctioning regimes
applicable to infringements of the provisions of EU financial services
legislation. These principles could be applied t the IORP Directive.

17.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules by


which supervisors can ensure that IORPs have proper stress test systems in
place. EIOPA should also reflect on the possibility for national supervisors
to impose administrative sanctions on IORPs which are sufficiently high to
have a deterrent effect.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 34(4) of Directive 2009/138/EC that


should be amended or removed to adequately address the specificities of
IORPs in relation to stress test;

– The material elements of Article 36 of Regulation No 1060/2009 on credit


rating agencies that should be amended or removed to adequately address
the specificities of IORPs in relation to administrative sanctions;

– The effectiveness of Article 20(10) of the IORP Directive in practice;

– Other general supervisory powers for IORPs, if any.

36
18. SUPERVISORY REVIEW PROCESS AND CAPITAL ADD-ONS

18.1. Introduction

The supervisory review process and, in exceptional circumstances for IORPs


that cover risks, the possibility to impose capital add-ons are key
components of the qualitative pillar of the supervisory system. Although
neither component is covered by the IORP Directive, some Member States
have established elements of the supervisory review process. The EIOPA
reports on risk management and management oversight and internal control
(see references) indicates that most supervisors use regulatory reporting and
analysis to evaluate compliance with the rules concerning general
governance requirements, risk management, the risk management function,
investment risk (based on the statement of investment principles) and
internal control.

18.2. References

• International:

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 8.

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on risk management rules applicable to IORPs CEIOPS-OP-22-09),


6 November 2009: section II.4

– Report on management oversight and internal controls rules applicable to


IORPs (CEIOPS-OP-37-10 Rev1), 9 June 2010: section II.4

• European Commission:

(20) Green paper on pensions: summary of consultation responses


(7.3.2011), question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 36


(supervisory review process) and Article 37 (capital add-ons).

18.3. Background: preliminary proposal for principles for draft Directive

Article 36 of Directive 2009/138/EC contains the provisions for the


supervisory review process and Article 37 of Directive 2009/138/EC
contains the provisions for capital add-ons. These two articles could be
applied, at least as a starting point mutatis mutandis to the IORP Directive.

18.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:

– The material elements of Article 36 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs;
37
– The material elements of Article 37 of Directive 2009/138/EC that should
be amended or removed to adequately address the specificities of IORPs
(where they are subject to own fund requirements); the advice should also
consider whether similar requirements should be applied to the level of
funding of technical provisions.

– Other rules for IORPs, if any.

38
19. SUPERVISION OF OUTSOURCED FUNCTIONS AND ACTIVITIES

19.1. Introduction

Outsourcing of functions is widely practised in the pension fund industry. In


many Member States IORPs can also outsource their activity to another
IORP.

The IORP Directive already contains some provisions to ensure that


supervisors have the necessary powers and means to supervise outsourced
entities or activities (article 13(b)) and to carry-out on-site inspections
(article 13(d)).

The EIOPA report on outsourcing (see references) has illustrated that most
supervisors have powers vis-à-vis third party service providers, although the
approaches differ. Moreover, the report mentions that the IORP Directive is
not very clear on what should be considered the relationship between IORPs
and third-party service providers (Article 13b).

19.2. References

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on outsourcing by IORPs (CEIOPS-OP-12-08M final), OPC, 30


October 2008: section II.3

• Directive 2009/138/EC (Solvency II Framework Directive): Article 38


(supervision of outsourced functions and activities).

19.3. Background: preliminary proposal for principles for draft Directive

Article 38 of Directive 2009/138/EC requires the regulated entity to ensure


that service providers are cooperative and that they provide access to data
and business premises. The article is more specific as to the conditions to
carry-out on-site inspections on the premises of the service provider. This
article could be applied, at least as a starting point mutatis mutandis to the
IORP Directive in order to clarify and strengthen the current provisions.

