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Document 52014SC0103
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision (recast)
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision (recast)
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision (recast)
/* SWD/2014/0103 final */
COMMISSION STAFF WORKING DOCUMENT IMPACT ASSESSMENT Accompanying the document Proposal for a Directive of the European Parliament and of the Council on the activities and supervision of institutions for occupational retirement provision (recast) /* SWD/2014/0103 final */
Executive Summary Sheet Impact assessment on Proposal for a Directive amending Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision A. Need for action Why? What is the problem being addressed? Directive 2003/41/EC marked a first step on the way to a Single Market for Institutions for Occupational Retirement Provision (IORPs). This Directive needs to be revised for five reasons. First, prudential barriers remain which make it more expensive for employers to join an IORP in another MS. Second, market developments require a regulatory response since the number of Europeans relying on defined-contribution (DC) schemes, which shifts risks from IORPs and employers to individuals, has increased significantly. Third, recent financial and economic crises have shown that current minimum levels of protection for scheme members and beneficiaries need to be improved. Fourth, citizens do not receive essential information in a comprehensible manner, which prevents them from making informed decisions about their retirement financing. Fifth, supervisory powers are insufficient in several areas. What is this initiative expected to achieve? In line with the 2012 White Paper on pensions, this initiative aims at facilitating occupational retirement provision by making it safer and more efficient, following the European Parliament resolution of 21 May 2013. Removing prudential barriers will make joining a cross-border IORP less expensive for employers. Moreover, the more prominent role of DC schemes makes the Single Market more accessible for occupational retirement provision. Modernising prudential regulation that emphasises good governance and risk management of IORPs will increase their safety. In MSs with small IORP markets there is a great potential that the proposal will help to realise. Strengthening information disclosures will make citizens better informed. IORPs’ role as long-term investors in the EU will benefit from removing unnecessary investment limits. Finally, efficiency gains are expected from increasing the degree of harmonisation in all MSs. What is the value added of action at the EU level? Action at the EU level will add value substantially since MSs alone cannot: (i) remove obstacles to IORPs' cross-border activities; (ii) ensure a higher EU-wide minimum level of protection of members and beneficiaries; (iii) take into account cross-border workers' interests; (iv) enable employers to benefit from cost savings resulting from cross-border synergies; (v) avoid regulatory arbitrage between financial services sectors; and (vi) avoid regulatory arbitrage between MSs. Moreover, the chosen policy options are proportionate since they are adequate to reach this proposal's objectives and do not go beyond what is necessary in doing so. The proposal has specifically taken into account the nature, size and complexity of IORPs by choosing those options that do not increase the administrative burden unnecessarily and respect MSs' prerogative to design their pension systems. B. Solutions What legislative and non-legislative policy options have been considered? Is there a preferred choice or not? Why? The initiative proposes to address the problems in the IORP sector through legislative action. Even though some further convergence might be achieved through co-operation between supervisors, differences in national law arising from divergent interpretations and implementation of key concepts in the Directive are expected to result only in temporary and limited clarification. The selected choices are as follows: (1) to remove prudential barriers for cross-border IORPs; (2) to ensure good governance and risk management by requiring IORPs to have staff performing key professional functions, well-functioning risk management systems and documentation and protection of DC scheme members against operational losses; (3) to require IORPs to provide members and beneficiaries a short and standardised Pension Benefit Statement with clear and relevant information about their pension entitlements and projections; and (4) to ensure that supervisors have the tools to effectively supervise IORPs, in particular verifying governance and risk management requirements, accessing information in case of chain-outsourcing, and conducting stress tests. Who supports which option? Extensive public consultations on all aspects of the Directive have taken place with many stakeholders involved since 2008. Modernising the governance, transparency and reporting aspects of the Directive is supported by the European Parliament, those MSs where insurance is the main vehicle of occupational pension provision (e.g. FR and SE), insurers and EIOPA. MSs with developed IORP markets such as UK, IE, NL and DE could agree to a revision of the Directive on these issues as long as the principle of proportionality is respected. Employers and employees recognise the benefits that can be gained from a review of the Directive, but remain wary of measures that raise costs without leading to more safety for members and beneficiaries. Finally, innovative employers stress the need of removing prudential barriers to cross-border provisioning of IORPs. C. Impacts of the preferred option What are the benefits of the preferred option (if any, otherwise main ones)? Better governance and risk management benefits members and beneficiaries by increasing risk-adjusted investment returns, with positive effects on their retirement income. Moreover, improved personalised information will help individuals make better informed decisions about their retirement provision. Employers, including SMEs, are expected to benefit through reduced cost of joining an existing IORP. This enables them to focus on their core business activity and, at the same time, benefit from a more professional service level. Moreover, employers joining a pension scheme in an established IORP market can expect to reduce their administration and investment costs. Multinational companies will also benefit from consolidating their existing pension schemes into one IORP. MSs will benefit because well-governed IORPs and deeper IORP markets at both the national and EU level are expected to reduce some of the fiscal pressure on state pension systems. What are the costs of the preferred option (if any, otherwise main ones)? The expected cost of the proposed action is an increase of the administrative burden mainly as a one-off adjustment cost in the short-term, and somewhat higher recurrent costs in the new regime. An estimate from the IORP sector of the administrative burden has pointed to three elements that they expected to be the most expensive. The proposed action avoids the two most costly elements by taking into account proportionality, in the sense that IORPs are only required to report descriptions of four key qualitative elements determining their funding position and to have only a limited number of key governance functions in place. DC schemes in a few MSs are expected to incur an additional cost from the mandatory appointment of a depository. Will there be significant impacts on national budgets and administrations? The future regime is likely to have a positive impact on the sustainability of public finances. Better information about expected retirement benefits from occupational pensions will help individuals decide whether or not they need to save more, in accordance with their consumption preference before and after retirement. As such, well-informed individuals are likely to exert less pressure on national state pension systems. Some MSs might need to increase supervisory resources where the proposed supervisory powers are not yet in place. Will there be other significant impacts? The proposed action is expected to have significant positive social impacts. It is expected to contribute to increasing the coverage of occupational retirement savings. The take-up of occupational pension schemes, like for any financial product, is largely driven by trust and performance. The proposed action will make occupational retirement products more efficient and safer than today. Moreover, the clear and standardised information disclosures to members will assist the growing number of citizens who work in another MS. No major environmental impacts are foreseen. D. Follow up When will the policy be reviewed? An ex-post evaluation of the application of the revised directive should take place five years after its adoption, in the form of a Commission report to the European Parliament, the Council, and the European Economic and Social Committee. It may be accompanied, if necessary, by policy recommendations or proposals for amendments to this Directive. 1. Introduction European society is ageing. Pension systems
across the European Union (EU) have to adapt in order to ensure adequate, safe
and sustainable pensions. This is not a simple matter. Effectively addressing
the challenge requires closely coordinated action by Member States (MS) and by
the EU to benefit from synergies. Joint measures in relation to fiscal
coordination, labour mobility and initiatives announced in the 2012 White Paper
on pensions (White Paper)[1]
are already underway. The Single Market, too, can contribute
decisively. The White Paper announces that “[t]he Commission will, in 2012,
present a legislative proposal to review [Directive 2003/41/EC on the
activities and supervision of Institutions for Occupational Retirement
Provision]”. The revision of the Directive was scheduled in the
Commission's Work Programme for 2012[2]
and 2013. The latter specifies that the Commission will "[p]ut in place
the right framework for the institutions handling occupational pensions"[3] and that "[a]
review of this Directive is required in view of the importance of ensuring that
appropriate structures are in place to fund retirement."[4] Institutions for Occupational Retirement
Provision (IORPs) are, like other financial institutions, an integral part of
the Single Market. Directive 2003/41/EC was adopted in 2003 in order to enable
IORPs to provide their services to sponsoring employers and employees across
the EU. The opening up of borders was accompanied by minimum harmonisation of
prudential standards and mutual recognition of supervision in order to ensure a
high level of member protection across the Single Market. Ten years after its adoption, the Directive
needs to be revised. Cross-border activity is possible but still too complex
and too costly. Risk is being shifted from IORPs to individuals, with the
greater significance of defined-contribution (DC) schemes.[5] Around 25 million Europeans
rely on DC schemes, considerably more than ten years ago, and looking forward
the upward trend is set to continue. The performance of DC schemes hinges
crucially on professional management, and DC schemes require individuals to
engage with longevity and financial risks directly. Moreover, the more
prominent role of DC schemes is making the Single Market more accessible for
occupational retirement provision. Finally, the recent financial and economic
crises have revealed vulnerabilities in the level of member protection, which
have led to irreversible financial losses for millions of scheme members and
beneficiaries across the MSs. Regulation needs to adapt, to ensure that
governance and transparency requirements are still suitable for today’s market
challenges. This is what this proposal sets out to do. In MSs with small IORP
markets there is a great potential that the proposal will help to realise. Improvements
to the performance of occupational pensions require long periods of time to
materialise. Failing to act now would lead to lost opportunities in terms of
cost savings and investment returns, and inadequate financial planning by
millions of Europeans. It would also increase the burden disproportionately for
younger generations and undermine inter-generational solidarity. This proposal does not consider the
introduction of new solvency rules[6].
Solvency rules are not directly relevant for DC schemes. Moreover, the
Quantitative Impact Study (QIS) conducted by the European Insurance and
Occupational Pensions Authority (EIOPA, 2013c)[7]
indicated that more complete data on solvency aspects are necessary before a
decision can be taken on those aspects. 2. Procedural issues and
consultation of interested parties 2.1. Procedural issues 2.1.1. Steering Group The Steering Group for this Impact
Assessment was formed by representatives of the Directorates General Internal
Market and Services (MARKT), Economic and Financial Affairs, Enterprise and
Industry, Employment, Social Affairs and Inclusion, Environment, Taxation and
Customs Union, Health and Consumers, Research and Innovation, Home Affairs,
Justice, Human Resources and Security, the Joint Research Centre, the Legal
Service and the Secretariat General. The Group met on 24 September 2012, 24 May
2013 and 3 July 2013. 2.1.2. Impact Assessment Board A meeting of the Impact Assessment Board
(IAB) took place on 4 September 2013. During this meeting the IAB raised a
number of issues which needed revisiting and requested resubmission of the
Impact Assessment. In this revised report, MARKT has taken on board all
comments made by the IAB. The main modifications to the report were: (1) a
complete redraft of section 2.2 to include the views of the MSs and different
stakeholder categories and explain how these views have been taken into
account; (2) a clarification of the problems being addressed by this initiative
in section 3.3; (3) a new section on subsidiarity in section 3.4.1, which sets
out the case for EU action in greater detail; (4) a clarification that further
harmonisation of supervisory reporting is not being proposed (section 6.5 and
6.6); and (5) a new section 6.1.3 on the impact on Small and Medium-sized
Enterprises (SMEs). 2.2. External expertise and consultation of interested
parties This report builds on multiple public
consultations, the first of which was launched in 2008. Although initially most
attention was drawn to possible new solvency rules for IORPs, these
consultations covered all aspects of the Directive, including cross-border
issues, governance, transparency and reporting. The issue of possible new
solvency rules greatly divided stakeholders with some - primarily in the
insurance industry and supervisors – favouring new rules, whilst others -
mainly in the IORP industry and employers organisations - strongly opposed
them. As solvency rules remained the main point of contention in subsequent
consultations, MARKT decided in 2012 to ask EIOPA to conduct a QIS on a
possible new quantitative framework. The results of this study (EIOPA, 2013c)
highlighted the need for deeper knowledge of this issue. It was therefore
decided in May 2013 that the IORP II proposal would focus on governance,
transparency and reporting.[8] On these issues, the Commission Services have consulted external
stakeholders extensively along with the solvency rules. This section summarises
the most important consultations: (i) Green Paper and White Paper on
pensions (2010 and 2012): Following the
concerns expressed by stakeholders after the first consultations, MARKT did not
propose legislative action but decided to place the policy choice on the
prudential standards for IORPs in the wider economic and social policy context.
In July 2010, the Commission published a Green Paper on pensions.[9] The paper included questions on the consistency of the EU
regulatory framework for funded pension schemes, the need to modernise the
information disclosure requirements for pensions products, and ways to amend
the Directive to improve the conditions for cross-border activity. The
consultation, which - in line with the minimum standards of consultation -
lasted from July until November 2010, drew almost 1700 responses from across
the EU, including 350 from MSs, national parliaments, business and trade union
organisations, civil society and industry representatives. On governance and
transparency a majority of stakeholders proved to be receptive to change, with
a number of MSs pointing at room for improvement with respect to governance and
risk management, safekeeping of assets and transparency to members and
beneficiaries. All did stress the importance of proportionality, however.[10] Following the Green Paper, the Commission
adopted the White Paper on pensions in February 2012, which announced a set of
20 EU-level initiatives. One of these initiatives was a revision of the
Directive in 2012. (ii) EIOPA advice and Public Hearing
(2012): Taking into account the feedback on the
2010 Green Paper, MARKT asked EIOPA on 7.4.2011 to provide technical advice on
how to change the Directive. Assisted by experts from national supervisors,
EIOPA produced draft advice on 8.7.2011 in which it recommended that - taking
into account the principle of proportionality - the governance framework set
out in the Solvency II Directive[11] should also apply to IORPs. The publication of the draft advice was
followed by a consultation which lasted until 2.1.2012. 170 responses were
received from 14 MSs and 20 European and international organisations.[12] EIOPA evaluated the responses, producing a reasoned feedback
statement, in which it specified what it would do with the various suggestions.
For example, the suggestion from EIOPA's Occupational Pensions Stakeholder
Group (OPSG) relating to the need for information to members to be written in
simple and plain language was integrated into the final EIOPA advice. EIOPA delivered its final advice in
February 2012, on the basis of which MARKT organised an exchange of views amongst
stakeholders during a public hearing on 1.3.2012. The hearing was
well-attended. Most
speakers at the hearing acknowledged the need to improve governance of IORPs, but stressed the importance of
proportionality. Likewise, on transparency, most saw room for improvement. In
particular, members of DC schemes were mentioned as most in need of more and
better information.[13] (iii) Regular
dialogue with external stakeholders: Outside the formal consultations
mentioned above the Commission Services have received many reactions regarding
this proposal. One such reaction was launched by seven groups representing the
European pension industry, employers and workers.[14] In a joint statement they urged the Commission to only propose
measures that were specifically designed for pension funds and contribute to
improvement of member protection and protection. They also called on the
Commission to avoid time-consuming and complex implementing measures. This
advice has been taken into account. To conclude, a proposal to modernise the
governance, transparency and reporting aspects of the Directive is supported by
those MSs where insurance is the main vehicle of occupational pension provision
(e.g. FR, SE), the insurance industry and EIOPA. National supervisory
authorities are also generally supportive. MSs that have developed IORP markets
(e.g. UK, IE, NL, DE) could, in principle, agree to a revision of the Directive
on these issues as long as the principle of proportionality is respected. They
do remain opposed against new solvency requirements. Employers and employees
recognise the benefits that can be derived from a revision of the Directive,
but remain wary of measures that raise costs without leading to increased
security for members and beneficiaries. Innovative employers meanwhile stress
the need to remove the remaining prudential barriers to cross-border
provisioning of IORP services, while employees stress the importance of
transparency of pension products. 3. Policy context, problem definition and subsidiarity 3.1. Market context 3.1.1. Institutions for occupational retirement provision IORPs are financial institutions. They are set
up by one or more employers (the sponsor) to provide retirement benefits to its
employees (the scheme members and beneficiaries). Occupational pensions are a
form of deferred compensation, whereby workers accept lower wages during their
active careers in exchange for salary-based pension after they retire. Employers
often supply occupational pensions on a voluntary basis, in order to benefit
from lower staff turnover costs (employee retention) and encourage high
productivity, possibly linked to efficiency wages (Laboul and Yermo, 2006). Employee
participation in occupational schemes may be mandatory or voluntary. In any
case the demand for such pensions by employees is driven by individual
preferences for smoothing consumption throughout life (Dummann, 2008). In
addition, favourable tax treatments for both employers and employees (e.g.
contributions may be deducted from taxable income) intend to make occupational
retirement products more attractive financially. 3.1.2. IORPs operate in the majority of MSs There are some 125,000 IORPs operating
across the EU. They hold assets worth €2.5 trillion on behalf of around 75
million Europeans, which represents 20% of the EU’s working-age population.[15] Figure 1 illustrates
that IORPs exist in the majority of MSs, but that there are differences in
market size. These differences reflect that occupational retirement provision
is part of the wider pension system which also comprises state pension schemes
(first pillar) and voluntary private pension schemes (third pillar). The
importance of state pension systems in the various MSs differs, reflecting that
the overall organisation of the pension system is a MS competence. Figure 1: Total number of
IORPs and assets managed, end-2011* || Number || Assets (€ millions) || || Number || Assets (€ millions) || || Number || Assets (€ millions) BE || 226 || 15,910 || IT || 352 || 69,050 || PT || 197 || 12,650 BG || 1 || na || CY || 1.651 || na || RO || 11 || 110 DK || 26 || 7,060 || LV || 7 || 170 || SI || 9 || 1,835 DE || 181 || 138,570 || LU || 19 || 970 || SK || 5 || 1,180 IE || 68.500 || 70,000 || HU || 1 || na || FI || 56 || 4,120 EL || 9 || 60 || NL || 514 || 774,060 || SE || 86 || 30,900 ES || 363 || 31,690 || AT || 17 || 14,760 || UK || 50.880 || 1,319,930 FR || 1 || na || PL || 5 || 360 || Total || 125,129 || 2,492,485 Source: Commission Services, EIOPA, national sources.
Note: *) or latest data
available ; data are not available for all MSs. Although IORPs are important financing
vehicles for retirement only in a few MSs at present, there is potential,
looking forward, for further expansion in other MSs. In many MSs the state
pension schemes have proven to be financially unsustainable as a result of increasing
longevity and pressure on public finances. MSs have been reducing, and some are
still reducing, pension benefits from state pensions. This means that an
adequate replacement rate for Europeans will require additional retirement
income from occupational and personal retirement provision. In many MSs private
pensions are therefore expected to provide for a larger share of retirement
income over the next decades. An approximation of the extent of this growth was
presented by the Social Protection Committee in 2009. In MSs like IT, RO, BG,
DE, HU, EE, LT, PL and SK, it is expected that occupational and statutory
funded pensions will make up a considerably higher proportion of income
replacement by 2046 (Figure 2). Figure 2: Share of occupational and statutory funded pensions in
total gross theoretical replacement rates in 2006 and 2046 Source: Indicator Sub-Group (ISG) of the Social
Protection Committee (2009) Note: Data not available for all MSs. 3.1.3. IORPs operate an increasing amount of
defined-contribution schemes IORP operate different types of pension
schemes. They can be categorised along a spectrum according to the entity that
is exposed to risks. The initial forms of occupational retirement provision
were defined-benefit (DB) schemes. The employer commits to pay to the employee
a lifetime monthly benefit on retirement for each year of service (e.g. 1.5% of
final salary for each year). The risks during the accumulation phase (e.g.
investment and operational risk) and the biometric risk during the pay-out
phase are fully borne either by the employer or by the IORP, or shared by both.
At the other end of the spectrum are DC
schemes, where the employer commits to contribute on the employee's behalf a
certain cash amount for each month of service. On retirement, the employee can
access the savings accumulated in the IORP in order to finance the pay-out
phase. The risks during the accumulation phase are fully borne by the employee.
