Managing collective retirement schemes – occupational pension funds

SUMMARY OF:

Directive (EU) 2016/2341 on activities and supervision of institutions for occupational retirement provision

WHAT IS THE AIM OF THE DIRECTIVE?

Directive (EU) 2016/2341 (known as the institutions for occupational retirement provision (IORPs) II directive) sets out minimum harmonisation rules for institutions managing collective retirement schemes for employers on behalf of their employees. European Union (EU) Member States’ governments may introduce further measures they consider necessary, provided that such measures are consistent with Member States’ obligations under EU law.

The rules aim to:

ensure occupational pension schemes are financially sound;
give greater protection and information to members and beneficiaries;
remove obstacles to cross-border fund activity;
encourage long-term and responsible investment.

The legislation revises and replaces Directive 2003/41/EC, which needed to be updated after the 2008 financial crisis.

KEY POINTS

Member States must ensure that occupational pension funds or IORPs:

are only involved in retirement-benefit activities;
safeguard their assets for members and beneficiaries if a partner organisation goes bankrupt;
are registered and authorised by the relevant national authority, including for cross-border activities;
have sufficient funds to cover their financial commitments;
invest prudently in the best long-term interest of members and beneficiaries;
operate an effective governance system that provides sound and prudent management of their activities;
are run by people with suitable expertise, qualifications and knowledge;
apply a sound remuneration policy for all employees;
have risk management, internal audit and actuarial functions* in place;
carry out an internal risk assessment at least every 3 years and provide a written statement of their investment policy principles;
draw up and publicly disclose annual accounts;
are subject to prudential supervision on issues such as solvency margins and investment rules;
take reasonable steps to ensure continuity and regularity in performing their activities, including developing contingency plans, by employing appropriate and proportionate systems, resources and procedures, and, in particular, setting up and managing network and information systems in accordance with Regulation (EU) 2022/2554 on digital operational resilience for the financial sector (see summary).

The relevant Member State national authorities:

must have the resources necessary to exercise the prudential supervision;
require IORPs to have sound administrative, accounting and internal control mechanisms;
may impose administrative and other penalties for any breaches of legislation;
have the power to review an IORP’s strategies, processes and reporting procedures, obtain internal documents they may require and conduct on-site inspections;
may exchange information with each other and with monetary authorities without violating professional secrecy conditions.

IORPs must provide prospective and actual members and beneficiaries with clear, updated and free information. This includes:

details of the IORP itself and members’ rights and obligations;
pension benefit statements containing, for instance, data on contributions paid, a breakdown of costs and the value of the personal scheme;
advice on how to obtain supplementary information;
pre-retirement advice on benefit payout options.

Depending on the requirements in question, Member States may exempt certain funds which operate pension schemes with fewer than 15 or 100 members from certain conditions of the legislation. In the event that a pension fund wishes to provide its services in other Member States, however, it has to apply all the rules laid down in the directive.

The European Insurance and Occupational Pensions Authority:

assists with cooperation between national authorities;
ensures consistent application of EU insurance and occupational pensions legislation.

FROM WHEN DO THE RULES APPLY?

The directive had to be transposed into national law by 13 January 2019.

BACKGROUND

Occupational pensions include contributions from employers. They are the ‘second pillar’ of the pension system. State-based social security pensions are the ‘first pillar’. The ‘third pillar’ consists of individuals’ non-compulsory private pension savings.

Under EU rules, funds in one Member State can manage occupational pension schemes for companies based in another. Pan-EU companies can also have a single pension fund for all their European subsidiaries.

Some 125,000 occupational funds operate across the EU. They hold assets worth €2.5 trillion on behalf of around 75 million citizens, representing 20% of the EU’s working-age population.

For further information, see:

Occupational pension funds (European Commission)
Revision of the occupational pension funds directive – frequently asked questions – press release (European Commission).

KEY TERMS

Actuarial functions. Defined in Article 48 of Directive 2009/138/EC (Solvency II), they cover (i) the coordination and monitoring of technical rules, including methodology, assumptions and data; (ii) reporting; and (iii) supporting the risk-management function.

MAIN DOCUMENT

Directive (EU) 2016/2341 of the European Parliament and of the Council of 14 December 2016 on the activities and supervision of institutions for occupational retirement provision (IORPs) (recast) (OJ L 354, 23.12.2016, pp. 37–85).