19.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:

– The way in which Article 13(b) of Directive 2003/41/EC should be


clarified. Particular attention should be paid to determine whether the
material elements of Article 38(1) of Directive 2009/138/EC could be used
for this purpose;

– The way in which Article 13(d) of Directive 2003/41/EC should be


clarified. Particular attention should be paid to determine whether the
material elements of Article 38(2) of Directive 2009/138/EC could be used
for this purpose;

39
– Other rules to supervise outsourced functions and activities, if any: e.g.
location of main administration, sub-contracting of the transferred activity
by the third-party service provider (chain outsourcing).

40
20. GENERAL GOVERNANCE REQUIREMENTS

Governance of pension funds is key. Governance systems should have clear


organisational structures with a clear allocation of responsibilities. Key governance
functions should by documented in writing and pension funds should have
contingency plans. A further aspect relates to remuneration policy. Remuneration
policies which give incentives to take risks that exceed the general level of risk
tolerated by pension funds can undermine the sound and effective risk management
of such undertakings. It is therefore necessary to provide for requirements on
remuneration for the purpose of the sound and prudent management of the pension
fund and in order to prevent remuneration arrangements arising which encourage
excessive risk-taking. This section looks at these two general issues.

The subsequent sections will look at requirements for specific governance aspects
including, risk management, ORSA, internal controls, internal audit, actuarial
function and outsourcing.

20.1. Introduction

The IORP Directive does not contain rules concerning the clear allocation of
responsibilities, written documentation of key governance functions or
contingency plans.

A recent EIOPA report (see references) illustrates that Member States have
developed national rules cover management board responsibilities, lines of
responsibility and accountability, as well as conflicts of interest.

20.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 2 (governance) and Core
Principle 6 (governance).

– OECD Guidelines for pension fund governance, June 2009.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 2 (management oversight and
culture).

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on management oversight and internal controls rules applicable to


IORPs (CEIOPS-OP-37-10 Rev1), 9 June 2010: section II.2

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 41.


41
20.3. Background: preliminary proposal for principles for draft Directive

Article 41 of Directive 2009/138/EC requires rules concerning the clear


allocation of responsibilities, written documentation of key governance
functions or contingency plans. It also requires that the system of governance
shall be proportionate to the nature, scale and complexity of the operations of
the IORP. Provisions on remuneration policy are contained in the Level 2
implementing measures for Directive 2009/138/EC that are currently being
developed.

Article 41 of Directive 2009/138/EC, including the implementing measure


addressing remuneration policy could be applied, at least as a starting point
mutatis mutandis to the IORP Directive.

20.4. Specific Call for Advice

The EIOPA advice should address at least the following subjects:

– The material elements of Article 41 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to general governance requirements;

– Provisions to ensure a sound remuneration policy, possibly based on the


Level 2 implementing measures currently being developed for Article 41 of
Directive 2009/138/EC;

– Other requirements for IORPs, if any.

42
21. FIT AND PROPER

21.1. Introduction

A person must hold the necessary qualifications and/or experience (fit) and
be of good repute (proper). Fit and proper requirements are one of the key
aspects of corporate governance and of particular importance in financial
services. In pension schemes, the confidence of scheme members is essential
because the contributions are paid long before the benefits are received.

The current IORP Directive already contains the general principle that
management must be fit and proper (article 9b). The application of these
requirements varies in the EU as documented in several EIOPA reports (see
references below). It seems necessary to define the scope of these criteria
more precisely and, possibly, extend them in order to increase the level of
harmonisation.

21.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 2 (governance)

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on management oversight and internal controls rules applicable to


IORPs (CEIOPS-OP-37-10 Rev1), OPC, 9 June 2010: pg. 15/16.

• European Commission:

(21) Green paper on pensions: summary of consultation responses


(7.3.2011), question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Articles 42 and


43.

21.3. Background: preliminary proposal for principles for draft Directive

More precise fit and proper requirements are contained in articles 42 of


Directive 2009/138/EC. Article 43 of that directive concerns additional rules
for the proof of good repute. These could be applied, at least as a starting
point mutatis mutandis to the IORP Directive.

21.4. Specific Call for Advice

EIOPA is invited to provide advice on at least the following questions:

(22) Scope: to whom should the fit and proper criteria be applied? The
current directive states that it applies to the persons that "effectively run"
the IORP. Should it apply only to the management board members or also

43
to other people such as those carrying out functions: risk management,
internal control, internal audit, compliance, actuarial and outsourced.