The employee also fully bears the biometric risk during the pay-out phase,
unless national law mandates the purchase of an annuity. DC schemes therefore
often need to be followed-on by a life assurance product during the pay-out
phase. Between the two ends of the spectrum are
hybrid schemes such as average-salary DB schemes, DC with guarantees, part
DB/DC schemes, etc. Hybrid schemes share the risks between employers and
employees. Pension schemes are similar to other
financial products. DC schemes are comparable to investment funds because the
outcome depends entirely on investment returns. DB schemes are comparable to
life insurance products because they offer protection against risk. However it
is important to note that DB schemes are not risk-free for members and
beneficiaries because, unlike for insurance products, IORPs do have the
possibility to reduce accrued pension rights if their funding position
deteriorates. Since the adoption of the Directive more
than 10 years ago, the importance of DC and hybrid schemes has increased
(Figure 3) and it is expected that this trend will continue. This is because
the traditional final-salary DB schemes have become unaffordable for many
sponsoring employers due to increasing longevity and adverse trends in
financial markets, notably protracted periods of low interest rates and market
volatility. The growing importance of DC schemes is also driven by changes in
the labour market and technological progress. As a result sponsoring employers
are increasingly providing DC and hybrid schemes, either to replace existing DB
schemes or when creating new IORPs. In the UK, for example, the proportion of
DB schemes open to new members fell from 33% of DB schemes in 2007 to 17% in
2012. In addition, the successive enlargements of the EU since 2004 have
increased the importance of DC schemes (Figure 4). Figure 3: Membership of IORPs per scheme type (millions) || Figure 4: Predominant scheme type in the MSs || Predominantly DC || Predominantly DB BG, DK, IE, EL, ES, FR, IT, CY, LV, LT, LU, HU, AT, PL, RO, SL, SK || BE, DE, NL, PT, FI, SE, UK Source: Commission Services, Eurostat, OECD and national sources. || Source: Commission Services, EIOPA (2013b). Today around 25 million Europeans rely on DC schemes for an adequate
retirement income. As a result of the trend towards DC schemes the risks are
shifted from the IORP to scheme members and beneficiaries, and this raises new
regulatory challenges (Ashcroft and Steward, 2010; OECD, 2012a). Moreover, the
potential for cross-border IORPs is larger for DC schemes because product
features are simpler. This reflects that many aspects of social and labour law
applicable to occupational retirement provision, such as the preservation and
the indexation of retirement benefits, are not relevant for DC schemes. 3.2. The current legislative framework The Directive enables IORPs located in one
MS to be sponsored by employers from other MSs. It enables sponsoring employers
to organise occupational retirement provision on a European scale. The
opening-up of borders was accompanied by a minimum harmonisation of prudential
standards and mutual recognition of supervision - comprising quantitative,
qualitative and disclosure requirements – in order to achieve a high degree of
security for scheme members and beneficiaries across the Single Market. An IORP
is supervised by the competent authority of the MS in which it is located (home
MS) but needs to respect the social and labour legislation of the host MS,
which typically is the MS where the sponsoring undertaking is located. The Directive is based on the Treaty provisions relating to the freedom
to provide services and the freedom of establishment (Annex
D for more details). 3.3. Problem definition 3.3.1. Specific problems There are four specific problems, which
will not resolve themselves without regulatory intervention. First, cross-border activity is still
expensive and complex for employers, which prevents IORPs from fully benefiting
from the Single Market. As of June 2012, there were 84 cross-border IORPs, representing
only 0.01% of IORPs with more than 100 members in the EU. By comparison,
cross-border activity in the life insurance industry represents around 10% of
gross written premiums, suggesting that there is considerable potential for the
organisation of occupational retirement provision on a European scale. Although
some employers prefer to continue the use of IORPs in their own MSs, other
employers – SMEs and multinationals – take a more innovative approach by
setting up or considering setting-up cross-border IORPs. Interest has been growing,
particularly for the new DC schemes.[16]
This has prompted a number of MSs to incentivise cross-border provisioning.[17] The remaining
complexity, however, reduces the prospects of efficient price formation because
of high entry or exit barriers and sunk costs, and a continued competitive
advantage of domestic IORPs over IORPs located in other MSs. Opening up the market needs to be
accompanied by some harmonisation of prudential standards in order to guarantee
a minimum level of protection for scheme members and beneficiaries,
irrespective of where the IORP is located. The financial crisis has
demonstrated that the current minimum level of protection is too low. Market
developments, in particular the trend towards DC schemes – shifting risks from
the IORP to the individual - call for an adjustment of regulation. Experience over the ten years since the
adoption of the Directive has clearly demonstrated that member protection is
undermined by principal-agent problems in the sense that those who effectively
manage IORPs might not necessarily act in the best interest of the scheme
members or beneficiaries (specific problem 2). Member protection is also insufficient
due to information inefficiencies arising from a lack of clear and effective
communication (specific problem 3). Scheme members do not have access to
essential information regarding their occupational pension in a comprehensible
form, which considerably undermines their capacity to take informed decisions
about savings and investments. The fourth specific problem is that
supervisory powers are insufficient to effectively ensure that IORPs comply
with the prudential standards and information disclosures. 3.3.2. General problem The specific problems have negative
consequences for employers, future and current pensioners and MSs. Weak member
protection and complex cross-border activity do not enhance trustworthiness and
performance which, as for any financial product, are crucial for the take-up of
occupational pensions. The specific problems hold back the development of complementary
private retirement savings which is one of the two objectives of the White
Paper. In a rapidly ageing society, this has negative consequences for the
fiscal sustainability of MSs’ budgets and poses threats to pension adequacy.
Moreover, employers may be missing opportunities to save costs in the supply of
occupational pensions. 3.3.3. Problem drivers The specific problems are caused by eight problem
drivers. These are: (1) cross-border IORPs face additional prudential
requirements; (2) some definitions and procedures for cross-border activity are
unclear; (3) there is no obligation for IORPs to have professional managers;
(4) risk management processes and documentation are not obliged to be
systematic; (5) assets are not protected from operational risk; (6) members do
not have to receive easy to understand pension information; (7) supervisory
powers for chain-outsourcing and stress testing do not exist in all MSs; and
(8) supervisory powers relating to new requirements need to be ensured. An
overview of the problems and the underlying drivers is provided in Figure 5.
The individual drivers are explained in more detail in the remainder of this
sub-section. Figure 5: Problem tree 3.3.3.1. Prudential
barriers restricting the development of cross-border IORPs The experience of employers, IORPs and
supervisors over the past years has clearly shown that important prudential
barriers restricting cross-border operations of IORPs remain. The mere
preparations, i.e. feasibility studies by sponsoring employers, may take two years
or even more. Setting-up a cross-border IORP takes nine months to a year, while
adding an additional host MS takes about six months on average (Hewitt
Associates, 2010). There is evidence that establishing cross-border IORPs can
be a burdensome task and projects are therefore often abandoned (Annex E).
Feedback from stakeholders suggests that there are two categories of problem
drivers. First, there are additional
prudential requirements for cross-border activity (driver 1), notably the
following: (a)
The Directive allows MSs to limit the prudent
person investment principle by enacting additional quantitative investment
restrictions. This leads to a situation where either sponsoring employers or the
IORP are faced with a number of different national investment rules, thereby imposing
additional investment rules on IORPs wishing to operate in other MSs. (b)
IORPs must be fully funded, but domestic IORPs
are allowed to have considerable recovery periods (up to 10 years or more). As
a consequence, IORPs wishing to operate across borders face more stringent
funding requirements which generate further costs, significantly reducing their
willingness to engage in such activities. Second, several definitions and
procedures for cross-border activity are not clear (driver 2), notably the
following: (a)
The Directive does not provide a clear definition
of cross-border activity. The Directive intends to enable activity when the
sponsoring undertaking and the IORP are located in two different MSs, but in
practice there have been issues around the location of the sponsoring
undertaking and the procedure to notify the applicable social and labour law.
As confirmed by EIOPA (2012a), supervisors interpret the definitions differently
in practice and might disagree as to whether a particular IORP intends to carry
out cross-border activity. This significantly discourages or hinders the
effective realisation of cross-border projects. (b)
The Directive does not ensure the smooth transfer
of occupational retirement schemes from one IORP to another located in a
different MS. In the course of consultations, stakeholders testified that some MSs
prevent cross-border transfers of past service assets and benefits and bulk
transfers into new cross-border IORPs. This reduces the attractiveness of
cross-border consolidation. (c)
The scope of prudential regulation rules
applicable in MSs is uncertain. This was confirmed by EIOPA (2012a). More
specifically, an IORP has to comply with the prudential regulation of its home MS
(the MS where it is registered or authorised) and the social and labour law
requirements from the host MS (generally the MS where the sponsoring employer
is located). What is social and labour law in one MS is, however, not necessarily
social and labour law in another MS (see, for instance, Guardiancich, 2011).
For example, qualitative investment rules are not part of social and labour law
in most MSs. A sponsoring employer that intends to set-up a cross-border IORP
needs to know whether it has to comply with the laws of the home or host MS.
The different scope of prudential regulations in MSs causes legal uncertainty
for sponsoring employers, IORPs and supervisors, involving legal costs for the
sponsoring employer, which might increase overall transaction costs and,
consequently, discourage such transactions. 3.3.3.2. Governance
and risk management requirements are not sufficiently comprehensive Financial institutions fail but direct
failures of IORPs are difficult to observe. IORPs do fail however and there are
several indications that these failures are caused by shortcomings in the
governance and risk management practices of IORPs. First, the QIS has shown
that the IORPs in three MSs, which cover a large share of all IORPs in the EU,
are on average extremely underfunded. The combined deficit for the UK, NL and IE amounted to more than €500 billion (Figure 6). PT has retracted from the QIS
exercise. There are indications that, at least for part of the extremely
underfunded IORPs, this reflects a lack of realistic and forward-looking
approach to risk-management. When a more comprehensive picture of the risks
faced by IORPs is taken into account (see QIS results in Figure 6), the QIS
clearly shows a deterioration of the funding position in nearly all the MSs.
This applies particularly to UK, IE and Pensionskassen in DE, suggesting that
those IORPs are currently not sufficiently comprehensive in their own risk
assessment. Figure 6 – Funding positions* (€ billions, end-2011) || BE || DE-PF** || DE-PK** || IE || NL || SE || UK Current national regime (€ billions) || 1.2 || 3.7 || 1.6 || -23.9 || -131.1 || 0.8 || -349.9 Funding ratio*** || 109 || 116 || 101 || 64 || 86 || 107 || 77 QIS results (€ billions)**** || -2.7 || 0.1 || -8.6 || -80.3 || -147.7 || 0.5 || -431.2 Source: EIOPA. Note: *) deficit (-) or surplus (+); ***) The DE
results distinguish between Pensionsfonds (PF) and Pensionskassen (PK); ***)
The funding ratio is calculated as the ratio between assets and liabilities
plus capital requirements. The extent to which the ratio is less than 100
indicates the size of the funding deficit; ****) The results shown are those
for the benchmark 3A scenario. Technical provisions are based on a risk-free
interest rate and include a risk margin for adverse deviation. Ex post benefit reductions
and sponsor default reductions are not taken into account. Sponsor support and
participation in a pension protection scheme are treated as an asset. More
details about benchmark 3A are contained in EIOPA (2013c). Second, the total number of pension schemes
transferred to the UK Pension Protection Fund (PPF) since its creation in 2005
has amounted to 602, with a total of 182,554 members, as of July 2013. The PPF was
established to pay compensation to members of eligible DB schemes, when there
is a qualifying insolvency event in relation to the sponsor and where there are
insufficient assets in the pension scheme to cover PPF levels of compensation.
The transfer of these 602 schemes into the PPF suggests a lack of professional
risk-management within the IORPs concerned, including their inability to
quantify their sponsor's support. Indeed, a study by Mercer (2006) on IORPs in
the UK partly attributes improvements in deficit levels (which improved from
£-40 to -2 billion in 2007) to strengthening pension fund governance. Moreover,
the link with sponsor support is supported by the QIS. In the UK the funding deficit using national rules amounted to €350 billion at the end of 2011.
According to the national funding regime this is allowed because it is implicitly
assumed that the sponsoring employer will be willing and capable of financing
shortfalls to pay pensions as they fall due. The QIS has attempted to make the
value of the sponsor support more explicit. The results indicate that the
sponsor support will still leave a considerable funding deficit of on average
around €300 billion, suggesting that at least some IORPs in the UK are significantly overestimating the financial strength of their sponsor. Third, a Parliamentary question to the
German Bundestag of 2.1.2008 (16/7664) referred to cuts in accrued pension
rights by six Pensionskassen between 2001 and 2007. The reason for these benefit
cuts was that the management of these IORPs had not correctly anticipated
future financial market developments. More recently, indications suggesting
that there is a lack of professional risk-management and investment strategy in
some Pensionskassen can be derived from the QIS. The deterioration of the
funding position is more severe for Pensionskassen than for Pensionsfonds
(Figure 6 above). An important difference between these two types of IORPs in
DE is that Pensionskassen, notably those sponsored by industrial companies
rather than by insurance undertakings, do not enjoy protection of the German
pension protection scheme (PSV). However, considering that the QIS has
indicated that the value of the PSV protection is relatively low, the larger
deterioration of the funding position for Pensionskassen indicates that those
IORPs, which are the dominant form of IORPs in DE, are particularly less
comprehensive in their own risk assessment. This is worrying because sponsors,
including large and historical companies, can and do fail. Data from the PSV indicate
that there have been over 15,000 failures for a combined volume of more than €21
billion since 1975. Fourth, IORPs in CY put a substantial
percentage of their assets in bank deposits. According to statistics by the
Central Bank of Cyprus, pension funds and insurers held €4.3bn of members'
contributions in bank deposits at the end of January 2013. According to
statistics produced by Aon Hewitt Cyprus in late 2011, local pension funds had
around 60% of assets in local financial institutions. This percentage has
decreased to around 50% by March 2013.[18]
[19] In several cases the
banks also happened to be the sponsor of IORPs concerned. After the CY bail-out
of March 2013, these bank deposits were converted into equity in the same
banks. This example points to a faulty investment strategy of the IORPs
concerned, which strongly indicates that management was neither fit nor proper. Fifth, OECD data on pension funds’ real
average net annual rate of investment returns show large differences in average
investment returns of pension funds between MSs in the period 2002-2011 (Figure
7). Clearly, investment returns depend on many factors such as the economic
cycle, but considering that the vast majority of IORPs operate in leading
economies with similar characteristics (notably DE, NL, UK) the wide variation in investment returns does suggest differences in the quality of governance
and risk management. For example, investment returns in the UK have been on average considerably lower. In fact, a recent review by the UK pensions regulator has shown that a large proportion of IORPs in the UK had not reviewed their
Statement of Investor Principles in the last three years.[20] Moreover, little
evidence exists that employers have the capability and resources to recognise
the importance of prioritising key elements of value for money such as
investment design and performance or scheme governance (OFT, 2013). Investment
returns in DE, reflecting mostly the situation for Pensionskassen, are also
considerably lower on average than those in NL despite both MSs being part of
the euro area. IORPs in IE have been the worst performers during the height of
the financial crisis (return of -35.7%) and the losses have been considerably
higher than in the other mature IORP markets. Figure 7: Pension funds’ real average net annual rate of investment
returns in selected OECD countries, 2002-2011
|| 2002 || 2003 || 2004 || 2005 || 2006 || 2007 || 2008 || 2009 || 2010 || 2011 Selected OECD countries AT || -6.9 || 5.7 || 3.6 || 9.0 || 3.8 || -1.8 || -14.4 || 7.3 || 3.7 || -6.0 BE || -11.6 || 6.0 || 6.0 || 10.3 || 10.3 || 7.7 || -22.3 || 13.4 || 4.4 || -4.6 CZ || 3.2 || 2.2 || 0.7 || 2.7 || 1.3 || -2.1 || -1.5 || -0.6 || -1.2 || 0.5 DA || -6.7 || 6.3 || 11.5 || 14.8 || 1.3 || -3.3 || 5.1 || 1.2 || 7.1 || 12.1 EE || 2.3 || 9.2 || 6.8 || 7.9 || .. || .. || -23.1 || 13.2 || 2.5 || -7.9 FI || -2.1 || 0.4 || 7.4 || 12.1 || 6.2 || 2.4 || -19.7 || 14.0 || 7.1 || -4.4 DE || 1.6 || 3.5 || 2.6 || 3.6 || 3.3 || 1.1 || 0.5 || 3.9 || 3.4 || .. EL || .. || .. || .. || .. || .. || .. || 2.3 || 0.3 || -7.8 || -5.6 HU || 1.4 || -2.6 || 9.5 || 7.6 || 1.2 || -3.9 || -21.7 || 12.8 || 4.2 || -0.5 IC || -2.8 || 10.4 || 9.6 || 11.8 || 8.8 || 0.4 || -23.1 || 1.0 || 1.3 || 2.3 IE || .. || .. || .. || .. || .. || -7.4 || -35.7 || .. || .. || .. IT || .. || .. || .. || .. || .. || .. || -5.3 || 5.3 || 1.2 || -2.8 LUX || .. || .. || .. || 29.0 || 4.9 || -2.5 || -11.3 || 6.5 || 0.7 || -2.2 NL || -10.6 || 8.7 || 8.4 || 10.9 || 6.8 || 0.6 || -17.3 || 11.5 || 8.8 || 8.2 NO || -5.2 || 11.4 || 7.5 || 9.2 || 7.4 || 3.1 || -10.6 || 9.8 || 5.5 || -0.1 PL || 11.8 || 8.8 || 8.6 || 12.9 || 13.4 || 1.5 || -17.3 || 8.9 || 7.2 || -9.1 PT || -6.7 || 7.3 || 6.6 || 7.0 || 7.2 || 5.5 || -13.2 || 11.6 || -3.0 || -7.3 SK || .. || .. || .. || .. || .. || -0.1 || -8.9 || 1.0 || 0.0 || -3.8 SL || .. || .. || .. || .. || .. || -1.0 || -5.4 || 4.2 || 1.8 || -1.8 ES || .. || .. || .. || .. || .. || .. || -9.9 || 6.9 || -2.2 || -2.2 CH || -7.2 || 4.9 || 2.8 || 9.2 || 5.3 || 0.2 || -13.8 || 9.9 || 2.8 || 0.6 UK || 0.9 || 1.2 || 0.6 || 0.2 || -0.9 || -0.2 || -0.9 || -0.9 || -2.1 || -2.5 BG || 4.8 || 7.6 || 5.0 || 3.3 || 0.9 || 6.2 || -32.3 || 5.6 || 2.5 || -3.0 MT || .. || .. || .. || .. || .. || .. || .. || .. || .. || -2.3 RO || .. || .. || .. || .. || .. || .. || 10.7 || 10.3 || 8.5 || -0.3 Source: OECD . Sixth, several IORPs in the UK and NL lost $51.5 million in assets during the Madoff scandal. This case, revealed in
December 2008, was an example of a so-called Ponzi scheme in which
contributions from more recent subscribers to the scheme are used for handing
out non-existent profits to earlier members of the scheme. The use of
depositories could have prevented the loss of assets to such a scheme since
these assets would remain in the hands of the depository. Furthermore,
depositories would have been liable for any losses incurred. This is an example
of a lack of proper custodianship of scheme assets. The examples above provide strong
indications that there is a lack of professionalism in the IORP industry. The
following three underlying problem drivers emerge in particular: First, IORPs may not have appropriate governance
functions in place (driver 3). This concerns in particular the internal audit
and risk management functions, as well as the actuarial functions for DB
schemes (CEIOPS, 2010). These functions' roles and activities are not
sufficiently defined either. Consequently, either these functions do not exist
within IORPs or unqualified staff could occupy key positions in the governance
structure of IORPs, leading to weak management. Moreover, a possible conflict
of interest could arise, as the functions may be shared by an IORP and its
sponsor. Second, IORPs may not take a systematic
approach to their own risk assessment and may not fully integrate the risk
management system in the decision-making process of the IORP (driver 4). A
general lack of a comprehensive approach to risk management of financial
institutions in the EU was revealed during the recent financial crisis
(European Commission, 2010). Insufficient understanding of the risks involved in
decisions taken by IORPs has led to financial losses in various cases for the
institution involved (DNB, 2013a). Third, IORPs do not necessarily use a
depository in order to ensure the safety of the assets held on behalf of scheme
members (driver 5). 3.3.3.3. Members
do not receive easy to understand pension information Individuals
need to be properly equipped to take informed decisions about pension savings,
but there are several strong indications of unsustainable information
inefficiencies. First, pension schemes allow for a reduction of accrued pension
rights, unlike other financial contracts. Many individuals do not know this.
