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Ireland transposes the IORP II Directive

Pension Board and Trustee Consulting|Pensions Corporate Consulting|Pensions Risk Solutions|Pensions Technology
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April 30, 2021

New regulations signed by the Minister for Social Protection begin the process of implementing the biggest change to occur in Irish pension governance in over three decades.

A milestone, not a destination

We see the making of these regulations as representing a key milestone in the transposition of IORP II into Irish law. It is not a first step – the process began with the EU’s adoption of the directive itself – and nor will it be the last. For that we will still have to await codes of conduct from the Pensions Authority.

However, the regulations do represent a key step forward:

  • Firstly, the regulations are already in force, meaning that the amendments they make to the Pensions Act 1990 are now also already in place.
  • Many of the previous indications from the Pensions Authority are confirmed, including those relating to the new regulatory regime, on which more follows further below. In some other areas, new detail has been provided.
  • Even in the many areas where there is no new detail, it can at least be said that the regulation ends speculation about what the Act will say and, arguably, existing familiarity with the content makes the changes to the Act easier to absorb.
  • Many pension schemes have already begun preparations in these areas, including preparing a gap analysis against the directive, clarifying risk management and governance frameworks, engaging with Environmental, Social and Governance (ESG) issues, and planning for new trusteeship requirements, amongst other things.
  • In general, the legislation is effective immediately. In a few areas a later date is set:
    • The new “Pensions Benefit Statement” must be available to members by 31 December 2022.
    • Remuneration policies and a rule requiring two trustees or trustee directors must be addressed by 31 December 2021.
    • There are transitional provisions for one member schemes and certain retirement annuity contracts.
    • Most interesting is the 31 January 2022 deadline for a new “Part VIB Compliance Statement”.

Early deadline to achieve governance and risk management standards

The new “Part VIB compliance statement” requires self-certification of compliance with all of the main Governance and Risk Management provisions that are being inserted into the Act. Those provisions extend to 18 pages of new material covering matters such as:

  • Overarching governance structures
  • Policy and procedures
  • Risk management obligations
  • Key functions
  • Investment governance issues such as ESG issues

 The 31 January 2022 deadline for preparing the first such compliance statement means there is a short deadline for compliance with these and other governance items. Schemes that have not already taken steps to identify and remedy gaps could struggle to achieve that timing.

New prudential supervisory regime

Perhaps the biggest news relates to a volume of new details that clarify the new regulatory regime that the Authority has been openly discussing since 2020.

The Pensions Authority now has a prudential supervision role that is forward-looking and risk-based. Accordingly, the regulation moves on from the past approaches which emphasised retrospective reporting and compliance.

The scope of prudential supervision is very broad, and it is clear that the Authority will have a very significant role in determining the future direction of pension regulation in Ireland. Amongst its powers, the Authority can:

  • Carry out supervisory reviews. These would address any governance and risk issues that concern the Authority and there are powers to compel trustees and others to supply information and documents.
  • Define monitoring tools to help identify deterioration in the funding position of schemes and to monitor remedial actions that are being taken.
  • Require schemes to undertake a stress test. This would assess the scheme’s resilience to changes in economic conditions, in scenarios that the Authority will prescribe. It will also allow assessment by the Authority of the processes that trustees have in place to assure resilience.
  • Issue an “Advisory Notice” to trustees, which may identify perceived material failures or weaknesses affecting matters such as governance, key functions or risk management. Advisory notices may also specify actions that are required to be taken by the Trustees.
  • Require schemes to commission a new “External Report”. These powers would require trustees to engage an External Report Reviewer with relevant expertise leading to an expert report on any matters within the governance and risk management requirements in the new Part VIB of the Act. The report would be issued to the trustees, who must in turn deliver it to the Authority. The Authority would no doubt follow up to confirm if suggested/mandated actions are being taken.

The Authority’s new role aims at improving protections for members and beneficiaries. The changes to the Act require that the Authority’s prudential oversight must be proportionate to the size, nature, scale and complexity of the scheme being supervised. We would anticipate that resource limitations might mean there is a focus on schemes that are considered most at risk. This would be in keeping with the Authority’s stated intention to classify defined benefit schemes as Category 1, 2 and 3.

Proportionality and cost impact

The IORP II directive doesn’t provide for derogations for smaller schemes. Instead, the Act now includes many references to proportionate application and, other than in relation to regulatory oversight, the decision on what is proportionate is effectively left to trustees. No doubt the code of practice will provide appropriate guidance.

Whatever about one-off implementation efforts, this could leave some schemes facing relatively significant additional governance and compliance costs into the future.

For DC schemes, particularly where members will be affected by rising costs, there are other alternatives. These include outsourced single and master trust solutions such as those under our LifeSight platform. These solutions are already available and can help trustees and sponsoring employers to address the regulatory needs flowing from IORP II in a cost effective way, while still supporting better outcomes for members.

Is there now clarity about the details?

 In many areas, particularly the new Part VIB, the changes largely adopt the language from the EU directive. This is broad and principle based, leaving room for interpretation – a problem that still remains.

Codes of practice and support from the Authority

 That said, the Pensions Authority issued a news release on Wednesday 28 April 2021 in which it sets out how it will provide support:

  • Week of 10 May 2021
    The Authority will release an overview of the key themes of transposition including how the Authority will oversee IORP II compliance and the effect of derogations and transitional periods.
  • Week of 19 July 2021
    A draft code of practice will be published, commencing an 8-week public consultation. This code will set out expectations from regulated entities concerning their obligations under IORP II.
  • Week of 15 November 2021
    The final form of the code of practice will be published.
  • Week of 13 December 2021Guidance for employers and members of the public concerning minimum standards to be expected from master trust vehicles will be published.

Key take-aways for trustees

Taken at face value the compliance timelines are unquestionably tight and may, realistically, be difficult if not impossible for some schemes to achieve.

While the Regulator’s comments in recent months might imply they could adopt a firm stance on compliance, the timings for development of a final code of practice lead us to anticipate there will be reasonable flexibility, at least in cases where trustees can show that they are taking clear actions. We hope to see more on this when the Authority publishes its guidance on the path to compliance.

Assuming the draft code of practice to be published in July looks sensible, we would think that this should lead to emergence of the main details about how to comply, even if the codes are still in consultation at that point.

In the meantime, there are still steps that can be taken sooner. In particular, with additional detail from the regulation, trustee boards and, where relevant, sponsors should:

  • Learn more about the new detail – we will be supporting with our webinar next week (see below) and in additional ways in the weeks and months ahead.
  • Review the outputs from your Governance Lens review or conduct out such a review, leading into concrete action plans to address gaps, taking the most significant ones first.
  • Deal with any appointments that are needed, whether these be trustee appointments that address the requirements of board composition, or the appointment of new key function holders.
  • Review the governance and risk management structures used by the scheme and establish necessary written policies.

Willis Towers Watson has been helping trustees of defined benefit and defined contribution schemes on their journeys to IORP II readiness over the past couple of years. With the regulations in place and a clear line of sight to the code of practice, we can continue that process to enable trustees to reach full compliance.

More information

The regulations run to 70 pages and include many details not covered here, where we have focused on what we see as the most significant news items, covering them only very briefly.

For any further information, please contact your Willis Towers Watson consultant or the colleague below who will be pleased to support you with getting to grips with the details.

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Senior Director, Head of Trustee Consulting, Human Capital and Benefits

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