(23) Timing: when should fit and proper requirements be applied?

(24) What procedures and ongoing controls should be set up by the


supervisory authority to check the continued respect of fit and proper
criteria?

(25) What powers should the supervisor exercise when fit and proper
requirements are not fulfilled?

44
22. RISK MANAGEMENT

22.1. Introduction

A risk-based supervisory approach can only be built on the basis of a


thorough knowledge by the IORP of the risks it incurs. A solid risk
management is therefore key. This is already recognised to some extent in
the IORP Directive, which makes several references to risk management:
article 12 requires that the statement of investment principles describes the
risk management processes; the investment rules in Article 18 presuppose
the existence of an effective risk management system. But there are currently
no specific rules on risk management in the IORP Directive.

A recent EIOPA survey (see references) illustrated that most Member States
have risk management rules for IORPs, but that there are considerable
differences.

22.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 2 (risk control).

– OECD Guidelines for pension fund governance, June 2009.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 1.

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on "Risk Management Rules applicable to IORPs (CEIOPS-OP-


22-09)", 6 November 2009.

• European Commission:

(26) Green paper on pensions: summary of consultation responses


(7.3.2011), question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 44

22.3. Background: Preliminary proposal for principles for draft directive

Article 44 of Directive 2009/138/EC (Solvency II Framework Directive)


requires that an effective risk management system is in place and that it is
well integrated into the decision-making process. It specifies the scope of the
risk management system and requires a risk management function and proper
documentation.

45
22.4. Specific Call for advice

The Commission Services would like EIOPA to advise on detailed rules to


ensure that IORPs have proper systems in place to identify, measure,
monitor, manage and report the risks incurred and has a prospective view on
the risks that might possibly occur.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 44 of Directive 2009/138/EC that should


be amended or removed to cater for the specificities of risk management
practices in IORPs;

– Differences, if any, in the risk management rules depending on the risk-


sharing mechanism of the pension scheme: e.g. DB, DC and hybrids.

– Specific risk management rules governing life cycling in DC schemes, if


necessary.

46
23. OWN RISK AND SOLVENCY ASSESSMENT

23.1. Introduction

As part of their risk management system, pension funds should have, as an


integral part of their business strategy, a regular practice of assessing their
overall solvency needs with a view to their specific risk profile. The own risk
and solvency assessment (ORSA) has a twofold nature. It is an internal
assessment process within the institution and as such embedded in the
strategic decisions of the institution. It is also a supervisory tool for the
supervisory authorities. The ORSA is currently not required by the IORP
Directive.

23.2. References

• European Commission:

– –Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 45

23.3. Background: Preliminary proposal for principles for draft directive

Article 45 of Directive 2009/138/EC (Solvency II Framework Directive)


could be applied, at least as a starting point mutatis mutandis to the IORP
Directive.

23.4. Specific Call for advice

The EIOPA advice should address at least the following subjects:

– The material elements of Article 45 of Directive 2009/138/EC that should


be amended or removed to suit the specificities of IORPs;

– Other rules, if any.

47
24. INTERNAL CONTROL SYSTEM

24.1. Introduction

The current IORP Directive already contains the general principle that
"competent authorities shall require every institution located in their
territories to have sound administrative and accounting procedures and
adequate internal control mechanisms" (article 14(1)). There is currently no
explicit requirement for a compliance function.

The application of these requirements varies in the EU as documented by


EIOPA (see references below). Many Member States also require IORPs to
establish a compliance function. It seems necessary to define the scope of
these criteria more precisely and, possibly, extend them in order to increase
the level of harmonisation.

24.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 6 (risk-based internal controls)

– OECD Guidelines for pension fund governance, June 2009.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 6 (control and monitoring
mechanisms).

– OECD Pension Funds' Risk Management framework: regulation and


supervisory oversight.

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on management oversight and internal controls rules applicable to


IORPs (EIOPA-OP-37-10 Rev1), OPC, 9 June 2010: section II.3

• European Commission:

– –Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 46.