During the financial crisis, many IORPs in several MSs have cut pensions, in
some cases significantly. For example, the Dutch central bank reported that since
the outbreak of the crisis 68 IORPs where compelled to curtail accrued pension
rights in April 2013; this affected 300,000 individuals (DNB, 2013b). In the UK, IORPs that fail can be taken over by the PPF but in that case the pension rights are
cut by 10%. Second,
members of DB and hybrid schemes generally expect their pension rights to be
acquired, but are not aware that pensions are not fully guaranteed. For example,
a question from an Irish MEP in January 2010 reported a case where Irish
workers lost a large part of their pensions as a result of a refusal by the
sponsoring employer to fund a €26 million deficit. Although this was
permissible under national law, the case highlights the severe disappointment
that can come from improperly disclosed information about the consequences of
business closure or winding up. Third, costs and
charges have a significant impact on pension rights, but individuals are
generally not aware of it. A report for the Irish
market (Department of Social Protection of Ireland, 2012) found that “the charges incurred serve to reduce the level of income which
individuals receive in retirement. Evidence suggests the impact of pension
charges is not necessarily readily understood by the saver. This can mean that
the monetary impact of each of these charges individually, and the cumulative
impact of the charges overall in monetary terms, can be relatively difficult to
identify and understand. Potentially adding to this challenge is the fact that
pension savings are by their nature made over long periods of time, meaning
that the impact of apparently smaller charges can be amplified over time.”[21] Another example
relates to the NL where a survey among Dutch IORPs
(managing together 99% of the total assets) showed that for every euro saved
for retirement 17 cents are deducted as charges.[22] Total charges amount
to around €5 billion per year. Employers and employees pay contributions worth
€30 billion per year. Fourth, there are indications that people
in general lack a thorough knowledge of their financial situation. Aviva (2009)
showed that a significant percentage of consumers say that they do not really
understand savings and retirement products. This figure is almost 60% in HU,
48% in PL, 35% in IT and 30% in FR (Figure 8). Moreover, most people surveyed
are worried that they will not have enough money in retirement, but relatively
few are taking steps now to do anything about it (Figure 9). A recent Eurobarometer
surveys suggest that 20% of EU citizens are very worried that their income in
old age would be insufficient for them to live a decent life and 34% are fairly
worried by such outlook.[23]
Other Eurobarometer surveys indicate that 57% of Europeans are not confident
about the future of their pensions[24]
and 30% of respondents are concerned about their pensions.[25] Looking forward, many
more individuals are likely to worry about their retirement savings reflecting
fiscal sustainability issues that have emerged during the recent financial
crises. Figure 8 - Percentage of respondents agreeing
that they do not really understand about pensions and savings policies Source: Aviva
(2009) Figure 9 – Percentage of respondents agreeing
with the following statements Source: Aviva
(2009) Fifth, individuals generally do not save
enough for their pension, leading to a considerable pension gap. Aviva[26] has measured the
difference between what pension provision people need for an adequate standard
of living in retirement and the pension amount they can currently expect to
receive. Some citizens would need to increase savings by an average of €12,000
each year to fully close the pension gap. Across the EU this figure stands at
€1.9 trillion. That is the equivalent of 19% of GDP and is higher than the
estimated cost of the recent economic crisis. Figure 10 shows the average
amount each person retiring between 2011 and 2051 would need to save every year
in order to fully close their personal pension gap. If saved, these amounts
would be available to financial institutions such as IORPs for investing in the
real economy, promoting growth. Figure 10 – Total EU annual pension gap
for individuals retiring 2011-2051 Source: Aviva
(2010) 3.3.3.4. There
are shortcomings in supervisory powers In the course of the consultations on this
proposal three issues regarding supervisory powers have been identified. First,
EIOPA (2012a) has pointed out that IORPs have the possibility to circumvent
prudential standards by chain outsourcing, i.e. third-party service providers
transferring activities to subcontractors (driver 7). A survey (CEIOPS, 2008a)
demonstrated that chain outsourcing is allowed in 15 out of 19 responding MSs
and that in 6 of these 15 cases (including DE and NL) chain outsourcing is not
specifically regulated. In these cases in particular it is important to lay down
that supervisory authorities should have the same powers vis-à-vis
subcontractors as vis-à-vis service providers. Second, EIOPA (2012a) highlighted the fact
that not all supervisory authorities have the power to develop necessary tools
to stress test the financial situation of IORPs (driver 7). In fact, CEIOPS (2009) showed
that only about half of the national supervisory authorities surveyed conducted
stress tests or modeling exercises for IORPs with one-third of these being a
result of the financial crisis. Stress-testing of individual IORPs is important
to assess the systemic robustness of the IORP sector and to inform supervisory
and policy decisions. A final problem relating to supervisory
powers arises in the context of this proposal. In order to effectively supervise new governance and transparency requirements,
supervisory authorities could need additional powers (driver 8). Without these
powers a situation could arise in which they cannot act if a breach of the
requirements of this Directive is detected. 3.4. Baseline scenario, subsidiarity and proportionality The Directive was adopted with two
objectives: (i) enable IORPs in one MS to be sponsored by an employer in
another MS and (ii) ensure a minimum security level for scheme members across
the EU to accompany the opening up of the market. The proposed action aims at
reinforcing those two objectives. It intends to make cross-border activity
easier and to raise the minimum level of protection. However, despite some first achievements,
the Directive has not been able to prevent the problems described in the
previous section. In the absence of EU action, the baseline scenario, it
is likely that the problems will persist. Cross-border issues by definition
cannot be resolved by MSs alone. As regards the problems relating to governance
and transparency, MSs that have mature IORP markets have partly taken action,[27] but no MS has taken
comprehensive action. Moreover, as explained in section 3.1.2 above, IORPs are
expected to become more prevalent also in other MSs and, in order to prevent
financial losses looking forward as much as possible, coordinated action at EU
level is more effective. The Commission committed to revising the
Directive by 2012 in the White Paper (action 11). This commitment has not yet
been met. The IORP II proposal would, in line with the White Paper, help
address the challenges of demographic ageing and public debt, not only by
promoting cross-border activity but also by contributing to improve overall
pension provision in the EU. Figure 11 shows that currently only a handful of
MSs have a mature IORP market. In the other MSs there is a great potential
market that the IORP II proposal will help to realise. EL is already taking
measures to develop an IORP market.[28]
Other MSs are in fact waiting for the IORP review before starting to implement
national reforms in this field. Figure 11 - IORP market in relation to the
size of the economy, end-2011* (in percentage of
GDP) Source: Commission Services, national sources. Note: *) or latest data available; data are not
available for all MSs. 3.4.1. Subsidiarity Under Article 4 TFEU EU action for
completing the internal market has to be appraised in the light of the subsidiarity
principle set out in Article 5(3) TEU. Hence it must be assessed whether the
objectives of the proposal could not be achieved by the MSs alone in the
framework of their national legal systems. EU level action can add value
substantially because action by MSs alone will not: i. remove obstacles to cross-border
activities. Requirements in the Directive that
raise the cost for cross-border IORPs and cause implementation divergences due
to different interpretations of the Directive can only be solved by changing
the Directive. Section 3.3.3.1 above provided clear evidence of employers that
would benefit from the removal of cross-border barriers directly. ii. ensure a higher EU-wide minimum
level of consumer protection. Action from MSs alone
is likely to result in different sets of rules in relation to governance and
transparency, which will create unequal levels of protection in the EU. Uncertainty
about the level of consumer protection undermines the confidence of the social
partners to use an IORP abroad. Action at the EU level can export good
practices to MSs with less developed prudential standards. Improved EU-wide protection
can also foster cross-border competition and welfare in terms of price and
security of IORPs. Article 114(1) TFEU, being a legal basis of the Directive,
requires that the Single Market is based on a high level of consumer protection
by reference to Article 169 TFEU. Reforms to strengthen consumer protection
across the Single Market for other financial sectors have already been made
(Solvency II, AIFMD[29],
CRDIV[30])
or are being proposed (MiFID[31]).
iii. take into account positive
externalities arising from scale economies, risk diversification and innovation
inherent to cross-border activity. Again, action by
MSs alone is likely to result in different sets of rules, which may undermine
or even create new obstacles to the functioning of the IORP internal market. Market
fragmentation would persist or even become more entrenched. The proposal
eliminates the need to research 28 different regimes, reduces IORPs’ costs, realises
economies of scale, thus facilitating cross-border IORPs and rendering them more
attractive. While cross-border activity is relatively complicated for DB
schemes, looking forward, the more prominent role of DC schemes makes the
Single Market more accessible for occupational retirement provision. iv. avoid regulatory arbitrage between
financial services sectors. Sponsors or social
partners in many MSs (e.g. AT, BE, DE, PL, UK) may choose among different
old-age savings providers and financial products, such as IORPs, group life
assurance or investment funds.[32]
The proposal fills a regulatory gap created by EU law and potential regulatory
arbitrage since EU-wide micro-prudential regulations of other sectors have
evolved considerably (e.g. Solvency II and UCITS[33] Directives). The
proposal also respects the G20 commitments (European Parliament, 2013) aiming
at a safer and more resilient financial system. v. avoid regulatory arbitrage between
MSs. The strengthening of prudential regulation for
IORPs only by some MSs could provide an incentive to locate IORPs in a MS that
has laxer rules. This would be to the detriment of member protection. The
proposal therefore contributes to a level playing field across borders. vi. take into account interests of
cross-border workers. The proposal ensures that
workers have clear and comparable information about their pension schemes in a
consistent manner across MSs. This is not only important for members of
cross-border IORPs, but even more so for members of IORPs who work in two or
more MSs during their career. The Acquisition and Preservation Directive
currently in the process of being adopted no longer contains rules on
cross-order transferability of pension rights. This implies that cross-border
workers will build-up pension rights in different MSs. Although still
relatively low, cross-border labour mobility has increased substantially from
2.1% of the EU labour force in 2005 to 3.1% in 2012.[34] There are around 7.6 million EU citizens
economically active in another EU country. Looking forward, cross-border labour
mobility is likely to gain further in significance
considering that it is an important macroeconomic adjustment factor
particularly within the euro area. 3.4.2. Proportionality The options analysed below take account of
the principle of proportionality, as enshrined in Article 5(4) TEU,
being adequate to reach the objectives and not going beyond what is necessary
in doing so. The selected policy options seek to strike the right balance
between public interest, protection of IORP members and beneficiaries, as well
as the costs for IORPs, sponsoring employers and supervisors. Although IORPs
are not SMEs - many IORPs would satisfy the criterion of staff headcount to be
defined as SMEs but exceed the thresholds for either annual turnover or annual
balance sheet – it is important that regulation properly takes into account
the nature of their activities and the fact that the scale and complexity of
IORPs’ activities are generally lower in comparison with most other financial
institutions. More specifically, as will be explained in more detail in Section
5 below, the proposed action takes into account proportionality in each of the
operational objectives in the following manner:
The removal of prudential barriers for cross-border
IORPs is limited to those that have raised the most important problems for
stakeholders;
The governance functions have been limited to those
that are essential for IORPs, reducing the number of functions in comparison
to Solvency II;
The documentation of own-risk assessment has been
streamlined to the specificities of IORPs, substantially reducing the
requirements in comparison with the own risk and solvency assessment
(ORSA) in Solvency II;
The mandatory appointment of a depository is
limited to DC schemes rather than for all IORPs;
The pension benefit statement is limited to maximum
two pages, focuses on essential information and does not prevent IORPs
from using additional types of disclosure following national requirements
and their own communication style;
New supervisory powers are only granted to the
extent that they are necessary to effectively supervise the activities of
the IORP sector;
Supervisory reporting is not harmonised, in order
to respect different national supervisory approaches.
The envisaged requirements have been
carefully considered, crafted as minimum standards and tailored to IORPs. Moreover,
the de minimis Article 5 is maintained. It provides MSs with the
possibility not to apply the Directive, in whole or in part, to any IORP with less
than 100 members in total.[35] 4. Objectives 4.1. General objective The general objective of the proposed
action is to facilitate the development of occupational retirement savings.
This is fully in line with the White Paper, which announced 20 initiatives
aimed at helping the MSs to better balance time spent in work and in retirement
and to develop complementary private retirement savings. The White Paper
mentions that the review of the Directive should make occupational retirement
provision more efficient and safe. This in turn would make a decisive
contribution to pension adequacy and sustainability by enhancing the
contribution of complementary retirement savings to retirement incomes. In its
resolution of 21 May 2013, the European Parliament (2013) considers that the
IORP II proposal should strengthen prudential standards for governance and risk
management and transparent information disclosures. Strengthening the
credibility and solidity of IORPs across the EU also reinforces their position
as institutional investors in the EU’s real economy. Enhancing the role of
IORPs, including in the MSs where the market is currently small, and removing
quantitative investment limits across the EU will contribute to reinforcing the
capacity of the European economy to channel long-term savings to
growth-enhancing project financing. The achievement of the general objective of
this proposal promotes human rights by protecting retirement provision. It is
in line with Article 25 of the Charter of Fundamental Rights of the EU which
calls for recognition and respect for the rights of the elderly to lead a life
of dignity and independence. The proposed actions would have a positive impact
on consumer protection under Article 38 and freedom to conduct business under
Article 16, in particular by ensuring a higher level of transparency of
retirement provisioning, informed personal financial and retirement planning as
well as facilitating cross-border business of IORPs and their sponsors. The
general objective justifies certain limitations on the freedom to conduct a
business (Article 16) is to ensure the market integrity and stability. 4.2. Specific objectives An enhanced role of occupational retirement
savings requires better access to supplementary schemes, including cross-border
ones. This in turn will be facilitated if employers can effectively supply
complementary private retirement savings and if people trust pension schemes to
deliver what they promise. Accordingly, the IORP II proposal – aiming to
further facilitate cross-border activity and reinforcing safety by
strengthening member protection – has the four following specific objectives:
(1) remove remaining prudential barriers for cross-border IORPs; (2) ensure
good governance and risk management; (3) provide clear and relevant information
to members; and (4) ensure that supervisors have the necessary tools to
effectively supervise IORPs. The latter three specific objectives contribute
not only to more safety, but also to the take-up of cross-border activity. This
is because reduced regulatory fragmentation in the areas of governance,
information disclosure and supervisory powers and a higher degree of member
protection will make IORPs less costly to establish from abroad and more
trustworthy for non-resident members. 4.3. Operational objectives The proposed action has eight operational
objectives in order to attain the specific objectives (Figure 12). Remaining
prudential barriers can be removed by taking away the extra requirements for
cross-border IORPs and by clarifying definitions and procedures for
cross-border activity. Better governance can be achieved with three
complementary and mutually reinforcing operational objectives: (i) ensure that
IORPs are managed professionally; (ii) require documentation concerning risk
management; and (iii) protect assets from operational risk. Information to
members can be made clearer and more effective by providing a simple statement
with essential information about pension benefits on a yearly basis. Ensuring
that supervisors have the necessary tools to effectively supervise IORPs can be
achieved by granting them new powers in relation to chain-outsourcing and
stress testing and by making sure that supervisors have sufficient powers to
verify compliance with prudential and transparency requirements. Figure 12: Objectives tree [1] White Paper - An Agenda for Adequate, Safe and
Sustainable Pensions, COM(2012) 55 final, 16.2.2012. [2] Commission Communication « Commission Work
Programme 2012 - Delivering European renewal », COM(2011) 777 final,
15.11.2011 [3] Commission Communication « Commission Work Programme
2013 », COM(2012) 629 final, 23.10.2012, Vol. 1/2 [4] Annex to the Commission Communication « Commission
Work Programme 2013 », COM(2012) 629 final, 23.10.2012, Vol. 2/2 [5] Specific terms are explained in the glossary in Annex
A. On DC schemes, see section 3.1.3. [6] Statement by Internal Market and Services
Commissioner Michel Barnier of 23.5.2013 available at http://europa.eu/rapid/press-release_MEMO-13-454_en.htm
[7] References are in Annex B. [8] Statement by Internal Market and Services
Commissioner Michel Barnier of 23.5.2013 available at http://europa.eu/rapid/press-release_MEMO-13-454_en.htm
[9] Green Paper, “Towards adequate, sustainable and safe
European pension systems", COM (2010) 365 Final, 7.7.2010 [10] Consultation summary at: http://ec.europa.eu/social/main.jsp?catId=333&langId=en. [11] Directive 2009/138/EC of the European Parliament and of
the Council of 25 November 2009 on the taking-up and pursuit of the business of
Insurance and Reinsurance [12] Responses to the consultations of EIOPA's advice can be
found via
https://eiopa.europa.eu/consultations/consultation-papers/2011-closed-consultations. [13] A summary of the public hearing (European Commission,
2012) can be found via http://ec.europa.eu/internal_market/pensions/docs/iorp/summary_of_panel_discussions_en.pdf [14] Joint statement of 10 July 2013 by European Association
of Paritarian Institutions of Social Protection (AEIP), BUSINESSEUROPE,
European Centre of Employers and Enterprises providing Public services (CEEP),
European Association of Public Sector Pension Institutions (EAPSPI), European
Fund and Asset Management Association (EFAMA), European Trade Union
Confederation (ETUC), European Private Equity and Venture Capital Association
(EVCA), PensionsEurope (formerly EFRP) and European Association of Craft, Small
and Medium-Sized Enterprises (UEAPME). [15] Annex C gives an overview of the investment portfolio held by IORPs
by type of assets. [16] See, for example, the question from the European
Parliament to the Commission (E-002485-13) of 4 March 2013 concerning the
project to establish a cross-border IORP in the NL for members and
beneficiaries in AT. [17] Examples include Luxembourg’s SEPCAV (Société
d’épargne-pension à capital variable) and ASSEP (Association
d’épargne-pension), Belgium’s OFP (Organization for Financing Pensions), SEPCAV
or ASSEP or the Netherlands’ PPI (Premium Pension Institutions). [18] http://www.ipe.com/news/cypriot-pension-funds-still-hold-half-of-4bn-assets-in-deposits_50666.php#.UlZySHea98E [19] http://www.efinancialnews.com/story/2013-03-19/cyprus-pension-fund-bank-deposits [20] TPR, Occupational pension scheme governance:
Accompanying Technical Report on the 13th (seventh) scheme governance survey,
2013 [21] The report provides the following illustrative example:
If an individual age 35 saves €250 per month for a pension for 30 years, a fund
of approximately €200,000 is created which results in a pension of about
€10,000 per annum. Apply an average charge of 2.18% of managed assets per annum
to this fund and the final fund is reduced by 31% i.e. the fund is reduced by
€62,000, resulting in a lower pension of €6,900 per annum. [22] "Pensioenpremie voor 17% op
aan kosten", Het Financieel Dagblad, 2/10/2012. [23] Eurobarometer survey – Measuring public perceptions of
poverty, June 2010. [24] Eurobarometer 71 - Future of Europe, January 2010. [25] Special
Eurobarometer 273, February 2007. [26]
https://www.aviva.com/europe-pensions-gap [27] For example, measures on transparency have been taken
in NL and by the National Employment Savings Trust (NEST) in the UK. Measures on governance have been taken in NL (Act on governance), IE (handbook on
governance) and DE (supervisory circular MaRisk). [28] The EL authorities have issued a request for proposal to
perform a comprehensive study of different jurisdictions on the
occupational-related structures for pre- and post-retirement benefits which
will lead to a short list of proposals of policy options relevant to EL. [29] Directive 2011/61/EU of 8 June 2011 on Alternative
Investment Fund Managers. [30] Directive 2013/36/EU of 26 June 2013 on access to the
activity of credit institutions and the prudential supervision of credit institutions
and investment firms. [31] Commission proposal of 20.10.2011 to amend the Markets
in Financial Instruments Directive (MiFID). [32]
See, for example, Ustawa z dnia 20 kwietnia 2004 r. o pracowniczych
programach emerytalnych (in PL), Betriebspensionsgesetz (BPG) (in AT), the
Occupational and Personal Pension Schemes (Automatic Enrolment) Regulations
2010 (in the UK), Betriebsrentengesetzes (BetrAVG) (in DE), Loi relative aux
pensions complémentaires et au régime fiscal de celles-ci et de certains avantages
complémentaires en matière de sécurité sociale (L.P.C.) (in
BE). [33] Directive 2009/65/EC of 13 July 2009 on the
coordination of laws, regulations and administrative provisions relating to
undertakings for collective investment in transferable securities (UCITS)
(recast) and the Commission proposal of 3 July 2012 for a directive amending
Directive 2009/65/EC as regards depositary functions, remuneration policies and
sanctions. [34] EU Labour force survey: http://epp.eurostat.ec.europa.eu/statistics_explained/index.php/EU_labour_force_survey [35] Six MSs use this provision: CY, DK, IE, IT, SE and UK. With the exception of IT, these are the MSs where there are many IORPs with less than
100 members (FI does not apply the exemption, although there are more IORPs
with less than 100 members).
5.
Policy options and comparisons
5.1.
