Documents considered by the Committee on 10 December 2014 - European Scrutiny Committee Contents


7 Financial services: occupational pension funds

Committee's assessment Legally and politically important
Committee's decisionNot cleared from scrutiny; further information requested
Document detailsDraft Directive to consolidate and amend legislation on the activities and supervision of institutions for occupational retirement provision
Legal baseArticles 53, 62 and 114(1) TFEU; co-decision; QMV
DepartmentHM Treasury
Document numbers(35944), 8633/14 + ADDs 1-5, COM(14) 167

Summary and Committee's conclusions

7.1 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. 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.

7.2 This draft Directive to recast (revise) the IORP Directive is confined to new rules on the governance of schemes and the information that schemes should provide to their beneficiaries.

7.3 Both we and the Government have been concerned about the lack of justification for the proposal, subsidiarity issues and the practical consequences of the measure. When we last considered the matter, in July, we said that, before considering the document further we wished to hear from the Government about its continued efforts to forestall the draft Directive, including the results of its detailed consideration, with the UK pensions sector, of the potential impact of the proposal. Meanwhile the document remained under scrutiny.

7.4 The Government tells us that there is now a considerably amended and more flexible Presidency text, that the Presidency hopes to secure COREPER agreement to a General Approach, that the Government will not support such a General Approach and that, in effect, it still hopes to see the proposal aborted. However, the Government makes no attempt to meet our request for the results of its consideration, with the UK pensions sector, of the proposal's possible impacts.

7.5 We are grateful for the information, so far as it goes, that the Government now gives us. We presume that, if necessary, the Government will continue to oppose the measure if it goes to the Council, both on substantive and parliamentary scrutiny grounds. When it confirms this to us, we should like also to have the assessment of impacts we requested previously. Meanwhile the document remains under scrutiny.

Full details of the documents: Draft Directive on the activities and supervision of institutions for occupational retirement provision (recast): (35944), 8633/14 + ADDs 1-5, COM(14) 167.

Background

7.6 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 €2.5 trillion (£1-96 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.

7.7 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.

7.8 In March the Commission presented this draft Directive to recast (consolidate and revise) the IORP Directive. It was confined to new rules on the governance of schemes and the information that schemes should provide to their beneficiaries. The Commission set 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.

7.9 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 said that a more mobile EU workforce requires pension benefits to be easily compared across the EU.

7.10 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.

7.11 When we first considered this proposal, in May, we noted the Government's initial view about lack of any real need or justification for the proposal. We presumed that its preliminary approach to Council discussion of the proposal would be simply to have it dropped. So before considering the matter again we asked to hear about the outcome of the Government's efforts to stymie the proposal.

7.12 We also said that because of the imminent end of the Session we were not able to consider the need for a Protocol No. 2 Reasoned Opinion on subsidiarity in time to meet the deadline of 30 May, but that we would return to the issue in the new Session. In June we did return to the matter and authorised our Chairman to write to the Presidents of the Commission, Council and European Parliament, as part of the political dialogue, in the terms of a Reasoned Opinion we would have recommended to the House.[7]

7.13 Later that month we heard that the Government shared our concerns that the Commission's proposal was not consistent with the principle of subsidiarity. It also gave us some preliminary information about its efforts to stymie the Commission proposal. We asked, before we would consider this matter further, to hear from the Government about its continued efforts to forestall the draft Directive, including the results of its detailed consideration, with the UK pensions sector, of the potential impact of the proposal. Meanwhile the document remained under scrutiny.

The Minister's letter of 2 December 2014

7.14 The Economic Secretary to the Treasury (Andrea Leadsom) writes now about progress with Council consideration of this draft Directive. She first reminds us that the Government shared our concerns, namely that the proposal was not consistent with the principle of subsidiarity and that the case for further IORP legislation had not been made by the Commission. The Minister adds that the Government also had very real concerns that the practical impact of the proposal would be to raise administrative costs for IORPs without providing any meaningful increase in protection for IORP members.

7.15 The Minister also recalls that the Government's intended approach to Council discussion was to focus on high level issues around the need for this legislation: whether the Commission had identified real problems that needed addressing, whether further legislation at EU level was really necessary and whether the Commission's impact assessment was reliable. She then reports that:

·  the Government received support from a number of Member States for raising these concerns and Council working group discussions focussed on these high-level issues for quite some time;

·  it seemed that this proposal would proceed slowly, with no certainty that a Council agreement could be reached;

·  in recent weeks, however, it has started to become apparent that, while several Member States share the UK's principled concerns about this proposal, there is little support in Council for blocking the proposal outright;

·  instead, concerned Member States began to concentrate on securing substantial amendments to the proposal to address their practical concerns about how the legislation would work in practice;

·  while it has not withdrawn its principled reservations on this proposal, the Government decided it should work closely with other Member States to explore whether it would be possible to substantially revise the proposal so that it addressed all of the UK concerns; and

·  if the proposal could not be withdrawn, it would be important to influence development of the Presidency compromise so that the new IORP Directive did not damage UK occupational pension schemes.