24.3. Background: preliminary proposal for principles for draft Directive

Article 46 of Directive 2009/138/EC requires an internal control system,


which includes at least administrative and accounting procedures, an
internal control framework, reporting arrangements and a compliance

48
function. This article could be applied, at least as a starting point mutatis
mutandis to the IORP Directive.

24.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules by


which supervisors can ensure that IORPs have proper internal control
systems and a compliance function in place.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 46 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to internal control systems and the compliance function;

– Other internal control requirements for IORPs, if any.

49
25. INTERNAL AUDIT

25.1. Introduction

While the current IORP Directive contains a few references to an "auditor",


they remain fairly vague. The directive does not explicitly require for an
internal auditor that evaluates all the elements of the pension fund
governance system, including the internal control system.

At the national level, most Member States have rules on an internal audit
function, although in practice they vary from one country to another (see
EIOPA references below). It seems necessary to define the scope of the
internal audit function more precisely in order to increase the level of
harmonisation.

25.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 6 (auditor)

– OECD Guidelines for pension fund governance, June 2009.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 6 (control and monitoring
mechanisms).

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on management oversight and internal controls rules applicable to


IORPs (EIOPA-OP-37-10 Rev1), OPC, 9 June 2010: section II.3

• European Commission:

– • Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 47.

25.3. Background: preliminary proposal for principles for draft Directive

Article 47 of Directive 2009/138/EC provides for an independent internal


audit function that reports to the decision-making bodies of the regulated
entity. This article could be used, at least as a starting point mutatis mutandis
for the IORP Directive.

25.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules by


which supervisors can ensure that IORPs have an internal audit function in
place.
50
The EIOPA advice should address at least the following subjects:

– The material elements of Article 47 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to the internal audit function;

– Other internal audit requirements for IORPs, if any.

51
26. ACTUARIAL FUNCTION

26.1. Introduction

Actuaries are key resources for IORPs because they provide expertise for the
calculation of technical provisions and the establishment of sound risk
management and funding policies.

The important role of the actuary - or a suitable expert in this field - in


relation to the calculation of technical provisions is recognised in the IORP
Directive in Articles 9(d) and 15(4). But their tasks remain vague and do not
cover risk management and funding policies.

It seems necessary to define the scope of the actuarial function more


precisely in order to strengthen the existing requirements and increase the
level of harmonisation.

26.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 6 (actuary & delegation and expert
advice)

– OECD Guidelines for pension fund governance, June 2009.

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 6 (control and monitoring
mechanisms).

• European Commission:

(27) Green paper on pensions: summary of consultation responses


(7.3.2011), question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 48.

26.3. Background: preliminary proposal for principles for draft Directive

Article 48 of Directive 2009/138/EC provides for an actuarial function. This


article could be used, at least as a starting point mutatis mutandis for the
IORP Directive.

26.4. Specific Call for Advice

The Commission Services would like EIOPA to advise, in close cooperation


with the actuarial profession, on detailed rules by which supervisors can
ensure that IORPs have an actuarial function in place.

The EIOPA advice should address at least the following subjects:

52
– The material elements of Article 48 of Directive 2009/138/EC that should
be amended or removed to adequately address the specificities of IORPs in
relation to the actuarial function;

– Other actuarial requirements for IORPs, if any.

53
27. OUTSOURCING

27.1. Introduction

It is important that pension funds remain fully responsible when they


outsource functions or occupational retirement provision activity.
Outsourcing should not undermine governance, operational safeguards,
supervision and servicing of members/beneficiaries.

The IORP Directive expressly permits outsourcing in Article 9(4). Moreover,


IORPs can not be prevented to appoint investment managers or
custodians/depositories located in another Member State provided that they
are regulated at EU level (see Article 19). But the IORP Directive does not
explicitly ensure that pension funds remain fully responsible and it does not
require a written policy regarding outsourcing. An EIOPA report (see
references) has shown that "overall decision making" and "taking on full
responsibility" are core functions of the IORP in all Member States. The
report also shows that in practice a vast number of functions are outsourced,
including IT services, administration, information provision, and many
others. Custody of assets and investment management is also outsourced and
in many Member States this is mandatory.

The functions that can be outsourced are left to the Member States and the
EIOPA report has shown that there are many national differences. This may
be an issue where IORPs are prevented to use a service provider in another
Member State (e.g. risk management or payment of benefits).