Remove additional requirements for cross-border
activity
To attain this operational objective, the
following options were considered: Option 1 – No policy change:
different quantitative investment limits; more stringent rules for the funding
obligation for cross-border IORPs. Option 2 – Remove additional
requirements from the Directive: no national quantitative investment
limits; same conditions to restore full funding for cross-border and domestic
IORPs. The baseline scenario (option 1) will
not help attain the objective and would hamper IORPs’ willingness to engage in
cross-border activities. Option 1 has therefore been discarded. Option 2 is
the preferred option. The proposed action removes two additional requirements for
cross-border activity in the current Directive:
IORPs should be allowed to invest in an
efficient manner, regardless of the MS where they operate. To this end
IORPs should be subject to a set of consistent investment rules which
would probably lead to a reduction of operating costs of IORPs wishing to
operate across borders. A solid governance system of IORPs with a strong
focus on risk management and other governance requirements would help the
management of IORPs to better assess investment risks. This will enhance
the security of the pension scheme. IORPs which invest in a safe and
efficient manner are even more important for members and beneficiaries of
DC schemes, whose pension benefits wholly or partly depend on investment
returns (European Commission, 2011). The same regulatory oversight should
apply to IORPs which operate domestically or across borders. This would
avoid regulatory arbitrage between the IORPs, regardless of how and where
they operate. Also respondents to the Green Paper on pensions mentioned
that it may be necessary to remove the possibility for MSs to impose
additional investment rules for cross-border activity of IORPs (European
Commission, 2011). By strengthening governance and risk management
processes of IORPs across the EU, the possibility to impose additional
national quantitative investment rules is no longer necessary.
The removal of the full funding requirements contained in
Article 16(3) make cross-border IORPs less expensive and less burdensome
by aligning the rules to those for domestic IORPs. Respondents to the
Green Paper on pensions mentioned that the full funding requirement is a
major obstacle to cross-border activity (European Commission, 2011).
Option 2 is coherent with overall EU policy in the pensions area, as
set out in the White Paper, the Europe 2020 strategy and the Green Paper on
long-term investment. It also meets the EU's fundamental goals of promoting
harmonised development of economic activities (Article 169 TFEU). This option is not expected to generate costs. On the contrary, it
is expected to generate significant gains (see Section 6 below). In particular
it will provide significant economic benefits to employees, employers and
IORPs. Cross-border IORPs are likely to bring additional benefits for workers
in SMEs and employees who move within corporate groups. Economic benefits will
also be reaped by innovative employers. Small or local companies, notably SMEs,
can benefit from a better functioning Single Market through scale effects and
lower transaction costs. This option has a positive impact on supervisors and
overall neutral impact on MSs. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness Facilitate cross-border activity || Efficiency || Coherence || Option 1 || 0 || 0 || 0 Option 2 || ++ || ++ || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SMEs || MSs/supervisors Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || ++ || ++ || ++ || ++ || 0/+
5.2.
Clarifications of definitions and procedures for
cross-border activity
To attain this operational objective, the
following options were considered: Option 1 – No policy change: maintains
unclear definitions and procedures for cross-border activity (different
interpretations of the definitions of cross-border activity, no provisions on cross-border
transfers of pension schemes, lack of clarity about the scope of prudential and
social and labour law rules). Option 2 – Guidelines
or recommendations for better enforcement and implementation of the
Directive. Option 3 – Clarification of
definitions and procedures for cross-border activity in the Directive. The baseline scenario (option 1) will
not help attain the objective, as it would hamper IORPs’ willingness to engage
in cross-border activities. Option 1 has therefore been discarded. Guidelines or recommendations (option 2)
could be adopted by the Commission under Article 288 TFEU or guidelines or
recommendations to supervisors issued by EIOPA under Article 16 of the EIOPA
Regulation 1094/2010. Guidelines or recommendations may only promote common
approaches by supervisors involved in the cross-border processes. They are not
legally binding. However, EIOPA on the advice of MSs’ supervisors, has
discarded this option and has called for the introduction of clear definitions
of the sponsoring undertaking and of the home MS (EIOPA, 2012a). Moreover, there
is no guarantee that the lack of clarity about the scope of prudential rules could
be resolved by non-binding guidelines or recommendations. Since there are no
rules on pension scheme transfers in the Directive, better enforcement and
implementation through guidelines or recommendations would not be grounded.
Like option 1, option 2 would not prove effective and efficient. Nor would it
be coherent with overall EU policy of promoting harmonised development of
economic activities (Article 169 TFEU). Therefore, option 2 has also been
discarded. Option 3 is
the preferred option. It proposes three improvements: (i) disagreements between
supervisory authorities of different MSs can be easily resolved by introducing
clear definitions of the sponsoring undertaking and of the home MS (EIOPA,
2012a); (ii) clear and simple conditions for transfers of pension schemes,
including past service and regardless of their size, laid down in the Directive
will increase legal certainty and ensure sound supervisory procedures; and
(iii) the clarified scope of prudential rules will ensure legal certainty for
cross-border activities. Respondents to the Green Paper on pensions called for
a clear definition of the scope of social and labour legislation and its
interaction with prudential regulation (European Commission, 2011). Option 3 is coherent with overall EU policy in the pensions area,
i.e., the White Paper, and Europe 2020 strategy. It also meets the EU's
fundamental goals of promoting harmonised development of economic activities
(Article 169 TFEU). This option is not expected to generate costs. On the contrary, it
is expected to generate significant to gains (see Section 6 below). In particular,
it will provide significant economic benefits to employees, employers and
IORPs. Cross-border IORPs are likely to bring additional benefits for workers
in SMEs and employees who move within corporate groups. Economic benefits will
also be reaped by innovative employers. Small or local companies, notably SMEs,
can benefit from a better functioning Single Market through scale effects and
lower transaction costs. As regards supervisors and MSs, this option has a
positive and overall neutral impact respectively. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness Facilitate cross-border activity || Efficiency || Coherence || Option 1 || 0 || 0 || 0 Option 2 || - || - || - Option 3 || ++ || ++ || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SMEs || MS/supervisors Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || 0 || 0 || 0 || 0 || 0 Option 3 || ++ || ++ || ++ || + || 0/+
5.3.
Ensure that IORPs are managed professionally
To attain this operational objective, the
following options were considered: Option 1 - No policy change: one governance
function (actuarial function) for DB and hybrid schemes and no functions for DC
schemes. Option
2 – Add a risk management and an internal audit function: three governance
functions for DB and hybrid schemes and two functions for DC schemes: ·
The risk management function would assess the
main risks that an IORP is exposed to, such as investment, biometric and
operational risks. Such a control mechanism forms the basis of good business
conduct, enhanced transparency, consistency as to management decisions, and the
protection of members and beneficiaries of the IORP. The risk management
function would have a well-integrated position in the IORP’s organisational
structure and its decision-making process. These functions would not be shared
with the sponsor of the IORP in order to avoid a possible conflict of interest. ·
The internal audit function would cover the
effectiveness of the IORP’s operations, the reliability of financial reporting,
deterring and investigating fraud, safeguarding assets and compliance with
applicable laws and regulations. The internal audit function would also include
an evaluation of the adequacy and effectiveness of the internal control system
and other elements of the system of governance of the IORP, including the
outsourced functions or activities. The internal audit function would,
moreover, be required to perform its activities in relation to the
administrative, management or supervisory body of the IORP. The baseline scenario (option 1)
does not ensure that IORPs improve their governance and risk management and has
therefore been discarded. Option 2 proposes
to enhance the quality of IORP management by adding explicit governance
functions that would be responsible for risk management and for internal audit.
As shown in Figure 13, this would improve the situation particularly in IE, UK, LU and BE. Option 2 addresses the operational objective in a proportionate manner by requiring
IORPs to have only a limited number of functions which are essential for IORPs
(OPSG, 2013). The option takes into account the fact that IORPs are generally small
financial institutions with a relatively simple risk profile. Respondents to
EIOPA’s consultation on its draft advice (EIOPA, 2012a) agreed that the general
governance requirements in the Solvency II Directive could be applied to IORPs,
as long as the principle of proportionality applies to all elements of the
governance system of IORPs (UK, DE, National Association of Pension Funds in
the UK, Pensioenfederatie in NL). Figure 13: Existence of functions || Functions || AT || BE || BG || DE || ES || HU || IE || IT || LU || LT || LV || MT || NL || PL || PT || RO || SI || SK || SE || UK Internal audit function || Y || Y || Y || Y || Y || Y || || Y || || || Y || || Y || || Y || Y || Y || Y || Y || Actuarial function || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y || Y Risk management function || Y || || Y || Y || Y || Y || || Y || || No data || Y || Y || Y || || Y || || || Y || Y || Y Source: CEIOPS
(2009), CEIOPS (2010). The main beneficiaries of option 2 are employees.
Well-managed IORPs ensure a high degree of protection for the scheme members
and beneficiaries (EIOPA, 2012a) and a reduction in operational risk. Well-governed
schemes are more likely to provide value for money by reviewing the quality of
administration and investment management services and the costs and charges on an
ongoing basis. If governance is not performed well, it can lead to member
detriment due to the use of outdated investment strategies that do not deliver
returns or expose members to excessive risks, or result in them paying higher
charges than necessary or leave them with sub-standard administration (OFT,
2013). Research suggests that good governance is
associated with increased returns. Better governed pension funds outperformed
poorly governed funds by 2.4 percent per annum (Capelle et al, 2008). Other
studies have confirmed this link (Ambachtsheer et al, 2006; Ambachtsheer et al,
2007; Clark et al, 2007; and Clark and Urwin, 2007). A better investment
outcome would be beneficial to scheme members and beneficiaries through higher
pension benefits.[1] This is even more important for members and beneficiaries of DC
schemes, whose pension benefits wholly or partly depend on the returns on their
investments. In Annex G the estimated gains from better governance, combined
with the improvement in risk management (see section 5.4), is estimated at €55
to €140 per member per year. Finally, better governance will also increase
trust in the safety of IORPs in other MSs and may lead to an increase in
cross-order activities of IORPs. Option 2 is coherent with the White Paper’s
objective of making pensions safer. Well-governed IORPs strengthen private
occupational retirement provision which may be beneficial for MSs due to
reduced pressure on statutory pension systems. Well-governed IORPs are also
beneficial for employers, including SMEs, in terms of capital efficiency. The main expected cost associated with
option 2 is a slight increase of the recurrent administrative burden for IORPs
and employers. SMEs are not unduly affected because the additional functions
can be outsourced. Given the monopolistic market environment in which IORPs
operate[2], it is likely that the burden stemming from option 2 will be passed
on to members. The estimation of the potential burden amounts to around €0.14
to €0.80 per member per year.[3] Option 2 is the preferred option because it
improves the protection of members and beneficiaries by taking into account the
different sizes and nature of IORPs, while not unduly increasing the
administrative burden for IORPs and sponsors. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness || Efficiency || Coherence || More safety || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || ++ || + || + || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SMEs || MSs/supervisor Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || + || + || 0 || + || +
5.4.
Require documentation concerning risk management
To attain this operational objective, the
following options were considered: Option 1 – No policy change: IORPs
do not carry out a systematic self-assessment of their risk profile and do not
communicate that assessment to their supervisor. Option 2 – Introduce a Risk Evaluation
for Pensions Report (REP) to document the IORP’s own risk assessment and as
part of that require qualitative descriptions of four key elements determining
the funding position: (i) explicit valuation of margin for adverse deviation
from best estimate as a risk buffer in calculation of technical provisions;
(ii) qualitative evaluation of sponsor support accessible to IORP in case of
funding shortfall; (iii) description of safety mechanisms available to IORPs in
case of funding deficit, such as mixed benefits, discretionary benefits or
ex-post benefit reductions; and (iv) qualitative evaluation of operational
risks for all schemes. The REP would be reported to the supervisor. Option 3 – Same as option 2 plus common
reporting on national solvency rules: require DB and hybrid schemes to
report to the supervisor in a common format the value of their assets and
liabilities following national requirements and require them to quantify, where
applicable, security mechanisms and benefit adjustment mechanisms. The baseline scenario (option 1) is
that IORPs do not carry out a systematic self-assessment of their risk profile.
A solid understanding of the risks by those who effectively manage an IORP lies
at the heart of modern prudential regulation. Risk-based supervision is more
important as a pattern of thinking than as a capital requirement framework, as
in the case of other financial institutions, such as banks and insurers. Risk
management processes should thus be documented in a clear and consistent
manner. Option 1 is therefore discarded. Option 2 proposes
to introduce a REP report reflecting the own risk assessment of IORPs. It is
essential that IORPs improve their risk management so that potential
vulnerabilities in relation to the sustainability of the pension scheme can be
properly understood by the holders of key functions and discussed with
supervisors. As part of the REP IORPs would provide a qualitative description
of four key elements determining their funding position: (a)
The explicit valuation of the margin would
support a more effective discussion about the economic and actuarial
assumptions chosen for the valuation of liabilities between the IORP and the
supervisor; (b)
In many cases an evaluation of the sponsor
support is implicit, for example, in the choice of the discount rate. But by
requiring IORPs to produce an explicit qualitative evaluation of the sponsor
support, IORPs can demonstrate vis-à-vis their supervisors that they have
properly thought about the ability and the willingness of their sponsor to make
up for future shortfalls in their funding position; (c)
Legal frameworks, regulatory powers and market
practices differ considerably regarding safety mechanisms available to IORPs in
case of a funding deficit, such as mixed benefits, discretionary benefits or
ex-post benefit reductions. IORPs should be able to explain to their
supervisors whether they expect to reduce benefits within the next few years
and under which conditions such reductions could be expected to materialise; (d)
Operational risks are the risks inherent in the failure
or insufficiency of internal processes, human and technical shortcomings, and
unexpected external events (DNB, 2008). This is particularly important for DC
schemes since these do not have to abide by further capital requirements. The
current prudential regulation for DB schemes, EU or national, does not ensure
that the overall regulatory capital includes an operational risk charge and
there is no operational risk charge for DC schemes at the EU level. Requiring
IORPs to produce an explicit qualitative evaluation of the operational risk
they are facing would encourage an effective dialogue with the supervisor about
when and how to mitigate that risk. Option 2 is proportionate in the sense that
it leaves sufficient flexibility for individual IORPs to describe their
particular situation in a way that reflects the nature, scale and complexity of
their activities. It needs to be stressed that the option does not oblige IORPs
to follow a specifically prescribed formal approach. This option is coherent with the objective
of the White Paper to make pension provision safer. Better risk management is
an advantage for employees reflecting more safety and for employers reflecting
greater efficiency. The main expected cost associated with
option 2 is a slight increase of the recurrent administrative burden for IORPs
and employers. SMEs are not unduly affected because the additional requirement
can be outsourced. Given the monopolistic market environment, it is likely that
the burden stemming from option 2 will be passed on to members. The estimation
of the potential burden amounts to around €0.14 to €0.40 per member per year.[4] MS will bear a cost to the extent that supervisors need extra
capacity to deal with an increased workload due to the examination of the REP. The advantage of option 3 is that
supervisors would receive an all-encompassing overview of the way IORPs in
their jurisdiction deal with their risks, enabling them to better assess the
risk management systems of individual IORPs. DC schemes would not be affected
by this measure because such schemes generally do not have to hold regulatory
capital. The main disadvantage of this option is that it could lead to
additional costs. Most national supervisors already require IORPs to submit
their funding position in accordance with national rules. Requiring reporting
on the same issue in the context of the REP would in these cases lead to double
reporting, which is clearly disproportionate. Option 2 is the preferred option because it
addresses the operational objective in the most efficient manner. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness || Efficiency || Coherence || More safety || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || + || + || + || + Option 3 || ++ || + || - || + Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SME || MSs/supervisor Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || + || - || - || + || - Option 3 || + || - || - || - || -
5.5.
Protect assets from operational risk
To attain this operational objective, the
following options were considered: Option 1 – No policy change: IORPs are
not required to appoint a depository; no provisions on the safe-keeping and
oversight of assets functions. Option 2 – Strengthen the safe-keeping
and oversight of assets functions; this means (i) financial instruments
have to be subject to due care and protection; (ii) records have to be kept, to
be able to identify all assets at any time and without delay; (iii) all
necessary measures need to be taken to avoid any conflicts of interest or
incompatibility; (iv) depositories or trustees need to carry out instructions
of the IORP, unless they conflict with the applicable national and/or EU
regulations; (v) ensure that in transactions involving the assets of IORPs any
consideration is remitted to it within the usual time limits; and (vi) ensure
that income produced by assets is applied in accordance with all national
and/or EU regulations. Option 3 – Strengthen the safe-keeping
and oversight of assets functions and make the appointment of a depository
compulsory for all IORPs: same as option 2 but appointment of a depository
is compulsory. Option 4 – Strengthen the safe-keeping
and oversight of assets functions and make the appointment of a depository
compulsory for pure DC schemes only: same as option 3 but appointment of a
depository is compulsory for pure DC schemes only. The baseline scenario (option 1) is
that IORPs' assets are not handled with due care and that risks relating to
fraud are not properly mitigated. Option 1 has therefore been discarded. Option 2
would lead to a marked improvement vis-à-vis the current situation. It would,
however, create a conflict of interest problem for those systems in which
trustees already today are tasked with oversight of IORPs’ assets. Therefore this
option cannot be selected. Option 3 has
as its main advantage that it would create a common approach for protecting
IORPs' assets. This option would be particularly beneficial for members and
beneficiaries of pure DC schemes in those MSs that do not require the
appointment of a depository already (notably UK, IE and NL, see Figure 14).
However, for members and beneficiaries of DB and hybrid schemes in those MSs
the benefits would be less evident. In fact, since in these cases the IORP
itself or the sponsor is expected to bear the cost of potential operational failures,
mandatory appointment of a depository would lead to duplication of functions
and increased costs. Because of this, and because of the fact that a majority
of respondents to EIOPA’s consultation on this topic (EIOPA, 2012a) indicated a
preference to retain the existing flexibility in their national systems as
regards DB and hybrid schemes, option 3 has been discarded. Figure 14: Compulsory appointment of a depository || Depository || AT || BE || BG || DA || DE || ES || FI || FR || GR || IE || IT || LT || LU || LV || MT || NL || PL || PT || RO || SI || SK || UK Y || Y || Y || || Y || Y || || Y || || || Y || Y || Y || Y || || || Y || Y || Y || Y || Y || Source: Commission
Services and national sources, 2006. Addressing the drawbacks of option 3 while
retaining its main benefits, option 4 proposes to strengthen the
asset-keeping and oversight functions related to the assets of all IORPs, while
at the same time requiring only pure DC schemes to appoint a depository. This
option is in line with EIOPA’s recommendation on this issue (EIOPA, 2012a). By
limiting the proposed action to the compulsory appointment of depositories for
pure DC schemes the increase in cost for members is expected to be limited. The
compulsory appointment of depositories for pure DC schemes is expected to lead
to an increase of costs for pure DC schemes in those few MSs (Figure 14) where
this is not yet required. The analysis in Annex H suggests that the cost of
this option could amount to at most €2 to €3 per member per year. Reflecting a
monopolistic market environment it is likely that this cost is passed on to
scheme members and beneficiaries. A modern cross-sectoral framework resulting
from a clarification of the roles and functions of depositories will improve
the protection of members and beneficiaries. Moreover, the compulsory
appointment of depositories for pure DC schemes will improve the effective protection
of members and beneficiaries which will be coherent with the objective of the
White Paper of making occupational pensions safer. This option also aligns the
framework with the UCITS and AIFM Directives. Option 4 is the preferred option
because it is expected to contribute to the gain for employees in terms of
better governance in a proportionate manner by avoiding unnecessary duplication
of protection against operational risk. Employers, including SMEs, might
benefit from the increased security by not having to provide sponsor support
since a funding shortfall would be less likely after the introduction of this
measure. Finally, no impacts on MSs are foreseen. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness || Efficiency || Coherence || More safety || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || + || 0 || - || + Option 3 || ++ || 0 || -- || ++ Option 4 || ++ || 0 || + || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SME || MSs/supervisor Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || + || - || - || - || 0 Option 3 || ++ || - || - || - || 0 Option 4 || ++ || + || 0 || + || 0
5.6.
