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IORP II Directive – Current State of Play

14 December 2018

The Government's ‘Roadmap for Pension Reform 2018–2023’ published earlier this year signalled that legislation to transpose the IORP II Directive (the ‘Directive’) into Irish law would be published before the end of September. Disappointingly, this has not happened.

The deadline for transposing the Directive into Irish law expires on 13 January 2019. If Ireland meets this transposition deadline, then trustees and scheme sponsors will have limited time to absorb the implications of the new legislation before it becomes law. It was, however, encouraging to see the Pensions Authority (the ‘Authority’) publishing a paper earlier this month on ‘Considerations for Trustees’ arising from the Directive. While the paper was published for information purposes only, it gives trustees a sense of the potential impact of the Directive and what actions they may need to consider.

Governance

One clear message which comes across from the Authority's paper is that trustees will be expected to adopt robust and detailed governance processes covering a range of scheme activities. Therefore, trustees will need to look at their existing governance processes, particularly in relation to scheme administration, risk management and internal controls, to assess what changes may need to be made to them based on the Directive's requirements once in force.

Trustee Qualifications and Experience

The Directive requires trustees, collectively, and certain key function holders to meet appropriate qualification, knowledge and experience criteria. The Roadmap for Pension Reform proposed that:
• one trustee should have a qualification of level 7 in the National Framework of Qualifications; and
• one other trustee should have at least two years' trustee experience.

We will have to wait to see what specific qualification and experience requirements are introduced. However, it will be important that the legislation gives existing trustee boards a grace period to re-organise or retrain their personnel to ensure that they can meet the new requirements.

The Authority in its recent paper has stated that it expects trustees to have conducted and documented their own due diligence on an incoming trustee's professional qualifications and previous experience before a person is appointed as trustee.

How such a requirement will work in practice is unclear. Typically, trustees are appointed by employers. It may mean that trustees will be advised not to join in deeds appointing new trustees if they have concerns regarding the fitness or probity of an incoming trustee, which are not shared by the employer.

Key Function Holders

The Directive will also require trustees to ensure that holders of key functions relating to risk management and internal audit or actuarial functions, in the case of defined benefit schemes, have the resources and authority to enable them to undertake their duties collectively in an objective, fair and independent manner.

Most schemes in practice outsource those functions to service providers. The Authority has flagged that trustees will now need to advise the Authority in advance before entering into a new agreement with a provider to outsource those roles. It will be interesting to see whether in practice this will operate as simply a notification requirement, which is what the Directive indicates, or whether the Authority takes any role in scrutinising such appointments.

Small Schemes

One issue that will be watched very closely is the extent to which there is any derogation for schemes with less than 100 members from the full rigor of the Directive's requirements. The Directive itself allows for some flexibility based on the ‘nature, scale and complexity’ of a scheme's activities. However, introducing a wide derogation for smaller schemes would arguably cut across the Government's stated intention to ‘progress measures that will support the rationalisation of the number of pension schemes.’

Conclusion

The Authority's recent paper helpfully gives trustees a sense of the scope of the new requirements that are likely to come into force once the Directive has been transposed. It may also be a signpost as to what will be contained in the Authority's own guidance on the Directive. The Pensions Regulator was quoted recently as stating that the Authority will supplement the underlying legislation with guidance ‘which will set out in practical and specific terms what we expect trustees to do.’

For now, the Authority acknowledges that specific action from trustees must await further details on transposition but it recommends that trustees read the Directive and consider what it means for their scheme. The Regulator has also stated that the ‘list of prescribed tasks will be much longer, more specific and more demanding than under current legislation.’

Given these more onerous obligations, and the absence of draft legislation at this late stage, it is hoped that the Authority will take a flexible approach towards trustees in their efforts to comply with these requirements once introduced.