What is important is that the IORP retains final responsibility for outsourced
activity and that supervisors are informed about outsourced activity in an
accurate and timely manner.

27.2. References

• International:

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 5 (outsourcing risk control).

• European Insurance and Occupational Pensions Authority (EIOPA):

– Report on Outsourcing by IORPs (EIOPA-OP-12-08M final), OPC,


30.10.2008

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 49.

54
27.3. Background: preliminary proposal for principles for draft Directive

Article 49 of Directive 2009/138/EC provides that entities remain fully


responsible when they outsource functions or activity, that outsourcing
should not undermine governance, operational safeguards, supervision and
servicing of members/beneficiaries, and that supervisors are informed about
outsourced activity in an accurate and timely manner. This article could be
used, at least as a starting point mutatis mutandis for the IORP Directive.

27.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules on


outsourcing for IORPs.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 49 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to outsourcing;

– Other outsourcing requirements for IORPs, if any.

55
28. CUSTODIAN/DEPOSITORY

28.1. Introduction

The IORP Directive enables an IORP to use a custodian/depository located


in another Member State. Article 19(2) of the IORP Directive provides that
"Member States shall not restrict institutions from appointing, for the
custody of their assets, custodians established in another Member State and
duly authorised in accordance with Directive 93/22/EEC or Directive
2000/12/EC, or accepted as a depositary for the purposes of Directive
85/611/EEC."

Meanwhile the directives to which article 19(2) refer have changed:

(28) Directive 93/22/EEC of 10 May 1993 on investment services in the


securities field has been repealed since 1 November 2007 by Directive
2004/39/EC of 21 April 2004 on markets in financial instruments
(MiFID), as mentioned in Directive 2006/31/EC of 5 April 2006.

(29) Directive 2000/12/EC of 20 March 2000 relating to the taking up


and pursuit of the business of credit institutions has been replaced by
Directive 2006/48/EC of 14 June 2006 relating to the taking up and pursuit
of the business of credit institutions (recast) or CRD (capital
requirements directive).

(30) Directive 85/611/EEC on the coordination of laws, regulations and


administrative provisions relating to undertakings for collective investment
in transferable securities (UCITS) has been replaced by Directive
2009/65/EC of 13 July 2009 on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective investment
in transferable securities (recast) or UCITS IV.

The EIOPA report (see references) has found that there are differences across
Member States in relation to the appointment of a custodian, the type of
body which is appointed to fulfil this role and the function that it performs.
Diversity also exists around the role of competent authorities, some of whom
play a role in the process of the custodian's appointment. The Commission
Report (see references) takes note of the analysis carried out by EIOPA, but
does not exclude that there may be a need for legislative change at a later
stage.

28.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 6 (custodian)

– OECD Guidelines for pension fund governance, June 2009.

56
– OECD/IOPS Good Practices for Pension Funds’ Risk Management
Systems, January 2011: Good practice 6 (control and monitoring
mechanisms).

• European Insurance and Occupational Pensions Authority (EIOPA):

– Initial review of key aspects of the implementation of the IORP Directive


(CEIOPS-OP-03-08 final), 31 March 2008, Section 4.6 and Annex 10.

• European Commission:

– Commission report on some key aspects concerning the IORP Directive, 30


April 2009

28.3. Background: preliminary proposal for principles for draft Directive

Articles 19(2) and 19(3) of the IORP Directive may need to be reviewed in
order to ensure that the custodians/depositories of IORPs, irrespective of
their location within the EU, adequately protect the interest of the
members/beneficiaries.

28.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on the issues


identified below:

– The need to create a more consistent approach, from a supervisory


perspective, in relation to the appointment of a custodian/depositary, the
type of body which is appointed to fulfil this role and the function that it
performs.

– The need to consider rules regarding conflicts of interest or incompatibility.

– The extent to which the rules on depositaries in the UCITS IV Directive


(articles 22 to 26) adequately protect the assets from IORPs from a
supervisory perspective.

– The effectiveness of the powers and procedures followed by the competent


authorities to prohibit the free disposal of assets by a foreign
custodian/depository, as required by article 19(3) of the IORP Directive.