Make available an annual pension benefit
statement
To attain this operational objective, the
following options were considered: Option 1 – No policy change: generic
scheme information is provided in most cases on request; personal information
is limited; no obligatory pre-enrolment information and no common template. Option 2 – Personalised information for
all stages: generic and personal information is provided once a year; pre-enrolment
information, but no common template. Option 3 – Standardised and short annual
Pension Benefit Statement (PBS) for all stages: same as option 2 but with a
common template. A short and standardised annual PBS would contain both personalised
and generic information about the pension scheme. The PBS would be produced
according to a standard template of two pages (see illustrative example in
Annex J) to be fine-tuned by EIOPA in a delegated act. The first page would contain
general information for all types of pension schemes and information about an
individual’s personal situation (e.g. accrued pension rights or assets
accumulated and projections) with a view to helping individuals to take
decisions about pension adequacy. A second page would contain information for
DC schemes about risks, returns and costs with a view to helping individuals to
take decisions on investment. The PBS would be the first layer in a modern
multi-layered approach to communication, which enables national specificities
to be described in depth in subsequent layers. The PBS would indicate where
more detailed national information is available. The baseline scenario (option 1) has
been discarded. It neither helps individuals to take informed decisions about
their retirement savings, nor does it facilitate cross-border activity. Option 2
proposes three improvements. First, provide more comprehensive personalised
information, which is more effective for facilitating individual decisions
regarding lifetime financial planning than general information (EIOPA, 2013a and
OECD, 2009). Second, provide information once a year rather than on request in
order to stimulate greater engagement from scheme members. Third, extend the
information requirements to the pre-enrolment phase. Prospective members should
have key information on the pension schemes in order to help them make a
decision as to whether or not to join. Most occupational pension schemes
operated by IORPs provide the possibility to opt out. Option 2 has, however, two important
shortcomings. As it leaves the possibility for MSs to define their own
information requirements it is likely to increase national differences and
thereby heighten the barriers and costs for cross-border activity. Moreover,
individuals that work in several MSs would be confronted with different sets of
information disclosures, which is not conducive to producing clear and concise
information for Europeans. Option 3
augments option 2 by proposing the introduction of a short and standardised
annual PBS at the EU level. This offers three advantages. First, ensuring a consistency
across the EU is important not only for individuals who are members of a
cross-border IORP, but particularly for those individuals who have built-up
pension rights in different national IORPs. Individuals who have worked in
several MSs will be able to better understand and calculate their total pension
rights in the different national IORPs. Particularly, as DC schemes with
investment choices for the member (multi-fund IORPs) are becoming more
widespread, the PBS is expected to provide more relevant information to
individuals for taking investment decisions in relation to their particular
circumstances, notably their age and risk appetite. The use of a common
template would support the effectiveness of the Acquisition and Preservation
Directive (soon to be adopted) because, due to the removal of the portability
element from the proposal, individuals will need to have a clear and concise overview
about their pensions rights accumulated in different national IORPs. The common
template will also support the development of an EU-wide pension tracking
system announced in the White Paper. The 2008 EU labour force survey indicated
that around 2.5% out of a total EU labour force of around 238 million people
are EU citizens who are resident in a MS different from their home country.
Around 6 million individuals are affected by cross-border labour mobility and
its importance is set to increase. A 2010 Eurobarometer survey indicates that 1
in 5 European citizens, particularly amongst the younger generations, have either
worked or studied abroad at some stage in their life. Individuals who have
studied abroad are also more likely to work abroad. Moreover, given the large
differences in unemployment rates across the EU, it is likely that there will
be more labour movements from labour markets in surplus to those having
shortages. The main beneficiaries of option 3 are employees. The common
template is expected to create greater transparency in communication with
scheme members and beneficiaries, and this will make a significant contribution
towards helping individuals to take more informed decisions about pensions
early on during their working lives. This is important because saving for
retirement is for the long haul, and by deciding to start saving early enough
individuals can significantly improve the adequacy of their pension income. As
the typical accumulation period for a worker is around 40 years, a high enough
cumulative performance over such a period is necessary to achieve adequate
pension benefits. OECD analysis indicates that a person who had saved for
retirement for 40 years in a pension plan investing 60% in equities and 40% in
long-term government bonds and retired at the end of 2010 would have
experienced a performance of 4.2% in Germany and 5.8% in the UK. By comparison,
the average real wage growth over the same period amounted to 0.7% in Germany
and 2.1% in the UK. This suggests that investment performance over the 40-year
period has been sufficient to deliver a higher standard of living after retirement
for each euro saved. A second advantage of option 3 is that MSs
will benefit because well-informed individuals can be expected to make better
decisions about their pension savings when they are young. They are thereby likely
to exert less pressure on a MS’ statutory pension system during their
retirement and this is beneficial for fiscal sustainability. Third, the common template is likely to
give rise to efficiency gains for employers operating IORPs in several MSs. The disadvantage of option 3 is the
administrative burden associated with the standardisation of the PBS borne by
the IORP and/or employer. The burden is expected to consist primarily of a
one-off implementation cost in the short-term because once implemented the cost
of the regularly producing the PBS is likely to be immaterial. The one-off cost
is expected to amount, on average, to around 7€ per member.[5] This cost is considerably lower than the expected benefits for the
employees over an entire 40-year accumulation period. Option 3 is the preferred option because it
is more effective and more coherent with other EU policies than option 2. The
implementation cost, although higher than for option 2, is expected to be
limited. Option 3 addresses the problem in a proportionate manner because the PBS
is short and focuses only on the essential information. Moreover, the PBS is
only the first layer within a modern multi-layered approach to communication,
which enables national specificities to be described in depth in subsequent
layers. Comparison of policy options against
effectiveness, efficiency and coherence criteria || Effectiveness || Efficiency || Coherence || Provide clear and relevant information || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || + || - || + || + Option 3 || ++ || ++ || + || ++ Comparison of the impact of policy options
on stakeholders || Employees || Employers || IORPs || SMEs || MSs/supervisor Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || + || 0 || 0 || 0 || + Option 3 || ++ || 0 || 0 || 0 || ++
5.7.
Ensure supervision of chain outsourcing and the
possibility to require stress tests
To attain this operational objective, the
following options were considered: Option 1 – No policy change Option 2 – Give supervisors the same
powers vis-à-vis subcontractors as vis-à-vis third-party service providers and
the possibility to require stress tests; no harmonisation of supervisory
reporting The baseline scenario (option 1) does
not take away the possibility to circumvent supervision by engaging in chain
outsourcing, nor would it make available the stress testing tool for all
supervisors. Option 1 has therefore been discarded. Option 2 proposes two improvements: -
It proposes to extend the Directive's current
provision on the supervision of outsourcing to include chain outsourcing.
Furthermore, to avoid overlap of supervision a clarification is proposed in
order to make clear that if subcontractors are supervised entities themselves
no overlap of supervision should take place. Finally, it is proposed to clarify
that allowing or not allowing (chain) outsourcing to take place in a particular
jurisdiction remains a matter for MSs. -
It proposes to provide supervisory authorities
with the powers to develop necessary tools to test the financial situation of
IORPs. In line with EIOPA's advice on this matter (EIOPA 2012a) it is also
proposed to make clear that the wide diversity in size, type of pension
benefits managed and the level of risk taken should be taken into account by
supervisors in using these tools. Again, the question whether or not national
stress tests should be conducted is left to the discretion of MSs and/or
supervisory authorities The main beneficiaries of option 2 are
employees and supervisors. Employees would benefit from higher safety levels.
Supervisors would be provided with the necessary tools to fulfill their tasks.
Employers, IORPs and MSs would not be greatly impacted by the proposed extra
supervisory powers. In terms of policy coherence,
option 2 links directly to the EU's objective of ensuring safe occupational
pensions as mentioned in the White Paper. Option 2 might entail some costs for those supervisory authorities.
As shown in Figure 15, there might be some cost to DE
and NL where chain outsourcing is allowed but not yet specifically regulated. The
introduction of a power to conduct stress tests might somewhat increase the
cost of the competent authorities in NL and IE (Figure 16), but only marginally
because stress tests are based on resources used for the analyis of funding
positions, which are already in place in those two MSs. The extent of these costs will depend entirely on their use of these
new powers. Since their use is not obligatory any extra costs will not be
systematically incurred. Option 2 is the preferred option. Figure 15: Chain outsourcing || Chain outsourcing || || AT || BE || BG || DE || ES || FI || IE || IT || LT || LU || LV || MT || NL || PL || PT || RO || SI || SK || UK || || || Allowed and/or regulated || Y || Y || Y || NR || || Y || Y || Y || Y || Y || NR || || NR || NR || NR || || || NR || Y || || || Source: Commission Services, national sources. Note: Y = allowed and regulated, NR = allowed but not specifically
regulated Figure 16: Current supervisory powers relating to stress tests || Stress tests || AT || BE || BG || DE || ES || IE || IT || LU || LV || NL || PL || PT || RO || SI || SK || SE || UK Able to require stress tests || Y || Y || || Y || Y || || || Y || Y || || || Y || || Y || || Y || Y Source: CEIOPS (2009). Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness || Efficiency || Coherence || More safety || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || ++ || + || ++ || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SMEs || MSs/supervisors Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || ++ || 0 || 0 || 0 || (-)
5.8.
Ensure supervision of requirements on governance
and transparency
To attain this operational objective, the
following options were considered: Option 1 – No policy change Option 2 – Give supervisors the power to
supervise the proposed requirements on governance and transparency; no
harmonisation of supervisory reporting In the baseline scenario (option 1)
supervisory authorities would not have the power to impose preventive or
corrective measures if an IORP is in breach of the proposed new governance and
transparency requirements. Option 1 has therefore been discarded. Option 2 is
the preferred option as it proposes to extend supervisory powers to the
proposed new requirements regarding governance and transparency. This option
primarily benefits supervisors and employees as it will enable supervisors to
effectively supervise IORPs' compliance with the Directive, thus enhancing
safety. IORPs would not be significantly impacted by the proposed 'mirroring'
of new requirements and supervisory powers unless they failed to comply with
the Directive's provisions. Employers and MSs would not be significantly
impacted by this option either. In terms of policy coherence, option 2 links
directly to the EU's objective of ensuring safe occupational pensions as
mentioned in the White Paper. Also, option 2 would be in line with other EU
initiatives in the field of financial services which also put great emphasis on
effective supervision. As to costs, option 2 could entail some
costs for those supervisory authorities that operate in jurisdictions that do
not yet have the governance and transparency requirements in place that are
proposed. The extent of the cost depends on pre-existing national regimes.
Figure 17 illustrates that the MSs with relatively mature markets already grant
supervisory powers in relation to the strengthening of governance requirements,
implying a relatively contained cost of the proposed action. There might be
some costs to the UK to turn non-binding supervisory guidance into legislation
and to IE to strengthen the supervision of functions and professional
requirments.These costs are considered reasonable since they outweigh the
benefits derived to society by enhanced safety of occupational pensions. Figure 17: Current supervisory powers || Supervisory powers || AT || BE || BG || DE || ES || HU || IE || IT || LU || LT || LV || NL || PL || PT || RO || SI || SK || SE || UK Checking tasks and responsibilities of management board || P,S || P,N || || P,N || S || P || || P, S, R || S || || No data || P, S, O || || R || P || P || P || P || N Checking fit and proper requirements || P || P,N || P || P, N || P, S || P || || P, S, R || S || P || P || P || P || P || P, S, R || P, S || P || P, R || P Checking risk management philosophy and risk appetite || P, S, R || || P, S || P, N || S || || P || || || || || S || || R || || || || R || N Source: CEIOPS (2010). Note: P = in primary legislation, S = in
secondary legislation, R = in regulation issued by supervisor, N = non-binding
supervisory guidance, O = other format. Comparison of policy options against effectiveness, efficiency and
coherence criteria || Effectiveness || Efficiency || Coherence || More safety || Facilitate cross-border activity || || Option 1 || 0 || 0 || 0 || 0 Option 2 || ++ || + || ++ || ++ Comparison of the impact of policy options on stakeholders || Employees || Employers || IORPs || SMEs || MSs/supervisors Option 1 || 0 || 0 || 0 || 0 || 0 Option 2 || ++ || 0 || 0 || 0 || (-)
6.
Overall impacts of the package
This Section summarises the preferred options and presents the
predicted costs and benefits of the entire package of preferred options (Figure
18). Figure 18: Overview of the operational objectives and preferred options Operational objective || Preferred option 1) Clarify definitions and procedures for cross-border activity || Option 3 – Clarification of definitions and procedures for cross-border activity in the Directive 2) Remove additional requirements for cross-border activity || Option 2 – Remove additional requirements from the Directive 3) Ensure that IORPs are managed professionally || Option 2 - Add a risk management and an internal audit function 4) Require documentation of risk management || Option 2 - Introduce a Risk Evaluation for Pensions Report (REP) to document the IORP’s own risk assessment and as part of that require qualitative descriptions of four key elements determining the funding position 5) Protect assets from operational risk || Option 4 - Strengthen the safe-keeping and oversight of assets functions and make the appointment of a depository compulsory for pure DC schemes only 6) Make available an annual pension benefit statement || Option 3 – Standardised and short annual Pension Benefit Statement (PBS) for all stages 7) Ensure supervision of chain-outsourcing and the possibility to require stress tests || Option 2 - Give supervisors the same powers vis-à-vis subcontractors as vis-à-vis service providers and the possibility to require stress tests; no harmonisation of supervisory reporting 8) Ensure supervision of new requirements on governance and transparency || Option 2 - Give supervisors the power to supervise the proposed requirements on governance and transparency; no harmonisation of supervisory reporting
6.1.
Economic benefits
6.1.1.
Benefits for employees
The proposed action is expected to provide
significant economic benefits to employees. Better governance is likely to
increase risk-adjusted investment returns, thereby helping to achieve efficient
outcomes in terms of retirement income or contributions. Better communication
will help individuals make more informed decisions about their retirement
financing. Cross-border IORPs are likely to bring additional benefits as
suggested by Ernst & Young (2009). First, increased efficiency could lead
to either higher benefits or lower contributions. Second, for small workforces
located in different countries, a cross-border IORP could improve the
investment prospects, as employees can enjoy the benefits associated with being
part of a larger operation. Third, employees working in locations of the corporate
group across several MSs can avoid a complex series of transfers from one
pension arrangement to another and will have a "one-stop-shop" for
their pension arrangement, while centralising their benefits within a single
European fund also means dealing with one pay-out institution.
6.1.2.
Benefits for employers
The proposed action is expected to benefit
employers, particularly innovative employers, and benefits might be even more
pronounced for smaller companies (SMEs) or for companies that are active in
different MSs (multinationals). Companies operating on a small or local
scale could save costs by joining an existing IORP. This enables
companies to focus on their core business activity and, at the same time,
benefit from a more professional service level. Better governed and more
efficient IORPs are expected to be less of a burden for their sponsor.
Moreover, companies operating on a small or local scale where no deep and
efficient IORP market exists could benefit from joining an existing IORP abroad
rather than setting it up locally. Indeed, IORPs established in MSs with
established pensions expertise might extend their service to sponsors in other MSs,
including SMEs or groups of SMEs establishing common collective agreements. The
Commission Services have been made aware of recent cases, where the social
partners for SMEs operating within a particular sector in one MS had the
intention of setting up an IORP in another MS, largely due to product
unavailability in the local market. Many multinational companies find
themselves with an international patchwork of local pension funds. As companies
expand their operations into new countries or make new acquisitions, they often
end up with additional pension schemes. A multitude of different pension funds
increases complexity, leading to less transparency, hidden risks,
inconsistencies and inefficiencies. Companies can avoid this by consolidating
the patchwork of local pension funds into one IORP. Recent discussions with
multinational companies - originating from DE, FR, NL, CH and the US - that
have actually set-up a cross-border IORP or have taken steps to do so, as well
as a survey by Achmea Pensions International (2011)[6]
confirm that the main benefit of cross-border IORPs is that they provide cost
efficiencies and enable better governance. This is achieved in the following
ways: First, companies can save costs on
administration and investment expenses. Cost savings on the investment side
come from streamlining investment and custody fees. An estimate[7] suggests that a multinational company combining five pension
schemes from different countries with assets totalling € 1 billion could expect
to save around € 1-2 million per year. Another survey of 219 Dutch pension
funds found that as much as 17% of some €30 billion contributions paid by
employers and employees are absorbed by costs for administration, control and
advice, accounting, asset management and transaction fees (Lane, Clark and
Peacock, 2012). A study from the Dutch central bank (DNB, 2010) suggests that
there is still a large unused potential to realise economies of scale for Dutch
pension funds, even for the large ones. By spreading the fixed costs over a
larger pool of scheme members the potential cost savings could be as much as
25% of the administrative costs. For the EU’s IORP sector as a whole, Annex F
suggests that the potential scale economies could be of the order of around €400
million to €1.3 billion, or €6 to 20 per member. Over a period of 40 years,
which is the typical accumulation period for a worker, the potential opportunity
cost of not using scale benefits could amount to tens of billions of euros. The
firms that are innovative in terms of the organisation of retirement savings
will benefit most from those benefits. Second, further cost savings also arise
from a reduction in compliance costs. An IORP is only subject to the
prudential regulation of the home MS, so that a multinational ends up with only
one prudential framework for its EU pensions. While the IORP still needs to
comply with different sets of national social and labour law, the market is
developing innovative solutions consisting of a single administration platform
that can manage multiple countries, multiple currencies and multiple languages.
Moreover, the use of cross-border IORPs enables multinational companies to work
with a single national supervisor, instead of having to meet the different
requirements of multiple supervisors. Third, a cross-border IORP can save costs
for multinationals because it requires fewer governance bodies compared
with local pension management through local pension funds. Local board members
and trustees can be replaced by a single IORP board. Some country
representatives are likely to join the IORP board or one of the social
committees, but, on the whole, the company can manage pensions with fewer
participants in the governance bodies. Fourth, cross-border IORPs enable better
governance. Survey-based evidence suggests that some multinational
employers have lost the oversight of their pension commitments in different
countries. This exposes them to uncertainty and unexpected liabilities. A
cross-border IORP has a more direct insight into total assets, liabilities and
cash flows, resulting in better governance, improved risk management and achieving
a broader diversification of its investment portfolio and a better choice of
investment options. Moreover, multinationals can focus their attention on one
single IORP, reducing the risks which may result from poor governance. Fifth, cross-border IORPs enhance
transparency. Multi-national employers can streamline communication by
implementing one corporate intranet site to gather information for supervisory
reporting and information disclosures to members and beneficiaries. Not only
does this save costs for the employer and the IORP, but it is also helpful to
maintain transparency for mobile employees that move from one country to
another within the corporate group.
6.1.3.
Benefits for SMEs
As indicated above, IORPs themselves - particularly those with more
than 100 members (therefore subject to the Directive) - are not formally SMEs
because they generally hold assets above the threshold. This notwithstanding,
there are many IORPs with just several hundreds of members and they are
generally small in comparison with other financial institutions. The simplification
of cross-border definitions and procedures is likely to benefit small IORPs
more in comparison with large IORPs because small IORPs have a lesser financial
capacity to absorb transaction costs. The additional requirements are not likely to impose a
disproportionate burden on small IORPs considering that outsourcing is
widespread. There will be some additional burden, but it will be limited given
that several proportionality measures described in section 3.4.2 above (notably
fewer functions than for insurers, limited risk assessment, short PBS) were
developed having in mind specifically the situation for the small IORPs. Given
the monopolistic market environment, small IORPs are likely to pass on at least
some of the additional burden to members. Moreover, it is conceivable that a
relatively higher fixed cost of running small IORPs or implementing the PBS
could provide an incentive for industry consolidation to spread the costs.
Attempts at the national level in MSs with a particularly high number of small
IORPs (IE and UK) have not been able to provide the right incentives so
far. Sponsoring undertakings that are SMEs, including groups of SMEs,
will benefit from having easier access to IORPs already established in markets
abroad, thereby avoiding much of the initial market entry cost and benefit from
the law of large numbers.
6.1.4.
