Documents considered by the Committee on 14 May 2014 - European Scrutiny Committee Contents

6 Financial services: occupational pension funds ~



+ ADDs 1-5

COM(14) 167

Draft Directive on the activities and supervision of institutions for occupational retirement provision (recast)
Legal base Articles 53, 62 and 114(1) TFEU; co-decision; QMV
Document originated 27 March 2014
Deposited in Parliament 9 April 2014
Department HM Treasury
Basis of consideration EM of 30 April 2014
Previous Committee Report None
Discussion in Council Not known
Committee's assessment Legally and politically important
Committee's decision Not cleared; further information requested


6.1 Institutions for Occupational Retirement Provision, or IORPs, more commonly known as occupational pension funds, are collective schemes which manage financial assets on behalf of employers in order to provide retirement benefits for their employees. There are around 125,000 such schemes operating within the EU, managing assets of around £2 trillion (€2.5 trillion) for around 75 million beneficiaries. The vast majority of these schemes are located in just four Member States: Germany, the Republic of Ireland, the Netherlands and the United Kingdom. Occupational pension funds do not play a significant part in pension provision outside of these four Member States.

6.2 The IORP Directive, Directive 2003/41/EC, sets out a minimum harmonisation framework for occupational pension schemes and their supervision, including rules which oblige occupational pension funds to invest their assets prudently, in the best interest of members and beneficiaries. Since 2011, the Commission has reviewed these arrangements with the intention of introducing a maximum harmonisation regime based on that being developed for insurers in the Solvency II Directive. Central to this review has been the question of how solvency rules developed for insurers could be applied to occupational pension schemes. The European Insurance and Occupational Pensions Authority (EIOPA) was asked to provide technical advice on how solvency rules for insurers could be applied to occupational pension schemes. The advice raised a number of significant policy challenges in developing solvency rules for occupational pension schemes which have not yet been resolved. As a result, the Commission announced in May 2013 that it would not be proceeding with new solvency rule proposals at this stage.

The document

6.3 This draft Directive to revise the IORP Directive is therefore confined to new rules on the governance of schemes and the information that schemes should provide to their beneficiaries.

6.4 The Commission sets out four key objectives for revision of the IORP Directive. First, to ensure the soundness of occupational pensions and better protect pension scheme members and beneficiaries, the draft Directive would provide for:

·  new governance requirements on the assessment of scheme risk, including requirements for self-assessment of risk management systems;

·  how audit functions should be carried out;

·  rules that govern the qualifications and remuneration of those responsible for managing occupational schemes; and

·  enhanced powers for supervisors, including enhanced ability to stress-test pension schemes.

6.5 Secondly, in relation to better informing pension scheme members and beneficiaries, the draft Directive would provide for detailed rules on the content of benefit information which should be provided to scheme members and would, in particular introduce a standardised EU Pension Benefit Statement. The Commission believes that a more mobile EU workforce requires pension benefits to be easily compared across the EU.

6.6 Next, in order to remove obstacles for cross-border provision of occupational pension funds so that they can operate across the single market — the draft Directive would permit transfers of all or part of a scheme's assets across Member State borders. Last, to encourage occupational pension funds to provide long-term investment to the wider EU economy, the draft Directive would prevent Member States from setting rules which restrict the investment decisions that schemes can make.

6.7 Member States would be required to transpose and implement the new rules by 31 December 2016.

6.8 EIOPA continues its work to produce a methodology for the application of solvency rules to occupational pension schemes and is expected to publish further advice in 2015. It is possible that the Commission will produce further proposals once EIOPA has published its technical advice.

The Government's view

6.9 The Economic Secretary to the Treasury (Andrea Leadsom) first notes that the Commission believes that these proposals are consistent with the principle of subsidiarity, as action is required at EU level in order to:

·  remove obstacles to cross-border activities of IORPs;

·  ensure a higher EU-wide minimum level of consumer protection;

·  promote scale economies, risk diversification and innovation inherent to cross-border activity;

·  avoid regulatory arbitrage between sectors and between Member States; and

·  protect the interests of cross-border workers.