– Other advice, if any.

57
29. INFORMATION TO SUPERVISORS

29.1. Introduction

The information to be provided to the supervisory authorities is a key


element of the third pillar of the supervisory framework. Pension funds need
to provide the information underpinning the supervisory review process and
have appropriate and well-documented reporting systems in place.
Supervisory authorities need to have the necessary powers to obtain accurate
and relevant information in an adequate format.

The IORP Directive already provides for some elements of supervisory


reporting. Article 13 of the IORP Directive requires that supervisory
authorities have the necessary power and means to obtain all business
documents (point a), the statement of investment principles, the annual
accounts and the annual reports and other documents such as actuarial
valuations or asset-liability studies (point c).

The EIOPA report (see references) has shown that reporting requirements
differ widely between Member States. This difference concerns the amount
of information, its content and timing. While in most Member States the
information needs to be submitted by the IORP itself, the reporting
obligations can also be attributed to other parties (e.g. fund manager,
administrator or custodian). Most of the Member States have gone beyond
the minimum requirements in the IORP Directive (e.g. whistle-blowing
reports, composition of membership, benefit payments, return on investment
based on standardised formulae, stress tests, projections, asset allocation and
commissions).

As supervisory regimes and practices gradually convergence, there will be


less pronounced need for differences in reporting requirements.

29.2. References

• International:

– OECD/IOPS Good Practices for Pension Funds’ Risk Management


Systems, January 2011: Good practice 7.

• European Insurance and Occupational Pensions Authority (EIOPA):

– Initial review of key aspects of the implementation of the IORP Directive


(EIOPA-OP-03-08 final), OPC, 31 March 2008, Section 4.3.1 and
Annex A.

• European Commission:

(31) Green paper on pensions: summary of consultation responses


(7.3.2011), question 10

• Directive 2009/138/EC (Solvency II Framework Directive): Article 35


(information to be provided for supervisory purposes).
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29.3. Background: preliminary proposal for principles for draft Directive

Article 35 of Directive 2009/138/EC could be used mutatis mutandis, at least


as a starting point, to strengthen the provisions in the IORP Directive.

29.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on detailed rules on


information to be provided for supervisory purposes.

The EIOPA advice should address at least the following subjects:

– The material elements of Article 35 of Directive 2009/138/EC that should


be amended or removed to adequately address the specificities of IORPs in
relation to supervisory reporting;

– Other requirements for IORPs, if any: e.g. specific reporting requirements


for DB, DC and hybrids schemes.

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30. INFORMATION TO MEMBERS/BENEFICIARIES

30.1. Introduction

The provision of accurate and relevant information to members and


beneficiaries is key. People need to have access to information to make
informed decisions about their retirement plans. Information should be
simple and easy to understand. The need for information has become even
more pronounced as the prevalence of DC schemes has increased
significantly in the EU over the past decade. Moreover, the public disclosure
of such information through a report on solvency and financial condition
may also be useful.

The IORP Directive contains minimum information requirements in several


places. Article 9 requires IORPs to inform their members about the rules
(point c) and the conditions (point f; e.g. rights and obligations, risks) of the
pension scheme. These are part of the rules on the conditions of operation
and constitute the provisions on "pre-contractual" information disclosure.
Article 11 requires the provision of information on financial conditions,
investment principles and investment options, risks and benefits and costs.
Most of this information is to be made available on request and constitutes
the information that needs to be available on a continuous basis. Article
20(7) enables the host Member State to impose additional information
requirements referred to in Article 11 for cross-border IORPs.

The EIOPA report (see references) showed that, as far as Article 11 of the
IORP Directive is concerned, most Member States have gone beyond the
minimum requirements and that the approaches differ widely. The report
concluded that more work is needed to ensure a level playing field.

The Solvency II Directive introduces new rules on public disclosure (report


on solvency and financial condition; Articles 51-56) but does not address
consumer information. Although members and beneficiaries of occupational
pension schemes are neither retail investors nor consumers, inspiration might
be sought from the following initiatives:

(32) The UCITS IV Directive requires UCITS to provide a Key Investor


Information Document (KII) in a harmonised and standardised form to the
investor. On the basis of consumer testing that fed into advice from the
Committee of European Securities Regulators (CESR), the Commission
has adopted Level 2 implementing measures in the form of a Regulation on
1 July 2010 (see references).

