IORP II & Data Integrity

The Chinese proverb “May you live in interesting times”, may not seem like a good introduction to the passing of further legislation affecting pension plans, but with so many changes afoot times are definitely getting most interesting.

In this article, John Grant takes a look at why data integrity should be at the top of all trustees and employers action lists and how the new Pensions Directive IORP II will shape the evolving Irish pensions’ landscape.

The “Institutions for Occupational Retirement Provision Directive 2016”, known as IORP II, is due to be implemented in Ireland in 2019. This EU Directive sets out a number of common minimum standards across the EU for IORPs i.e. pension schemes 

Wake-up Call on Data Quality

For the first time, there will be a requirement for schemes to produce annual benefit statements for deferred members. This is a huge challenge, as contact with deferred members tends to be more sporadic, with data typically being revised and updated when a deferred member reaches retirement or requests a transfer value.  Unless a scheme has recently undergone a major data cleansing exercise, there will be significant time and cost associated with such a Data Integrity Project.  

Sponsors and trustees alike need to start planning for this, a project that will assist in compliance with General Data Protection Regulations (GDPR). Inevitably, this will put pressure on pension scheme administrators and questions should be asked as to how they are preparing for this major challenge.   

Companies with schemes of more than 100 members (active and deferred), a long history of pension provision and / or a high level of staff turnover are guaranteed to bear the full weight of the Directive. However, those responsible for smaller schemes are not out of the woods, with indications from the Department of Employment Affairs and Social Protection that the legislation may not contain any derogation for small pension schemes. 

Thus we believe that at this stage, all trustees and sponsoring companies should be looking to review their member Data Integrity as soon as possible.  A big question is whether resources are available for such an undertaking.  

 Higher Levels of Governance & Professionalism 

Just as ‘Solvency II’ and and the ‘Insurance Distribution Directive’ have increased compliance demands on insurance companies and insurance intermediaries, ‘IORP II will lead to higher compliance demands on pension trustees, sponsoring companies and scheme administrators 

This latest  EU IORP Directive requires that those that effectively run an IORP: 

  • Are of good repute and integrity 
  • Are suitably qualified, both individually and as a group
  • Put in place key functions covering internal audit, risk management and actuarial (this last function being required for schemes with a defined benefit element)
  • Provide an effective communication and reporting process for members and beneficiaries

While a number of functions may be delegated by trustees, the legislation is clear that where functions are delegated, the trustees remain responsible. For any pension scheme subject to the new regulations there will be considerable practical implications beyond those associated with annual benefit statements.  

 Transposing IORP II into Irish Legislation 

Each EU country has to transpose the EU legislation into national law, ensuring that the minimum harmonisation levels are met. Derogation allows individual member states to provide exemptions to smaller schemes (those with less than 100 active and deferred members). As at 1st April 2019 we continue to await the details of exactly how this legislation is to be transposed into Irish Law.  

In October 2018, The Pensions Authority published a guidance note to provide assistance for those charged with running pension schemes in Ireland. The following are taken from this note: 

  • The trustee board should consider the production of a Board Manual 
  • All significant activities should have documented policies and procedures, the rationale for the various decisions should be recorded and all material should be retained and available for inspection and audit 
  • The trustee board should satisfy itself that the trustees, including any potential new trustee prior to his/her appointment, collectively meet the proper standards and should document how it has satisfied itself in that regard
  • The trustee board should meet at least four times per calendar year and at least once in every six month period
  • The Pensions Authority will be adopting a forward looking and risk based approach to supervision

The above all help to provide a picture of how the market is developing, with many procedures being required to be documented, implemented and reviewed regularly. The note also underlines a minimum time commitment required of trustees, one which helps to underline the more substantial and demanding nature of the role, even where significant parts are delegated.   

This will lead to compulsory reviews of trustee boards, their make-up and whether each trustee is able to devote sufficient time to the role. Inevitably questions on the nature of existing trustee boards and whether in their current form they remain appropriate will need to be met, along with the challenge and cost of an increased compliance burden. 

Exactly how far reaching the regulation proves to be may also depend upon whether any use is made of derogation for smaller schemes.  

 The Pensions RoadMap 2018 – 2023 

In February 2018 the Government brought out its “A Roadmap for Pension’s Reform 2018 – 2023 Report. This report is instructive to see the likely direction of the Irish pensions market and included six separate strands, the third strand entitled “Improving Governance and Regulation including the EU Pensions Directive ‘IORP II’”.  

Among the comments under this Strand were: 

  • The need to raise scheme governance standards in the existing system 
  • The need to provide for economies of scale and number of pension schemes in Ireland which by international norms is excessively high 

To help such a move it is envisaged that future provision by smaller employers will increasingly be by means of membership of large multi-employer structures or through pensions contracts.  

The message is clear, pension schemes face increased oversight and governance demands, placing pressures on trustees and the resources of sponsoring companies. Exactly how this will pan out for existing schemes will need to be addressed, but clearly the expectation is that not all schemes will continue in their current form; smaller schemes will come under most pressure.  

The second strand of the Pensions Roadmap concerns Auto Enrolment, a proposal to bring in a government sponsored defined contribution scheme with an automatic enrolment facility, targeted at employees without access to a pension plan through their employment. The key objective of this strand is to increase pensions coverage across the workforce, particularly in sectors that traditionally have not provided pension schemes to their workforce. This is a very interesting development and likely to affect a lot of smaller/medium sized businesses in particular 

 Why the Delay? 

There is clearly a lot of highlevel changes going on in the Irish institutional pensions market with the government having an end goal of better pensions coverage, less dependence on the State and better standards of governance 

Even taking into account that the IORP II legislation states that the “system of governance shall be proportionate to the size, nature, scale and complexity of the activities of the IORP”, it is inevitable that smaller schemes will see a disproportionate increase in costs.  With auto enrolment not happening until at least 2022 the focus must be on the practical implications of IORP II for all stakeholders of existing arrangements. Feedback from the auto-enrolment process may have caused a rethink on where that balance should be and whether use should be made of derogation for smaller schemes.  

Conclusion 

It is unequivocal that IORP II will lead to higher compliance demands on trustees, sponsoring companies and scheme administrators, just as Solvency II and the Insurance Distribution Directive have increased compliance demands on insurance companies and insurance intermediaries.  

Trustees and sponsoring companies alike should consider how resources, processes and documentation are to be put in place to meet the higher standards. The challenge for trustee groups, sponsoring companies, insurance companies and intermediaries is how to meet these demands in an adequate and cost effective manner.  

The good news is that The Pensions Authority stated in its Guidance note back in October 2018 that there would be a period of 18 to 24 months to adapt to the new regime.

However, time is already ticking and the data integrity issue will need urgent attention, especially for those schemes which have significant numbers of deferred members. We would suggest that a data audit would be sensible for most schemes. To understand how we  may assist you in gearing up for the realities of IORP II and other compliance challenges, contact John Grant or email info@fitzgeraldactuarial.ie for more general queries