Impact on MSs
The proposed action is expected to have two positive impacts on MSs
and some costs linked to supervision. The first positive impact is that well-governed IORPs and a deeper
market for IORPs strengthen private occupational retirement provision. This in
turn contributes to alleviating the pressure on statutory scheme. The MSs that
have the potential to benefit most are those where the IORP market is small in
relation to the size of their economy. As shown in Figure 11 above, the vast
majority of MSs, including some large euro area economies, would benefit from a
deeper IORP market. The second positive impact is that well-informed
individuals can be expected to make better decisions about their pension
savings when they are young. Better information about expected retirement
benefits from occupational pensions will help individuals decide whether or not
they need to save more in accordance with their consumption preference before
and after retirement. Well-informed individuals are therefore likely to exert
less pressure on a country's statutory pension system during their retirement
and this is beneficial for fiscal sustainability. Accordingly, the potential
for benefits are greatest for those MSs that face a sustainability gap. Figure
19 clearly shows that this concerns 22 out of 24 MSs. More importantly, for
most of those MSs the initial budgetary position is not enough given the
expected long-term increase in expenditure due to an ageing population. This
includes MSs with mature IORP markets, notably UK, NL and BE. Figure 19 – Long-term fiscal
sustainability indicators, 2012
(breakdown of the S2
indicator*) Source: European Commission, Fiscal
Sustainability Report 2012. Note: * The further along the horizontal
axis countries are, the larger the required adjustment to stabilise the debt
ratios given the initial budgetary position (IBP), before considering the
long-term costs of ageing. If, however, the debt ratio is above the 60% of GDP threshold,
the EU fiscal rules stipulate that it should be reduced below it, while this is
not a constraint in the S2 indicator. The higher up the vertical axis, the
greater the required adjustment due to the long-term change in age-related
costs (CoA). The sustainability gap (S2) is the sum of the vertical and
horizontal distances from each dot to the solid diagonal line. Countries that
are northeast of the solid diagonal line have a sustainability gap; the further
away from that line, the greater their gap. Countries that lie southwest of the
solid line (in the chart Italy and Latvia) do not have a S2 sustainability gap.
The proposed action is likely to require greater supervisory
resources in some MSs. This implies a cost for those MSs because they finance,
together with the IORP industry, part of the budget of competent supervisory
authorities. However, as demonstrated by CEIOPS (2010) and EIOPA (2011) the
extent of the cost depends on pre-existing national regimes. The analysis in
section 5 above suggested that there might be some costs in relation to
governance, chain-outsourcing and stress testing in MSs like DE, IE, NL and UK.
Finally, the proposed action does not foresee a formal supervisory role for the
PBS.
6.1.5.
Impact on EU budget
Additional tasks for EIOPA arising from the
Directive will require a small number of extra staff, at a cost of between
€500,000 and €1 million, of which 40% accrues to the EU budget and 60% to
national supervisors.
6.2.
Social benefits
The proposal is expected to have a
significant positive social impact. First of all, the demand for any financial
product is largely driven by trust and performance. The proposed action will
make occupational retirement products more efficient and safer than today. This
is therefore likely to contribute to increasing the coverage rate of
complementary private retirement savings, thereby strengthening social
protection and income equality in a rapidly aging society. The proposed action
contributes towards allowing people to maintain, to a reasonable degree, the
living standard they achieved during their working lives. This, in turn,
supports the right of the elderly to lead a life of dignity and independence. A
positive social impact can be expected particularly in the MSs where the risk
of poverty for older people is relatively high. According to the 2012 Pension
Adequacy Report (EMPL and SPC, 2012) this is the case for BE, BG, DK, CY, MT,
AT, FI, SI and UK. In those MSs the risk of poverty for older people compared
with the poverty risk for the population aged 0-64 is higher and the difference
in many instances is significant. Poverty reduction, more generally, is one of
the main objectives of the Europe2020 strategy. Second, greater safety and awareness
through more effective information disclosures will make the public better
informed about the pensions gap. This can contribute to giving individuals the
right incentives to take informed decisions about the amount of savings needed
for an adequate pension and the choice of investments, in order to save
efficiently. This is particularly helpful for the younger generations, which
are not only more likely to be members of DC schemes, but also have greater
potential to accumulate good returns over time. Due to the long accumulation
periods a euro saved during the early part of the career is likely to yield
more pension than a euro saved just a few years before retirement. Third, the common format of the PBS is
likely to support the functioning of the labour market for people who work in
different MSs. Finally, more transparency will help the
social partners to subject the management of IORPs to greater discipline and
thereby potentially enhance risk-adjusted investment returns.
6.3.
Environmental benefits
The proposed action is not expected to have any significant direct
environmental impact.
6.4.
Administrative burden
The most important cost of the proposed action is the administrative
burden resulting from new requirements for governance and the PBS. The
Commission Services, with the support of the IORP industry, have estimated the
administrative burden as explained in detail in Annex I. The main result is that
the proposed action is expected to increase the administrative burden as a
one-off adjustment cost of around €22 per member, and a somewhat higher recurrent
burden of around €0.27 to 0.80 per member per year. Moreover, as explained in
section 5 above, DC schemes in some MSs are expected to incur an additional
burden from the appointment of a depository. It is likely that the administrative burden - although initially
borne by the IORP industry or the sponsoring employer - will be passed on to
the scheme members and beneficiaries. This is because IORPs are non-commercial
financial institutions that operate in a monopolistic situation. At the same
time, passing-on costs from employers to employees might be held back, at least
partially, through dialogue between the social partners.
6.5.
Macro-economic impact
The proposed action is not expected to have any significant direct
macroeconomic impact, although three indirect benefits might be expected. First, good governance and risk management of IORPs is expected to reinforce
their role as long-term investors in the European economy by avoiding an
excessive focus on risk-return profiles in the short-term. Second, better performing and safer retirement products are also
expected to increase staff motivation and impact labour productivity
positively. Third, more efficient occupational
pensions, in terms of attaining a higher level of risk-adjusted returns on
assets, will contribute to support the purchasing power of the retired
population, without necessarily any offsetting reduction of consumption during
the working-age stage of the life cycle.
6.6.
Impact on third countries
The proposed action does not concern a policy field in which
international regulatory approaches exist. It is not expected to have any
significant direct impact on third countries. Although, in the light of the
protracted period of low interest rates in the euro area, particularly larger
IORPs might have an incentive to invest in more dynamic economies outside the
EU, the volumes of those portfolio investment in those economies is not
sufficiently large to influence prices.
6.7.
Overview of benefits and costs
Figure 20 summarises the expected effect of the preferred options on
various stakeholders. The benefits are mainly economic,
as well as social given the importance of an adequate and sustainable
retirement system in an aging society. Although the proposed action will involve some one-off adjustment
cost in the short-term, the benefits of the entire package of preferred options
are expected to outweigh the costs. The potential benefits for employees could be of the order of some €55
to €140 per member/beneficiary a year stemming from better governance and risk
management. Greater transparency introduced by the PBS would add to that a gain
stemming from the excess of growth in net portfolio investment returns over
wage growth. The potential scale economies for employers are estimated at €6 to
€20 per member/beneficiary a year. Employers are expected to face a one-off cost to adjust to the new
regulation estimated in the order of €22 per member/beneficiary and a higher recurrent
administrative burden of around €0.27 to 0.80 per member/beneficiary per year.
For DC schemes the cost of the proposed action would be around €2 to €3 per
member per year, reflecting the cost of the depository. Employers are likely to
pass on the burden to employees, unless the social dialogue results in some
degree of risk sharing. The net financial gains for employees (benefits
minus passed-on burden) are expected to be significant. IORPs and sponsoring employers
are expected to realise efficiency gains through economies of scale, risk
diversification and innovation, and they can pass on at least part of the
adjustment burden to scheme members and beneficiaries. Overall, this suggests
that the proposed action is likely to be value-creating in an ageing economy.
It can help attain a higher social outcome without undermining economic growth.
Figure 20: Summary of the impact of the preferred proposals on various
stakeholders || Employees || Employers || IORPs || SMEs || MS/ supervisors || Third countries BENEFITS || || || || || || Economic benefits || || || || || || - save costs || ++ || ++ || ++ || ++ || O || O - increase management efficiency || + || ++ || ++ || ++ || O || O - improve governance || + || ++ || ++ || ++ || O || O - greater transparency || ++ || ++ || ++ || ++ || ++ || O - greater labour productivity || + || ++ || O || ++ || + || + - facilitate labour mobility || ++ || + || O || + || O || O Social benefits || || || || || || - higher coverage rate (poverty reduction) || ++ || O || O || O || ++ || O - greater awareness of pensions gap || ++ || O || O || O || ++ || O - functioning of the labour market || ++ || O || O || O || ++ || O - greater discipline || ++ || + || + || + || + || O Environmental benefits || O || O || O || O || O || O COST || || || || || || Stronger supervision || O || O || - || O || - || O Administrative burden || -- || (O) || (O) || (O) || O || O Notes: ranging from a very positive impact (++) to neutral (o) and very
negative impact (--).
7.
Monitoring and evaluation
The Commission
is the guardian of the Treaty and will therefore need to monitor how MSs have
implemented the changes to the Directive. Providing for a robust monitoring and
evaluation mechanism is crucial to ensure that the rights and obligations
envisaged in the Directive are complied with. The following arrangements are
proposed in order to set up an appropriate monitoring and evaluation framework. The Commission's
Services will prepare an Implementation Plan where the following actions will
be considered: meetings with MSs, exchange of best practices amongst MSs, and training
programmes addressed to national authorities. A preliminary examination by
EIOPA followed by an evaluation report by the Commission would also be
considered and envisaged. Wherever
necessary, the Commission will follow the procedure set out in Article 258 TFEU
in case a MS fails to respect its duties concerning the implementation and
application of EU law. The evaluation of effects of the preferred
policy options shall be carried out to see to what extent the anticipated
impacts materialise. Therefore, an ex-post evaluation of the application
of the revised Directive should take place five years after the adoption of the
Directive. It should take the form of a Commission report to the European
Parliament, the Council, and the European Economic and Social Committee. It may
be accompanied, if necessary and in the light of developments, by policy
recommendations or proposals for amendments to this Directive. EIOPA will
collect the qualitative and quantitative data. The OPSG of EIOPA will also be
consulted and the advisory role of the Commission’s Financial Services User
Group could also be utilised. A Eurobarometer survey and a loose survey with
IORPs, employers, members and beneficiaries will also be considered. Employers
could be targeted for questions concerning possible difficulties of
establishing cross-border pension schemes. Improved disclosure by IORPs, in
terms of quantity (i.e. increased number of statements or reports) and quality
of the information disclosed, would be indicators of better transparency. On
governance, the increase of specific requirements for functions would be
assessed. For cross-border activity, the number of cross-border IORPs would be taken
into account.
ANNEX
A – GLOSSARY
Accumulation phase || The phase in an investor's life when he/she builds up his/her savings or rights with the intention of having an income for retirement. Annuity || A sum payable at specified intervals, especially annually, over a period, such as the recipient's life or a certain number of years, in return for a premium paid either in instalments or in a single payment. Biometric risks || Risks linked to death, disability and longevity. Conditional benefits || Benefit adjustment mechanisms on the basis of legally or contractually established policies. Conditional indexation || A system whereby pensions in payment and/or preserved benefits can be increased at regular intervals by reference to a specific index of prices or earnings. Defined benefit (DB) schemes || Pension schemes where the benefits accrued are linked to earnings and the employment career (the future pension benefit is pre-defined and promised to the member). It is normally the scheme sponsor who bears the investment risk and often also the longevity risk: if assumptions about rates of return or life expectancy are not met, the sponsor must increase its contributions to pay the promised pension. These tend to be occupational schemes (see also: Defined contribution (DC) schemes). Defined contribution (DC) schemes || Pension schemes where the level of contributions, and not the final benefit, is pre-defined: no final pension promise is made. DC schemes can be public, occupational or personal: contributions can be made by the individual, the employer and/or the state, depending on scheme rules. The pension level will depend on the performance of the chosen investment strategy and the level of contributions. The individual member therefore bears the investment risk and often makes decisions about how to mitigate this risk (see also: Defined benefit (DB) schemes). Depository || An institution charged with the safe-keeping of assets and oversight of compliance with the fund rules and applicable law. Efficiency wages || Wages paid above the market clearing rate. Companies often choose to pay an efficiency wage in order to try to get better staff, keep good staff, improve morale and productivity, etc. Ex post benefit reduction || Reduction of accrued rights. Funded scheme || A pension scheme whose benefit promises are backed by a fund of assets set aside and invested for the purpose of meeting the scheme's liability for benefit payments as they arise. Funded schemes can be either collective or individual (see also: Pay-As-You- Go schemes). Governance (of IORPs) || The operation and oversight of an IORP. The governing body is responsible for administration, but may employ other specialists, such as actuaries, custodians, consultants, asset managers and advisers to carry out specific operational tasks or to advise the scheme administration or governing body. Home Member State || The MS in which the IORP has its registered office and its main administration or, if it does not have a registered office, its main administration. Host Member State || The MS whose social and labour law relevant to the field of occupational pension schemes is applicable to the relationship between the sponsoring undertaking and members. Hybrid pension scheme || A pension scheme with both DC and DB elements or, more generally, a scheme where the risk is shared by the scheme's operator and beneficiaries. Information disclosure regulations || The rules prescribing the periodicity, procedure, type and extent of information to be provided to members of pension plans and/or the supervisory authority. Institutional investor || Generally refers to a group of investors such as pension funds, insurance companies, investment funds and, in some cases, banks. Multi-fund || A pension scheme with some degree of investment choices for the member. Occupational scheme || A pension plan where access is linked to an employment or professional relationship between the plan member and the entity that sets up the plan (the plan sponsor). Occupational pension schemes may be established by employers or groups of employers (e.g. industry associations) or labour or professional associations, jointly or separately, or by self-employed persons. The scheme may be administered directly by the sponsor or by an independent entity (a pension fund or a financial institution acting as pension provider). In the latter case, the sponsor may still have responsibility for overseeing the operation of the scheme. Operational risk || The risk of loss arising from inadequate or failed internal processes, personnel or systems, or from external events. Own funds (regulatory) || Refers to the additional assets of a pension funds above its technical provisions serving as a buffer. Regulation usually requires that these assets are free of all foreseeable liabilities and serve as a safety capital to absorb discrepancies between anticipated and actual expenditure and profits. Also referred to as regulatory capital. (See also: Technical provisions). Pay-As-You-Go (PAYG) schemes || Pension schemes where current contributions finance current pension expenditure (See also: funded schemes). Pay-out phase || The period during which a person receives income from pension savings accumulated before retirement. Pension protection scheme || An arrangement to pay compensation to members or beneficiaries of pension schemes in the event of insolvency of to the pension fund and/or sponsoring employer. Examples of a pension protection scheme include the Pensions-Sicherungs-Verein Versicherungsverein auf Gegenseitigkeit (PSVaG) in Germany and the Pension Protection Fund in the UK. Pension pillar || Different types of pension schemes are usually grouped into two, three, four or more pillars of the pension system. There is however no universally agreed classification. Many pension systems distinguish between statutory, occupational and individual pension schemes, or between mandatory and voluntary pension schemes. Participation in occupational and individual pension schemes, usually private pension arrangements, can be mandatory or voluntary. Prudential rules || Rules on provisions, assets, the solvency margin. They also comprise rules on internal controls, risk management and risk monitoring by prudential supervisors and transparency designed to encourage market discipline. Portability of occupational pensions || It refers to the transferability of occupational pension rights. The Commission proposed a Directive on improving the portability of supplementary pension rights (SEC(2005) 1293) asking MSs to implement minimum requirements for the acquisition and preservation of pension rights for people who go to work in another MS. The proposal has not yet been adopted by the European Parliament and the Council. Replacement rate || Generally refers to an indicator showing the level of pension income after retirement as a percentage of individual earnings at the moment of take-up of pensions or of average earnings. Replacement rates measure the extent to which pension systems enable typical workers to preserve their previous living standard when moving from employment to retirement. Social and labour law relevant to occupational pensions (SLL) || National legislation defining the rights of members and beneficiaries under an occupational pension scheme. Solvency || The ability of a pension scheme's assets to meet the scheme's liabilities. The scheme's liabilities cover all future pension payments and must therefore be discounted well into the future, thus making substantial assumptions about longevity. The value of a scheme's assets is dependent on the type of accounting standard used. If a scheme is not deemed to have a sufficiently high solvency level, it needs to consider whether to increase contribution levels or reduce entitlements, where scheme rules permit. Sponsor covenant || Refers to a sponsoring employer’s ability to support pension fund volatility by providing additional funding if required. The 'covenant' in this context is a very similar concept to 'creditworthiness' for borrowers. At a simple level, if a pension fund has a deficit then it is in many respects similar to a bond holder in financial market terms. It depends on the ability of the company to pay additional contributions in the future if investment returns are not sufficient to make up the shortfall. Sponsoring employer || The employer with responsibility for meeting the liabilities of a DB pension scheme. In DC schemes, typically the employer who sets up and/or assumes responsibility for the running of the scheme, and meets the expenses. Sunk cost || A past cost that has already been incurred and cannot be recovered. Supplementary pension schemes || Mandatory or voluntary pension schemes which generally provide additional retirement income to the statutory pension scheme. Technical provisions || The amount of liabilities corresponding to the financial commitments of a pension fund which arise out of its portfolio of existing pension contracts. Technical provisions measure the extent of the liabilities to pay pension benefits in relation to past service as they fall due. See also Article 15 of Directive 2003/41/EC.
ANNEX B – LIST OF REFERENCES
Achmea Pensions International (2011),
"Pan-European pension fund solutions". Ambachtsheer K., Capelle R., Lum H. (2006),
"Pension Fund Governance Today: Strengths, Weaknesses, and Opportunities
for Improvement", Financial Analysts Journal. Ambachtsheer, K., Capelle, R. and Lum, H.
(2007), "The State of Global Pension Funds Governance Today: Board
Competency Still a Problem", Rotman International Centre for Pension
Management. Antolín, P. and Harrison, D. (2012),
"Annual DC Pension Statements and the Communications Challenge", OECD
Working Papers on Finance, Insurance and Private Pensions, No. 19, OECD
Publishing. Ashcroft, J. and Steward, F. (2010),
"Managing and supervising risks in defined contribution pension systems",
IOPS Working Paper No. 12. Aviva (2009), "Consumer Attitudes to
Savings", survey. Aviva (2010), “Mind the Gap Regional Report”,
September 2010
(https://www.aviva.com/europe-pensions-gap/pensions-gap-individual.html) Capelle, R., Lum, H. and Ambachtsheer, K.