(33) The KII Document is the benchmark for the process of developing
improved mandatory disclosures for retail investment products. This is
stated in the Commission Communication of 30 April 2009 on Packaged
Retail Investment Products (PRIPs). The Commission is committed to
introducing a new horizontal approach to the regulation of sales and pre-
contractual disclosures for these products, so as to ensure a level playing
field between different types of investment products offered in the retail
market. The aim is to ensure that consumer protection measures are
60
effective and appropriate. Following the Communication, the Commission
will focus on developing specific legislative proposals for this new
horizontal approach, possibly in spring 2011.

30.2. References

• International:

– OECD Recommendation on the Core Principles of Occupational Pension


Regulation, June 2009: Core Principle 2 (statement of investment
policy) and Core Principle 5 (disclosure and availability of
information).

– OECD Guidelines for the protection of rights of members and beneficiaries


in occupational pension plans, September 2003 (for the annotations to
Core Principle 5)

– IOPS paper on Managing and Supervising risks in defined contribution


pension systems, October 2010: pages 11-14 & 27-31 & 35-38

– IOPS Working Paper No. 5, "Information to Members of DC Pension


Plans: Conceptual Framework and International Trends", September
2008.

• European Insurance and Occupational Pensions Authority (EIOPA):

– Initial review of key aspects of the implementation of the IORP Directive


(CEIOPS-OP-03-08 final), OPC, 31 March 2008, Section 4.3.1 and
Annex A.

• European Commission:

– Green paper on pensions: summary of consultation responses (7.3.2011),


question 8 and 12

– Key Investor Information Document (KIID):

– Directive 2009/65/EC of the European Parliament and of the


Council of 13 July 2009 on the coordination of laws, regulations
and administrative provisions relating to undertakings for
collective investment in transferable securities (recast of the
UCITS Directive): articles 78-82.

– Commission Regulation (EU) No 583/2010 of 1 July 2010


implementing Directive 2009/65/EC of the European Parliament
and of the Council as regards key investor information and
conditions to be met when providing key investor information or
the prospectus in a durable medium other than paper or by means
of a website

– CESR Guidelines Guideline on the methodology for the


calculation of the synthetic risk and reward indicator in the Key

61
Investor Information Document (Ref. CESR/10-673), 1 July
2010.

– CESR Consultation paper - Template for the Key Investor


Information document, 20 July 2010.

– Communication from the Commission on Packaged Retail


Investment Products, 30.4.2009, COM(2009) 204 final

• Directive 2009/138/EC (Solvency II Framework Directive): Articles 51-56


(report on solvency and financial condition).

30.3. Background: preliminary proposal for principles for draft Directive

The Commission Services do not make a firm proposal at this stage. As far
as pre-contractual information disclosures are concerned, it should be
envisaged to build on the work done for the KII Document for UCITS. But
this is not the only solution. Regarding public disclosure, inspiration could
be found in Articles 51-56 of the Solvency II Directive 2009/138/EC.

30.4. Specific Call for Advice

The Commission Services would like EIOPA to advise on how to strengthen


the information requirements to provide useful information on a consistent
basis across the EU. This should at least cover the issues identified below:

– The extent to which the KII Document can be used for IORPs as regards
pre-contractual information disclosure. This includes advice on the
material elements of Articles 78-82 of Directive 2009/65/EC that should be
amended or removed to adequately address the specificities of IORPs with
a view to replacing Article 9c and 9f of Directive 2003/41/EC;

– The content, format and timing of ongoing information disclosures to


strengthen and make more consistent the current provisions of Article 11a
and 11c. This should also include advice on the possibility to delete Article
20(7) of Directive 2003/41/EC.

– The extent to which Articles 51-56 of Directive 2009/138/EC can be used


for IORPs as regards public disclosure through the report on solvency and
financial condition.

– Other requirements for IORPs, if any: e.g. specific reporting requirements


for DB, DC and hybrids schemes.

62