6.10 She says that the Commission does not believe that such outcomes can be achieved by Member States alone.

6.11 The Minister then comments that:

·  while this proposal relates to the regulation of financial services, it could also impact on the organisation of national pension systems, which remains a Member State responsibility;

·  the different national approaches taken to the regulation of occupational pension schemes is closely connected with the diverse nature of social and labour laws across Member States;

·  the Commission in its White Paper, An Agenda for Adequate, Safe and Sustainable Pensions, said that "Member States have the primary responsibility for designing their pension systems according to their circumstances"[19] — as such, the principle of subsidiarity is highly relevant;

·  the proposal would shift the balance of competence towards the EU in two important respects;

·  first, the present IORP Directive is a minimum harmonisation regime which leaves a significant degree of flexibility on the design of occupational pension regimes to Member States — the Commission's proposal would introduce a maximum harmonisation regime reducing the flexibility available to Member States;

·  secondly, the IORP Directive is entirely prudential in scope — by introducing detailed rules on the information which should be provided to scheme members, the Commission's proposal would extend the scope of the Directive into consumer protection policy;

·  the Commission has not clearly demonstrated that the small number of Member States which have significant occupational pension scheme provision cannot address the problems raised by the Commission on their own; and

·  it is noted that this point was made by the Commission's Impact Assessment Board in its opinion on the impact assessment of the draft Directive.

6.12 Turning to the policy implications of the draft Directive the Minister tells us that the Government's initial view on the proposal is that the Commission has failed to make the case for such a significant revision of the existing IORP Directive. She says that there is a risk that the introduction of much more detailed rules on the governance of schemes and the information provided to scheme members will increase the administrative cost of providing occupational pensions, hitting pensioner incomes without providing any clear benefits to scheme members or the wider economy.

6.13 The Minister then elaborates the Government's initial view by reference to the Commission's four objectives, first saying, on ensuring the soundness of occupational pensions and better protect pension scheme members and beneficiaries, that:

·  there is no compelling evidence to suggest that scheme members are not already well protected; and

·  the UK already has a strong system of regulation which is underpinned by a comprehensive pension protection regime, including providing scheme members with compensation from the Pension Protection Fund in the event of a sponsoring employer's insolvency leading to a shortfall in the scheme's funds.

6.14 As for better informing pension scheme members and beneficiaries, the Minister says that again there is no strong evidence to suggest that scheme members are poorly informed about the management of their pension benefits. She says that there is a real risk that a one-size-fits-all approach to different models of occupational pension scheme in different Member States will increase the administrative burden on schemes without providing any meaningful improvement to the information provided to scheme members.

6.15 In relation to removing obstacles for cross-border provision so that occupational pension funds can operate across the single market, the Minister says that, while the Government supports the removal of obstacles to the functioning of the single market, the Commission has produced no evidence of significant demand for cross border pensions provision — hence any positive impact on stimulating cross border provision would likely be outweighed by the disproportionate effect on schemes that operate within a single Member State.

6.16 Regarding encouraging occupational pension funds to provide long-term investment to the wider EU, the Minister says that:

·  while the Government supports this aim, there is no evidence to suggest that the current IORP Directive is inhibiting long-term investment by occupational pension schemes;

·  there are no rules to restrict such investment in the UK; and

·  in any case, the brief provision in the proposed Directive to prevent Member States limiting the investment choices of pension schemes does not require a comprehensive revision of the entire IORP Directive — this simple amendment could stand alone.

6.17 The Minister concludes her comments on the policy implications of the proposal by saying that the Government will continue to examine the proposals in detail and work closely with Member States, particularly the small number that have any significant occupational pension provision, to ensure that any revision of the IORP Directive adds value and is clearly in the interest of pension scheme members.