(2008), "The Pension Governance Deficit: Still with Us". Rotman International
Journal of Pension Management, Vol. 1, No. 1, 2008 CEIOPS (2008a), "Report on outsourcing
by IORPs". CEIOPS (2008b), "Survey on fully
funded, technical provisions and security mechanisms in the European
occupational pension sector".CEIOPS (2009), "Report on Risk Management
Rules applicable to IORPs". CEIOPS (2010), "Report on management
oversight and internal controls rules applicable to IORPs". Clark, G. L., Caerlewy-Smith, E. and
Marshall J. C. (2007), "The Consistency of UK Pension Fund Trustee
Decision Making", Journal of Pension Economics and Finance, Volume 6 (1). Clark, G. L. and Urwin, R. (2007),
"Best-Practice Investment Management: Lessons for Asset Owners",
Oxford-Watson Wyatt Project on Governance. Van Dijk, E. and Zeelenberg, M. (2009), "De
(ir)rationaliteit van de beslisser." In Tiemeijer, W. L., Thomas C. A. and
Prast, H. M. (Eds.), "De menselijke beslisser; over de psychologie van
keuze en gedrag" (pp. 25-41), Amsterdam University Press. Department of Social Protection of Ireland (2012),
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risk'', http://www.toezicht.dnb.nl/en/2/51-201940.jsp). DNB (2010), "The impact of scale,
complexity, and service quality on the administrative costs of pension funds: A
cross-country comparison", DNB Working Paper 258. DNB (2013a), "Leading by example (Gedrag
in de bestuurskamers van financiële instellingen)", p. 5. DNB (2013b), “Five years in the pensions
sector: curtailment and indexation in perspective”. Dummann, K. (2008), "What determines
supply and demand for occupational pensions in Germany?", Journal of
Pension Economics and Finance, No. 7, pp. 131-156. EIOPA (2011), "Report on reporting
requirements to supervisory authorities", April. EIOPA (2012a), "EIOPA’s Advice to the
European Commission on the Review of the IORP Directive 2003/41/EC". EIOPA (2012b), "2012 Report on Market
Developments". EIOPA (2013a), "Good practices on
information provision for DC schemes – enabling occupational DC scheme members
to plan for retirement". EIOPA (2013b), "Survey of EU practice
on default investment options", April. EIOPA (2013c), "Report on QIS on
IORPs", July. EIOPA (2013d), "Occupational Pensions
Peer Review Project 2012 Final Report", April. EIOPA (2013e), ''QIS on IORPs - Technical
Specifications''. EMPL and SPC (2012), "Pension Adequacy
in the European Union 2010-2050", Report prepared jointly by the
Directorate-General for Employment, Social Affairs and Inclusion of the
European Commission and the Social Protection Committee, 23 May 2012. Ernst & Young (2009),
"Pan-European pension funds in a future world". European Commission (2010), "Green
Paper on Corporate governance in financial institutions and remuneration
policies" {COM(2010) 285 final}{COM(2010) 286 final} {SEC(2010) 669}. European Commission (2011), "Summary
of Consultation Responses to the Green Paper "Towards Adequate,
Sustainable and Safe European Pension Systems"". European Commission (2012), "Summary -
Public Hearing of 1.3.2012 on the Revision of the Directive on Institutions for
Occupational Retirement Provision (IORP II proposal)". European Commission (2012a), Commission
Staff Working Document, "Impact Assessment Accompanying the document
Proposal for a Directive of the European Parliament and the Council amending
Directive 2009/65/EC on the coordination of laws, regulations and
administrative provisions relating to undertakings for collective investment in
transferable securities (UCITS) as regards depositary functions, remuneration
policies and sanctions {COM(2012) 350}". European Commission and Economic Policy
Committee (2009), “Pension schemes and pension projections in the EU-27 Member
States — 2008-2060: Volume I — Report”, Occasional Papers 56, October. European Parliament (2013), "European
Parliament resolution of 21 May 2013 on an Agenda for Adequate, Safe and
Sustainable Pensions (2012/2234(INI))". Guardiancich, I. (2011), "Pan-European
pension funds: Current situation and future prospects." International
Social Security Review, Vol. 64, 1/2011. Hewitt Associates (2010), "Feasibility
Study for Creating an EU Pension Fund for Researchers Prepared for the European
Commission Research Directorate-General". Indicator Sub-Group (ISG) of the Social
Protection Committee (SPC) (2009), "Updates of current and prospective
theoretical pension replacement rates 2006-2046". Laboul, A. and Yermo, J. (2006), "The
development of occupational pension systems" in Oxford handbook of
pensions and retirement income. Lane, Clark and Peacock (2012),
"Pension costs survey 2012". Mercer (2006), "Global Governance of
Retirement Plans Survey 2006: Meeting the Challenge of Implementations". OECD (2009), “OECD Recommendation on the
Core Principles of Occupational Pension Regulation, June 2009: Core Principle 5
(disclosure and availability of information)." OECD (2012a), "OECD roadmap for the
good design of defined contribution pension plans". OECD (2012b), "OECD Pensions Outlook
2012". OFT, ''Defined contribution workplace pension
market study'' (OFT1505), 2013. Occupational Pensions Stakeholder Group
(2013), "OPSG report on occupational pension scheme governance". Pensions
Europe (2013), “Input for the Impact Assessment on pillar II and III
requirements of the IORP II Directive (update)", 18 July, available at http://ec.europa.eu/internal_market/pensions/consultations/index_en.htm Pension Protection Fund and the Pensions
Regulator (2013), "The Purple Book: DB Pensions Universe Risk
Profile".
ANNEX C – PORTFOLIO
INVESTMENT BY IORPs
Although most IORPs are small in terms of
membership, collectively they constitute a group of large institutional
investors in some MSs. IORPs accumulate contributions from employers and
employees over long periods of time. They are, together with insurance
undertakings, investment funds and banks, major institutional investors. At the end of 2009 (see Figure) the asset
portfolio of IORPs in most MSs comprised mainly of bonds and cash, although
there were two MSs (UK, IE) where equities accounted for about half of total
assets. Over the past years, direct investments in equities have decreased
driven partly by adverse movements in stock prices and by a greater share of
maturing DB schemes. Figure: Investment portfolio of IORPs by type of assets, 2009 Source: Commission
Services, national sources.
ANNEX D – CURRENT REGULATORY
FRAMEWORK
8.
Legal basis
The legal bases of the
Directive are ex-Articles 47(2), 55 and 95 EC (now Articles 53, 62 and 114
TFEU), which seek to establish the internal market by means of freedom to
provide services and freedom of establishment. According to the Court of Justice of the
European Union in Case C-343/08, Commission v Czech Republic, the
obligation to transpose the IORP Directive neither affects MSs’ competence as
regards the organisation of the national retirement pension system nor
disregards the MSs’ prerogatives under ex-Article 137 EC (now Article 153
TFEU). The prerogatives are also guaranteed by the proposed action. The Directive was not adopted on the basis
of ex-Article 137 EC (Article 153 TFEU), which constitutes the legal basis for
the approximation of national legislation in the field of social policy. The
Court of Justice in Case C-343/08 upholds that it follows from the Directive’s
Recitals 1, 6 and 8 that the Directive seeks to introduce an internal market
for IORPs in which IORPs must have freedom to provide services and freedom of
investment.
9.
Quantitative requirements
The Directive lays down rules to calculate
technical provisions and that they should be funded. Commitments as to future
benefits should be calculated prudently and represented by sufficient assets on
the balance sheet. Where IORPs underwrite risks, the IORP is required to
provide for a regulatory solvency margin, which consists of the assets of the
institution free of any foreseeable liabilities, less any intangible items. The starting point for an adequate
protection of occupational pension rights in DB and hybrid schemes is to
require IORPs to calculate pension liabilities in the form of technical
provisions. In addition to those provisions, IORPs use further security
mechanisms (notably regulatory own funds, sponsor support and insurance from a
pension protection schemes) and benefit adjustment mechanisms (conditional
indexation and the reduction of accrued rights in a going concern). The figure
below provides an overview of those mechanisms used in the different MSs. Figure: Overview of security and benefit
adjustment mechanisms for IORPs Source: CEIOPS (2008). Given that IORPs invest on a very long-term
basis, they need to be free to apply whatever investment policy is best suited
to the commitments they have made. The Directive lays down a set of principles
aimed at helping IORPs define their asset-allocation strategy in accordance
with the "prudent person" rule. In accordance with this rule, assets should
be invested in the best interests of members and beneficiaries and always in a
broadly diversified manner in order to ensure the portfolio’s security,
quality, liquidity and profitability. The Directive also lays down that
investments in shares and capital investment should not be unduly restricted.
However, Members States are able to subject IORPs established under their
jurisdiction to more detailed investment rules but must allow IORPs to invest
at least 70 % of their technical provisions or their portfolio in shares and
corporate bonds and at least 30 % in currencies other than that in which their
future pension payments are expressed.
10.
Qualitative requirements
The Directive ensures that IORPs are
subject to a minimum set of conditions of operations, such as fit and proper
requirements and basic risk management functions. Member States are required to confer on
their supervisory authorities the necessary powers to supervise their IORPs
effectively.
11.
Information disclosure
The Directive contains some elements to
ensure that scheme members and beneficiaries are informed about the rules of
the scheme, the financial situation of the institution in question and their
rights.
Annex E – Stakeholders - IORP Case Studies
The Commission Services organised a seminar
with multinationals on 6 June 2013 where several case studies were presented: 1. Ireland
to Belgium: Positive Mature DB scheme, wound up, assets and
liabilities bulk transferred in 2010. Process: o
Due Diligence undertaken with
consultants to ensure no barriers o
Corporate approval AtN obtained to
establish Irish section of Belgian XB IORP o
Invited Trustees to consider company
offer – several meetings, with independent consultant giving overview –
obtained their agreement to proceed “in principle” o
Communication to members – short cover
letter covering rationale, with attaching FAQ’s covering details – offered
Freephone dial in and town hall meetings – positive reaction o
Submitted proposal FSMA (CBFA then)
approval granted within 3 month window o
Irish Regulator confirmed no objections
in less than 2 weeks o
Entered the statutory 60 day
consultation period – no objections received o
Implemented transition process –
liabilities transferred December 2010, assets re-registered over Q1 2011 o
Trustee wound up in 2011, replaced by
Irish Social Committee, responsibilities determined by charter from IORP Board
of Directors (Trustee) 2. Germany
to Belgium, 2 cases: Negative Closed DB scheme pensioner only Pensions
Kasse. This was a relatively small scheme with assets and liabilities of ~€2m.
It would be helpful to be able to “sweep up” such small schemes to our
Cross-Border plan to benefit from economies of scale and quality governance,
like we were able to do with the Swiss case above. o
Due Diligence undertaken with
consultants to ensure no barriers – advised early consultation with Bafin o
Corporate approval obtained to establish
a German section of Belgian XB IORP o
An informal approach was made to BAFIN,
on a no-names basis and a senior named individual stated that a portfolio
transfer was impossible because the OFP is not an insurance undertaking, e.g.
ruled out categorically. Another Bafin source also said that chances of BaFin
approval to a portfolio transfer are very low. However, the second individual
seemed to believe that a portfolio transfer is not categorically ruled out.
Prerequisite for a portfolio transfer in his view however was to create some
kind of ring fenced insurance-like section within the OFP for the PK portfolio
that is identical or at least very similar to that of a German Pensionskasse. o
Based on this Regulatory reaction
project was cancelled Working Time Arrangement - early retirement
scheme, whereby employees forgo overtime, holidays, salary increases etc. to
finance an annuity payment of up to 5 years, between age 60 and 65 o
Due Diligence undertaken with
consultants to ensure no barriers o
Corporate approval obtained to establish
a German section of Belgian XB IORP o
Regulated by AOK Niedersachsen, the
Social Security Regulator, liaised with them to ensure no barriers, received
confirmation “in principle” there would be no objections o
Liaised with FSMA, confirmed no issues
and confirmed this scheme could be admitted o
Consultant referenced case to BAFIN who
declared that the WTA was not in their opinion classified as a pension scheme
and therefore the Belgian OFP would not qualify as a licensable business for a
Pension Fund in Germany and Bafin would raise objections accordingly if
submitted. As the IORP was not capable of providing Trustee services the
alternative was to establish a Contractual Trust Arrangement (CTA) in Germany o
Although not legally a “pension”
benefit, this is effectively a pre-funded early retirement benefit which
requires investment policy considerations, actuarial valuations, governance and
all the items one would normally associate with a pension fund. It is also accounted
for as a pension benefit under IAS19 and viewed/managed internally like a
pension benefit. o
Based on this Regulatory reaction
project was cancelled. The sponsoring employer is therefore required to
duplicate in Germany a governance structure, associated investment arrangements
etc. that it already has in place in Belgium, as it is already a participating
employer in the Belgian OFP. 3. Case
Study – Partial transfer of member population in a company-own Pensionsfonds to
a 3rd party Pensionfonds in accordance with sec. 14 German Insurance
Supervision Act (VAG) Population characteristics o Approx.
400 actives and active terminees o Approx.
10 beneficiaries o Volume:
approx. EUR 4m Planned transfer method, reasons Transfer of existing accrued benefit
expectations and past service in the company-own pensionsfonds (hereafter
Group-PF) from former entities in the corporation to a third party
pensionsfonds (hereafter 3rd part- PF). After a successful transfer,
benefit provision continues via the 3rd party PF. The Group-PF is
thereafter a company-own pension vehicle for the provision of benefits solely
to its own employees and their survivors. Project schedule Work on the project has been going on
intensively for two years. A transfer agreement between the Group-PF and the 3rd
party-PF has been drafted and for the beneficiaries, an information plan has
been drawn up. The transfer agreement was submitted to the federal supervisory
authority for approval in August 2008. The time required by the authority to
check and approve the agreement proved to be long; in November 2008 the first
written questions were submitted by the authority. After having received
explanations, the authority sent a further set of questions in October 2009. To
speed up the process, a telephone conference took place in 2010. The project
was terminated after this call as it was not possible for the pensionsfonds to
reach an agreement with the supervisory authority. Reasons for project termination o
The federal supervisory authority
adhered strictly to the criteria in sec. 14 of the German Insurance
Supervision Act when interpreting the population transfer: ·
Pension plans are to be transferred
unchanged when they contain contractually agreed provisions. Consequence: 3rd
party-PF must apply the same pension plan as previously under the Group-PF or
the Group-PF must apply the 3rd party-PF pension plan(s) to the
portion of the population to be transferred. ·
Also, there has to be proof that after a
transfer, there is no change to the profit share in accordance with sec 14 para
4. German Insurance Supervision Act; the principle of proportionality does not
apply. o
These requirements resulted in costs for
the Pensionsfonds that stood in no proportion to the size of the population
being transferred. 4. Another
case study o We
sponsor 23 separate funding vehicles in 11 European countries; legacy is mainly
due to historic acquisition and change from DB to DC. 2 very large funds;
rest are very small. Many DB funds face funding
shortfalls. o
Long term strategy is to move to DC for
all future accrual. However, also wish to continue to self-manage legacy
DB plans as long as it is cost-effective to do so, and to ensure a robust DC
offer to active employees, which helps to achieve best benefit outcome. o
Strong business case that the foundation
to achieve these objectives is to pool our plans into a central vehicle. o
Barriers: stakeholder misconceptions
about concept and process; stakeholder reticence to lead the market in this
area; number of stakeholders (Trustees; management etc) involved in decision
making o
What would help: improved communication
that clearly shows the benefits for all stakeholders and eliminates concerns
about e.g. tax complications, treatment of past service etc; ability to easily
facilitate inclusion of plan for internationally mobile employees; lots of
publicity for success stories. 5. Comments
on Cross Border IORPs We strongly support EC’s decision to cancel
the transfer of the first pillar of Solvency II to IORP. We definitely assume,
that this decision is irrevocable. o
The renouncement of applying unjustified
capital requirements to IORP is a first step in removing the existing
uncertainties that keep employers and social partners from creating and
developing IORP structures. It is not longer acceptable, that any planning of
employers and social partners regarding IORP are forced to complete standstill
due to the unpredictable legal development. o The
positive signal we received from the EC’s decision must now be directed into as
lean as possible rules in second and third pillar to remove the remaining
uncertainties as soon as possible. The target must be an environment that
strengthens existing “non profit” IORP´s and supports new “non profit” IORP´s
of sponsoring employers or social partners. o Priorities
in second and third pillar are now to be set on helping IORPs to work as
efficiently as possible in a legally reliable environment. In this regard it
will be mandatory to formulate simple, comprehensible and efficient rules.
Employers and social partners can only be won, when it is credibly indicated
that no significant negative impact will arise for companies sponsoring IORPs
in the Member States. o The
regulation should also refrain from encouraging “gold plating” by Member States
regulation. The future success
of organizing occupational pensions in IORP structures as the most efficient
way will also depend on creating an encouraging environment for cross border
activities: o The
main point of employers and social partners to engage in cross border
activities is to reduce and not to increase complexity. That’s why a suitable
environment must follow simple, comprehensible and efficient rules in
organizing cross border activities. o These
rules have to be fit national IORP and cross border IORP alike. Separate regulation
and legal environment for cross border IORP would be contraproductive. We
assume that IORP II will deliver a harmonized regulation. o It
is mandatory that regulatory law does not prohibit what´s perfectly legal in
national labor law. We strongly recommend to address this issue in the text of
IORP II, to avoid future divergences. This applies not only to the issue of
collective transfers, but also to plan design changes, which are of grave
importance in practice. o Portability
via cross border IORP is not limited to the perspective of single person
transfers. Enabling collective transfers cross border is a crucial element to a
future orientated and sustainable strategy to develop our occupational pension
concepts for our EU employees. We assume, that it is not the intention of
EC to promote the business interests of the insurance industry when talking
about organizing occupational pensions for our employees. o Therefore
we strongly recommend to keep a close eye on using consistent terminology in
legislative texts and public statements: Within IORP we discuss “occupational
pensions”. Neither “supplementary pensions” and most definitely not “personal
pensions” – these are termini that (intentionally or unintentionally) blur the
line between “not for profit” and “with profit” concepts. o The
superior efficiency that lies in the “not for profit” organization of
occupational pensions should be emphasized in any way possible. In times of
scarce resources –of companies and Member States - we should focus our efforts
only on the most efficient concepts. 6. Cross-border
projects - lengthy processes When I propose a cross-border project to my
management, they want to see a project plan with a definitive time line. In one
case, a home country regulator decided the decided to change their
interpretation of the Budapest protocol. They started the 3 month response
period after they had completed their due-diligence, rather than from when we
submitted the approval file. This meant that we had to re-communicate the
timetable, and we lost credibility because we could not explain why the
regulator had deviated from the standard process. The eventual cross-border
transfer was successful, just took much longer than expected, and now senior
management is more cautious about future transfers. Somehow, the Commission needs to try and
convince regulators that they need to create an environment which has some
stability: where neither laws, regulations or the interpretation thereof,
changes on a regular basis 7. Other
experience o The
Belgium regulator apparently only accepts communication in French and Flemish,
being the official languages in Belgium. For most of our future
"targets", these languages are not primary languages, so in practical
terms we use official and in-official translations, which increases complexity
and cost. This becomes cumbersome, when e.g. a Greek director would like to
comment on the French text of the by-laws. -- It would be simpler, if the
regulators accepted also English as a language for submitting the relevant documents.
One could e.g. admit the submission of relevant documents in English, like e.g.
Financing plan, By-laws etc. o The
definition of "pensions" needs to be formalised. For
Corporates it is not practical, if, like in Spain, part of the
"pension" piece fall under insurance law and part under pension law.
There would certainly be a greater take-up, if this piece could be harmonised. o Double
filing:
XYZ had already a cross-border license for the pension plan of XYZ subsidiary 1
NL in the Netherlands (size = EUR 3 million), from 2009 until 2011. By
coincidence, the same pension plan was already in use for XYZ NL (size = EUR
500 million). – When we wanted to move also the XYZ NL plan to Belgium for
cross-border use, we were slightly surprised to learn, that for this endeavour
we needed to file a second time. At first glance we cannot see a difference for
running a pension fund for a couple of dozens (XYZ subsidiary 1) compared to a
couple of hundreds (XYZ NL), even more so as the administration was (and
will remain) outsourced to a service provider. o Transfer
of past service: It is cumbersome if we have to file for two things
in the same time: For the cross-border operation and also for the transfer of
past service. I see that technically future service and past service are
different things. But I would like to point out that in many legislations the
transfer of past service can occur simply by moving job resp, the pension fund.
So the regulator can maybe hinder the bulk transfer, but not the single
transfer. In our
experience, this was used by the NL regulator as a lever against us (... I
would not say blackmail), in the sense, the regulator know that they cannot
avoid the cross-border operation, but they can freeze the transfer of the past
service ... And if by moving to cross-border all of a sudden we would have to
operate past service and future service in two different settings would be a
no-go, because HR considerations and also because there would be no economies
of scale. o Ruling
out of the grave: When we are preparing the cross-border move for
the Netherlands, the regulator came up with the opinion that before going
cross-border, we would have to "clean up the mess" in the asset
management (too high percentage of alternative investments). But it was just
this mess that we wanted to clean up by moving to Belgium ... So a chicken and
egg situation. And after the transfer the regulator voiced his opinion that we
would no longer be allowed to invest in those asset classes anymore. This came
over quite strange to us, because so far the NL regulator has never indicated
that they would impose ring-fencing on the assets (... which would be a no-go,
as well).