7.16 The Minister continues that:

·  only in the last two weeks has it become clear that the Presidency is determined to reach a Council agreement on the proposal before the end of its term;

·  it is now also clear that other Member States will almost certainly support a General Approach based on the latest Presidency compromise, which has radically amended the original Commission proposal;

·  while the Government remains of the view that a real need for this legislation has not been established, the Presidency compromise would lead to an EU IORP regime which still leaves very significant flexibility with Member States and which would not damage UK IORPs or the UK supervision of IORPs; and

·  by moving the proposal away from its original maximum-harmonisation approach to a principles-based minimum-harmonisation framework, the proposal also addresses much of the concern around subsidiarity.

7.17 The Minister tells us that the key amendments made by the Presidency compromise address the Government's concerns as follows:

·  all powers for the Commission to make Delegated Acts, or for the European Insurance and Occupational Pensions Authority (EIOPA) to develop technical standards or guidelines, have been removed;

·  there is now no possibility of the Commission or EIOPA increasing EU competence further through implementing measures;

·  the Pension Benefit Statement (PBS) is now principles-based and leaves flexibility with Member States on the detailed content and format of statements;

·  this is no longer a maximum harmonised approach to the information that IORP members should receive, but a more modest requirement that members should receive basic information about their pension on an annual basis;

·  the mandated elements for the PBS are now high-level and are compatible with information already required in the UK;

·  while there is a requirement for members to receive information about pension projections, this does not have to be included in the PBS so UK IORPs could continue with their current approach;

·  the format of statements is also left to Member States; which should help minimise any increase in administrative costs that flow from the PBS;

·  the requirement for all defined contribution IORP schemes to appoint depositaries now exempts Member States using equivalent protection, including the UK's trustee obligations;

·  the Government was concerned that this would significantly increase costs for no meaningful increase in protection of IORP assets and, in particular, could undermine the low-cost model necessary for auto-enrolment of lower paid workers in the UK;

·  Member States that already have equivalent protections in place, such as the UK's fiduciary duties owed by IORP trustees, are now exempted from this requirement;

·  the risk evaluation which IORPs must perform is also principles-based with a very high level of flexibility left to national authorities on what is required of individual IORPs;

·  the measure now sets out a core list of high-level risks that an IORP would normally be expected to evaluate, but it is left to Member States to make the detailed rules on what is required and for national authorities to decide what is applicable in the circumstances;

·  this will mean that current UK arrangements should meet the requirements of the Directive, but the provision does represent helpful progress in that all IORPs will now be required to submit one document on risk evaluation to the supervisor;

·  this means that administrative costs flowing from the provision should be minimal;

·  all references to quantitative requirements in risk evaluation, which could have paved the way towards a standardised EU-wide approach to the supervision of solvency requirements, have been removed;

·  any legislation which paves the way for EU-wide solvency requirements for defined benefit IORPs has always been one of the Government's biggest concerns;

·  there is now nothing in this proposal which could extend EU competence over quantitative requirements for IORPs;

·  requirements around IORP governance and functions are now much less prescriptive;

·  stripping out the detail on how IORPs should be governed and how key functions must be discharged means that current UK arrangements should now meet these more high-level requirements;

·  in particular, the revised governance requirements will allow the current UK system of trustees to continue, with the ability to include social partners in governance arrangements through the appointment of lay trustees left intact;

·  prudential supervision requirements are now high-level with significant flexibility for Member States;

·  many of the detailed requirements have been removed leaving core elements that supervisors would normally be expected to review;

·  this should enable the UK Pension Regulator to continue with its risk-based approach, focusing supervision resources where they are needed most;

·  there are now much more substantial safeguards in place around the operation of cross-border IORPs and the transfer of liabilities across borders; and

·  the safeguards introduced effectively bring in a national supervisor veto to prevent cross border activity where a supervisor is concerned that this is not in the interest of IORP members.

7.18 Asserting that these changes are a radical departure from the Commission's original proposal, the Minister says that it is on this basis that the Presidency looks likely to achieve a large majority of Member States in support of General Approach at the meeting of COREPER in the week beginning 8 December. She says that, while the Presidency compromise appears to meet the Government's concerns about the impact that a new IORP Directive would have on the UK IORP system, it will not support a General Approach at the COREPER meeting for three key reasons:

·  first, the principled concern about whether there is a real need for this legislation has not been addressed;

·  secondly, the Government does not see why Council consideration of this proposal should be rushed — very significant amendments have been made to the proposal in recent weeks and it thinks it would be sensible to allow time for Member States to perform thorough checks on the revised text; and

·  finally, the new Commission has made its intention known to review pending proposals that do not represent best practice on better regulation — it is not known if this proposal will be a candidate for this review, but the Government believes that Council should give the new Commission an opportunity to consider this before concluding Council discussions.

7.19 Noting that in the circumstances she is not asking us for a waiver, in terms of the scrutiny reserve resolution, for the COREPER meeting, the Minister says that:

·  the Government will make it clear that we and the Lords European Union Committee continue to hold this proposal under scrutiny; and

·  she will inform us of the outcome of IORP discussions under the Italian Presidency and how the Government will approach this proposal following the COREPER discussion.

Previous Committee Reports

Fiftieth Report HC 83-xlv (2013-14), chapter 6 (14 May 2014), First Report HC 219-i (2014-15), chapter 13 (4 June 2014) and Sixth Report HC 219-vi (2014-15), chapter 3 (9 July 2014).



7   For the letters see http://www.parliament.uk/documents/commons-committees/european-scrutiny/Sefcovic%2035944.1.pdf. Back


 
previous page contents next page


© Parliamentary copyright 2014
Prepared 23 December 2014