6.18 The Minister then discusses the Commission's impact assessment, first noting that:

·  it argues that costs would arise through an increased administrative burden on occupational pension schemes;

·  its estimates include a one-off average adjustment of €22 (approximately £18) per member, with an average ongoing cost of €0.27-0.80 (approximately £0.22-0.66) per scheme member per year;

·  it says that the benefits would be largely indirect and economic and social: first better governance and risk management of IORPs would help reinforce their role as long-term investors in the wider EU economy, secondly, safer and better performing pension products would increase staff motivation and labour productivity and thirdly, better performing pension products would help support the purchasing power of beneficiaries in their retirement.

6.19 The Minister then comments that:

·  the Government is of the view that the Commission's impact assessment does not reliably assess the costs and benefits of the proposal;

·  it has not clearly demonstrated that there are real problems with the existing regulation of occupational pension schemes that need addressing;

·  it is notable that the stated benefits of the proposal are indirect benefits to the wider EU economy, which are speculative rather than impacts that have been reliably measured;

·  the Government notes that the Commission's Impact Assessment Board also had significant reservations about the existence of the problems the Commission is trying to address and questioned whether Member States could not address the issues without EU legislation; and

·  the Board published two opinions on the impact assessment, both of which are 'Negative', meaning that it concluded that the assessment needed significant improvement.

6.20 The Minister adds that, in summary, the most recent opinion of the Board recommended that:

·  there should be a better demonstration of the existence of the problems the proposal is intended to solve;

·  considering the small number of countries which currently have significant occupational pension scheme provision and the low proportion of cross-border IORPs (only 0.01% of schemes operate across borders), a better explanation of why EU action is necessary would be needed;

·  alternative options should be more clearly identified; and

·  better demonstration of the effectiveness of the proposals is needed, particularly in relation to the Benefit Statement for scheme beneficiaries.

6.21 On the financial implications of the draft Directive the Minister says that:

·  there are likely to be financial implications for UK occupational pension schemes that would be subject to the proposed Directive through increased administrative costs in complying with more detailed requirements on governance and information to scheme members;

·  without a reliable impact assessment, it is difficult at this stage to give any accurate view as to the scale of the additional costs, although the National Association of Pension Funds estimates a one-off adjustment of approximately £328 million for UK schemes, with an on-going additional cost of around £7.5 million a year, based on the Commission's own figures;[20] and

·  the Pensions Regulator might also need to make changes to its supervisory regime and processes that could incur costs — it is difficult at this stage to estimate what these costs would likely to be.

6.22 Finally, the Minister tells us that throughout the Commission's review of the IORP Directive the Government has used a stakeholder group to gather the views of employers, trade unions and pension practitioners and that it will continue to consult this group as part of its detailed consideration of the proposal.


6.23 We note that the Government thinks that there is a significant subsidiarity problem with this proposal a suggestion which we are carefully considering. However, the Parliamentary timetable means a recommendation that the House adopt a Protocol No. 2 Reasoned Opinion for the Council, European Parliament and Commission could not be considered in time to meet the deadline of 30 May. Consequently, we will return to this document in the new Session and if we conclude that we agree with the Government's view, we will instead write to the Presidents of the three institutions in the terms of the Reasoned Opinion we would have recommended, as part of the political dialogue, and report to the House accordingly.

6.24 As for the substance of the draft Directive we note the Government's initial view about lack of any real need or justification for the proposal. We presume that the Goverment's preliminary approach to Council discussion of the proposal will be simply to have it dropped. So before considering the matter again we should like to hear about the outcome of the Government's efforts to stymie the proposal. Meanwhile the document remains under scrutiny.

19   (33698) 6715/12 + ADDs 1-3: see HC 428-liv (2010-12), chapter 1 (14 March 2012) and Gen Co Debs, European Committee B, 10 July 2012, cols. 3-20. Back

20   See: Back

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Prepared 28 May 2014