ANNEX F – POTENTIAL SCALE
ECONOMIES
For the EU’s IORP sector as a whole,
considering that there are more than 125,000 IORPs in the EU - and even among
the 7,000 IORPs with more than 100 members many are still relatively small
financial institutions - the potential to increase scale is high in several Member
States. Exact data on potential cost savings cannot be obtained, but some
quantitative indication could be extracted from OECD data on the operating
expenses of pension funds. The latest data indicate that depending on the
country the operating expenses of pension funds ranges between 0.1% to 1.3% of
total assets per year. Considering that the IORP sector holds assets worth
around €2.5 trillion, but also taking into account that the level of
consolidation of the IORP market in Member States differs, the Figure below
suggests that the IORP assets with a consolidation potential amount to around
€1.4 trillion. Using the OECD data on operating expenses this suggests that the
current operating expenses for the assets with a consolidation potential in the
EU are of the order of €4 billion per year. Assuming that greater scale could
reduce the operating expenses by around 10% to one-third, the potential of cost
savings for IORPs by increasing scale could be of the order of around €400
million to €1.3 billion, or €6 to 20 per member (for 64 million members). Over
a period of 40 years, which is the typical accumulation period for a worker,
the potential opportunity cost of not using scale benefits could amount to tens
of billions of euros. Figure – Estimate of potential gain from consolidation || Assets (in € millions, end-2011) || Consoli-dation factor *) || Assets with consoli-dation potential (in € millions) || Opera-tional expenses (in percentage of total assets, 2011**) || Operational expenses for assets with consolidation potential (in € millions) || Estimate of potential gain from consolidation (in € millions) || || || || || || 10% reduction of operating expenses || 33% reduction of operating expenses || (1) || (2) || (3)=(1)*(2) || (4) || (5)=(3)*(4) || (6)=0.9*(4)*(3)-(5) || (6’)=0.67*(4)*(3)-(5) BE || 15,910 || 0.25 || 3,978 || 0.5 || 19.9 || 2.0 || 6.6 DK || 7,060 || 0 || 0 || 0.1 || 0 || 0 || 0 DE || 138,570 || 0.25 || 34,643 || 0.5 || 69.3 || 6.9 || 22.9 IE || 70,000 || 0.75 || 52,500 || 0.5*** || 262.5 || 26.3 || 86.6 ES || 31,690 || 0.25 || 7,940 || 1.3 || 103.2 || 10.3 || 34.1 IT || 69,050 || 0.50 || 34,525 || 0.5*** || 172.6 || 17.3 || 57.0 LU || 970 || 0.25 || 243 || 0.1 || 0.2 || 0 || 0.1 NL || 774,060 || 0.25 || 193,515 || 0.1 || 193.5 || 19.4 || 63.9 AT || 14,760 || 0.25 || 3,625 || 0.5 || 18.1 || 1.8 || 6.0 PL || 360 || 0 || 0 || 0.5 || 0 || 0 || 0 PT || 12,650 || 0.5 || 6,325 || 0.2 || 12.7 || 1.3 || 4.2 SI || 1,835 || 0 || 0 || 0.9 || 0 || 0 || 2.5 SK || 1,180 || 0.25 || 286 || 0.4 || 1.1 || 0.1 || 0.4 FI || 4,120 || 0.50 || 2,210 || 0.4 || 8.8 || 0.9 || 2.9 SE || 30,900 || 0.75 || 22,500 || 0.5*** || 112.5 || 11.3 || 37.1 UK || 1,319,930 || 0.75 || 989,948 || 0.3 || 2,969.8 || 297.0 || 980.0 To-tal || || || 1,352,235 || || 3,944.4 || 394.4 || 1,301.6 Source: OECD, Commission Services. Note: *) Consolidation factor is an
assumption based on the current number of IORPs operating in a market. The
larger the number of IORPs the market the greater the potential for industry
consolidation. The factor ranges between 0 and 1. A factor of 0 signals that
the IORP market is already highly concentrated and that the potential for
consolidation is negligible. A factor of 0.75 indicates that there are many
small IORPs operating in that market and that around 3 in 4 IORPs might
benefits from operating on a larger scale; **) or latest data available; ***)
Simple average of the countries where data are available.
ANNEX
G – POTENTIAL BENEFITS FROM BETTER GOVERNANCE AND RISK MANAGEMENT
Research suggests that good governance is
associated with increased returns. Better governed pension funds outperformed
poorly governed funds by 2.4 percent per annum (Capelle et al, 2008). Other
studies have confirmed this link (Ambachtsheer et al, 2006; Ambachtsheer et al,
2007; Clark et al, 2007; and Clark and Urwin, 2007). A better investment
outcome would be beneficial to scheme members and beneficiaries through higher
pension benefits. This is even more important for members and beneficiaries of
DC schemes, whose pension benefits wholly or partly depend on the returns on
their investments. Providing a figure for the potential benefits
from better governance and risk management for scheme members and beneficiaries
is a complex exercise to undertake and there is not one exact result. This notwithstanding,
some quantitative indication can be extracted from the OECD data on pension
funds’ real net investment rates of return (see Figure 7 in the main text). These
data indicate that the average real net investment rates of return between 2002
and 2011 have ranged, depending on the country, between -21.6 and 4.9 percent
per annum. Assuming that amongst the assets worth €2.5 trillion held by the
IORP sector, around 10% to 25% are run by “badly-managed” IORPs, the potential
additional gains had the investment returns been better by 1.5 percentage
points per annum could have been of the order of around €3.5 billion to €9
billion for one year, or €55 to €140 per member per year (for 64 million
members). Considering that pensions involve very long investment horizons, up
to 40 years or more, the potential opportunity cost of not improving the
governance could amount to hundreds of billions of euros. Figure – Estimate of potential gain from better governance || Assets (in € millions, end-2011) || Proportion of “badly-managed” IORPs || Returns 2002-2011* || Estimate of potential gain from better governance (in € millions) || || 10% || 25% || (ppa) || (in € millions) || 10% || 25% || (1) || (2)=(1)*0.1 || (2’)=(1)*0.25 || (3) || (4)=(1)*(3)/100 || (5)=(2)*[(3)+1.5]/100-(4) || (5’)=(2’)*[(3)+1.5]/100-(4) BE || 15,910 || 1,591 || 3,978 || 2.0 || 31.2 || 23.9 || 59.7 DK || 7,060 || 706 || 1,765 || 4.9 || 34.9 || 10.6 || 26.5 DE || 138,570 || 13,857 || 34,643 || 2.6 || 361.8 || 207.9 || 519.6 IE || 70,000 || 7,000 || 17,500 || -21.6 || -1,508.5 || 105.0 || 262.5 ES || 31,690 || 3,169 || 7,923 || -1.9 || -58.6 || 47.5 || 118.8 IT || 69,050 || 6,905 || 17,263 || -0.4 || -27.6 || 103.6 || 258.9 LU || 970 || 97 || 243 || 3.6 || 3.5 || 1.5 || 3.6 NL || 774,060 || 77,406 || 193,515 || 3.6 || 2,786.6 || 1,161.1 || 2,902.7 AT || 14,760 || 1,476 || 3,690 || 0.4 || 5.9 || 22.1 || 55.4 PL || 360 || 36 || 90 || 4.7 || 1.7 || 0.5 || 1.4 PT || 12,650 || 1,265 || 3,163 || 1.5 || 19.0 || 19.0 || 47.4 SI || 1,835 || 184 || 459 || -0.4 || -0.8 || 2.8 || 6.9 SK || 1,180 || 118 || 295 || -2.4 || -2.8 || 1.8 || 4.4 FI || 4,120 || 412 || 1,030 || 2.3 || 9.6 || 6.2 || 15.5 UK || 1,319,930 || 131,993 || 329,983 || -0.5 || -607.2 || 1,979.9 || 4,949.7 To-tal || || || || || || 3,739.6 || 9,348.9 Source: OECD, Commission Services. Note: *) average of data available.
ANNEX
H – POTENTIAL COST OF A DEPOSITORY
The compulsory appointment of depositories
for pure DC schemes is expected to lead to an increase of costs for pure DC
schemes in those Member States where this is not yet required. As shown in
Figure 13 in the main text, this is the case notably for DK, IE, NL, FI and the
UK. In those Member States the assets in DC schemes amount to some €380 billion
(see figure below). In line with the Impact Assessment Report accompanying the
UCITS V proposal (European Commission, 2012c) the cost of custody and
record-keeping with depositories for investment funds are estimated to amount
to 1.25 to 2.5 basis points per annum (0.0125% and 0.025%). In many cases this
cost also includes the cost of oversight and the cost is higher for complex
financial instruments. The upper limit for IORPs is likely to be lower because
IORPs generally hold a limited amount of complex financial instruments. In the
calculations of this impact assessment the upper limit is therefore lowered to
2 bpa. Applying a range of costs of a depository between 1.25 and 2 bpa to the
DC assets in the few Member States concerned suggests that the cost would
amount to around €50 to €75 million a year, or €2 to €3 per member per year
spread over 25 million members. Reflecting a monopolistic market environment it
is likely that this cost is passed on to scheme members and beneficiaries. This
estimate is likely to give an indication of the maximum cost because even in
Member States where the appointment of a depository is not mandatory, some
IORPs might already use a depository nevertheless. Figure – Calculation of the cost of a
depository in Member States where the appointment is not mandatory Source:
Commission Services.
ANNEX
I – ADMINISTRATIVE BURDEN ASSESSMENT
An assessment of the potential additional administrative burden for
IORPs stemming from the proposed action was requested from the IORP industry
with the support of PensionsEurope. Pensions Europe represents the various
national associations of pension funds and similar institutions for workplace
pension provision. It affiliates associations in 16 EU Member States and 5
other European countries. The occupational pension plans, IORPs and others, of
about 75 million EU citizens are covered by PensionsEurope members. The administrative burden assessment was carried out by the
Commission Services in close coordination with PensionsEurope over a period of
around five and a half months between end January 2013 and mid-July 2013. 1. PROCESS The Commission Services, in collaboration with Pensions Europe,
elaborated a questionnaire to assess the potential administrative burden on the
basis of the EIOPA advice for governance, reporting and transparency of
February 2012, as well as follow-on EIOPA advice for the Pension Benefit
Statement of 26 March 2012. The Commission Services indicated that this is
likely to result in an upper limit of the potential burden because the EIOPA’s Advice
did not fully specify how proportionality could be taken into account and
assumed that the IORP II proposal would also cover solvency rules. The questionnaire (see Figure A) together with extensive guidance
documentation (see Figure B) was sent by PensionsEurope to the IORP industry in
early February 2013. It was subsequently discussed in a meeting on 8 February
2013 between the PensionsEurope’ Working Group on Qualitative requirements and
disclosure and the Commission Services. The Working Group brought together
representatives from national pension fund associations from the nine MSs that participated
in the administrative burden assessment: BE, DE, ES, IT, NL, AT, SE, FI and UK.
The IORPs in those MSs account together for around 95% of the total assets in
the EU’s IORP industry. The discussion revealed that the questionnaire was too detailed and
too complex. Therefore, as a follow-up to the meeting, the Commission Services
with the support of PensionsEurope developed a simplified version of the
questionnaire (see Figure C). The simplified version of the questionnaire was
sent to the IORP industry for completion in early April 2013. Figure A – Questionnaire to assess the
potential administrative burden of the IORP II proposal (a) Part I Questionnaire to assess the administrative burden of an IORP II
proposal Date:
Brussels, 3 April 2013 The questions in this document aim to assess the potential administrative burden of the technical advice presented by EIOPA, as reflected in the "EIOPA's advice to the European Commission on the review of the IORP Directive 2003/41/EC " (EIOPA-BOS-12/015) dated 15.2.2012, as well as further considerations concerning information disclosures to members and beneficiaries. Where several options are proposed or where some working assumptions are necessary, this questionnaire focuses on the scenario that is likely to be the most costly. The assessment is based on the EU Standard Cost Model. The results will feed into the European Commission's impact assessment report accompanying the legislative proposal to review directive 2003/41/EC (IORP II proposal). This document does not represent or pre-judge the formal proposals of the European Commission. | Institutional information I.
Institutional details 1)
Contact? Name
of institution ______________________________________ Country
of head office ______________________________________ Name
of contact person ______________________________________ Telephone
of contact person ______________________________________ Email
address of contact person ______________________________________ 2)
In how many countries does your institution operate? q One country q More than one-country
(cross-border) 3) Could we contact you to ask any
questions with regard to your response, if necessary? q Yes (please confirm
contact details) q No | Assessing
the administrative burden of an IORP II proposal This
section aims to assess the administrative burden of an IORP II proposal. Please
note that administrative burdens are defined as the costs incurred by
enterprises in meeting legal obligations to provide information on their action
or production, either to public authorities or to private parties. Here, we are
interested in the net change in costs. For example, an administrative action
required by law (as e.g. accounting, auditing, reserve or present value
calculations) but corresponding to what you would normally do in absence of any
legal obligation should not be regarded in this questionnaire[8]. In
the two following subsequent sections, you will be asked questions with regard
to the introduction of new or expansion of existing information obligations.
The first section deals with reporting requirements to the relevant supervisory
authorities, whereas the subsequent section deals with requirements to members
& beneficiaries. For
each of these sections you will firstly be asked to describe the current
situation of your institution. In case you are not currently required to
provide information on a specific regulatory obligation, you will consequently
be asked to estimate the relevant cost parameters of this incremental
requirement. More guidance is set out in the guidance document that
accompanies this questionnaire. In case you have further questions do not hesitate
to contact us. We would appreciate it if you would answer these questions to
the best of your abilities. | Section I: Reporting requirements to supervisory authorities I.
Please make an estimate of the cost parameters of the relevant reporting obligations
in the following table: || Reporting Requirement: || Information on the main trends || Information on objectives || Information on the contributions and expenses from occupational retirement provision || Information regarding the performance (net contributions) relating to occupational retirement provision Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance document) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [9] || || || || Estimated current administrative cost? || || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || || Required level of qualification? (ISCO) || || || || Estimated hourly pay? || || || || Frequency of reporting requirement? [10] || || || || (If applicable) number of entities involved? || || || || Total estimated labour cost? || || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || || Total incremental cost? || || || || II. Please make an
estimate of the cost parameters of the relevant reporting obligations in the
following table: || Reporting Requirement: || Projections of the performance || Information on risk mitigating techniques Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance Document) || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [11] || || Estimated current administrative cost? || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || Required level of qualification? (ISCO) || || Estimated hourly pay? || || Frequency of reporting requirement? [12] || || (If applicable) number of entities involved? || || Total estimated labour cost? || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || (If applicable) estimated cost of outsourcing reporting requirement? || || Total incremental cost? || || III. Please make an estimate of the
cost parameters of the relevant reporting obligations in the following table: || Reporting Requirement: || Information on income and expenses with respect to investment activities || Information on the overall investment performance || Projections of the expected investment performance Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance Document) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [13] || || || Estimated current administrative cost? || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || Required level of qualification? (ISCO) || || || Estimated hourly pay? || || || Frequency of reporting requirement? [14] || || || (If applicable) number of entities involved? || || || Total estimated labour cost? || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || Total incremental cost? || || || IV. Please make an estimate of the
cost parameters of the relevant reporting obligations in the following table: || Reporting Requirement: || Information on the key assumptions with regard to investment decisions || Information about any investments in tradable securities || Information on any material contributions and expenses Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance Document) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [15] || || || Estimated current administrative cost? || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || Required level of qualification? (ISCO) || || || Estimated hourly pay? || || || Frequency of reporting requirement? [16] || || || (If applicable) number of entities involved? || || || Total estimated labour cost? || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || Total incremental cost? || || || V. In case a reporting
requirement consists of multiple administrative requirements, please fill in
the following table for the relevant requirement: Reference to relevant requirement || Total Labour Cost || Total Equipment costs (per year & per entity) || Total Outsourcing costs (per year & per entity) || Total Administrative Costs Average cost || Frequency Number of action || Description of required action(s) (based on typology) || Time per action (man-hours) || Required level of qualification? || Price per action (€ per hour) || Frequency per action (E=0,33; A=1; S=2) || Total number of entities involved || || || 1. || || || || || || || || || 2. || || || || || || || || || 3. || || || || || || || || || 4. || || || || || || || || || 5. || || || || || || || || || 6. || || || || || || || || || 7. || || || || || || || || || 8. || || || || || || || || || 9. || || || || || || || || || 10. || || || || || || || || || Additional
Comments (e.g.
general remarks, difficulties, shortcomings): | Section II: Reporting
requirements to members & beneficiaries I.
Please make an estimate of the cost parameters of the relevant reporting
obligations in the following table: || Reporting Requirement: || Information on pension scheme guarantees (all schemes) || Information on current balance (all schemes) || Information on pension projections (all schemes) || Practical information (all schemes) Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance Document) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [17] || || || || Estimated current administrative cost? || || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || || Required level of qualification? (ISCO) || || || || Estimated hourly pay? || || || || Frequency of reporting requirement? [18] || || || || (If applicable) number of entities involved? || || || || Total estimated labour cost? || || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || || Total incremental cost? || || || || II. Please make an estimate of the
cost parameters of the relevant reporting obligations in the following table: || Reporting Requirement: || Detailed breakdown of costs (DC only) || Information on investment options & risk profile (DC only) || Information on past performances (net) (DC only) Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive and/or in the accompanied Guidance Document) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Current reporting frequency? (e.g. every three years, annually, on request) [19] || || || Estimated current administrative cost? || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || Required level of qualification? (ISCO) || || || Estimated hourly pay? || || || Frequency of reporting requirement? [20] || || || (If applicable) number of entities involved? || || || Total estimated labour cost? || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || Total incremental cost? || || || III. In case a reporting
requirement consists of multiple administrative requirements, please fill in
the following table for the relevant requirements: Reference to relevant requirement || Total Labour Cost || Total Equipment costs (per year & per entity) || Total Outsourcing costs (per year & per entity) || Total Administrative Costs Average cost || Frequency Number of action || Description of required action(s) (based on typology) || Time per action (man-hours) || Required level of qualification? || Price per action (€ per hour) || Frequency per action (E=0,33; A=1; S=2) || Total number of entities involved || || || 1. || || || || || || || || || 2. || || || || || || || || || 3. || || || || || || || || || 4. || || || || || || || || || 5. || || || || || || || || || 6. || || || || || || || || || 7. || || || || || || || || || 8. || || || || || || || || || 9. || || || || || || || || || 10. || || || || || || || || || Additional
Comments (e.g.
general remarks, difficulties, shortcomings): (b) Part II Questionnaire to assess the compliance costs of an IORP II proposal Date:
Brussels, 01 February 2013 The questions in this document aim to assess the potential compliance costs of the technical advice presented by EIOPA, as reflected in the "EIOPA's advice to the European Commission on the review of the IORP Directive 2003/41/EC" (EIOPA-BOS-12/015) dated 15.2.2012. Where several options are proposed or where some working assumptions are necessary, this questionnaire focuses on the scenario that is likely to be the most costly. The assessment is based on the EU Standard Cost Model. The results will feed into the European Commission's impact assessment report accompanying the legislative proposal to review directive 2003/41/EC (IORP II proposal). This document does not represent or pre-judge the formal proposals of the European Commission. | Institutional information I. Institutional
details 1)
Contact? Name
of institution ______________________________________ Country
of head office ______________________________________ Name
of contact person ______________________________________ Telephone
of contact person ______________________________________ Email
address of contact person ______________________________________ 2)
How many entities does your institution consist of? q
One (head office) q
More than one (group) 3) In how many countries does your
institution operate? q One country q More than one-country
(cross-border) 4)
IORP II will include an option for companies to choose between a Standardised
Approach and an Internal Model approach to calculate the capital requirement.
Also, there will be the option to use internal models for parts of the company
and the standard approach for the remainder. This is called ‘Partial Internal
Models approach’. What approach does your company intend to use? q
Standardised Approach q
Internal Model Approach q
Partial Internal Models Approach 5) Could we contact you to ask any
questions with regard to your response, if necessary? q Yes (please confirm
contact details) q No | Cost of
compliance with an IORP II proposal This
section aims to address the compliance cost of an IORP II proposal. For the
purpose of this exercise, IORPs are required to make an estimation of the total
compliance work or project expenses split by costs which they already have or
have at least planned to do and additional expenses due to further compliance. Due
to the inherent complexity and the likelihood that a specific governance
requirement consists of a multitude of relevant administrative actions, IORPs
are required to identify the actions which are associated to specific
requirement. As guidance, IORPs are encouraged -albeit not obliged- to use the
typology provided in the Administrative Burden guidance document. In
addition, for each of these administrative actions, IORPs are asked to indicate
whether the associated costs are one-off or recurring. The questionnaire itself
consists of two sections. The first section focusses on compliance costs
associated with proposed governance requirements as reflected in the
"EIOPA's advice to the European Commission on the review of the IORP
Directive 2003/41/EC". In addition, the second section focusses on the
administrative burdens associated with these governance requirements. For
each of these sections you will firstly be asked to describe the current
situation of your institution. In case you are not currently abiding to the
governance requirements (as proposed in 'EIOPA’s Advice to the European
Commission on the review of the IORP Directive') you will consequently be asked
to estimate the relevant cost parameters of this incremental requirement. More
guidance is set out in the Compliance Costs guidance document that
accompanies this questionnaire. In case you have further questions do not
hesitate to contact us. We would appreciate if you would answer these questions
to the best of your abilities. | Section I: Governance Requirements I.
Please describe the current situation of your institution by answering the
following questions: 1)
We currently abide to the general governance requirements (as proposed in 'EIOPA’s Advice to the European Commission on the review of the IORP
Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 2)
We currently abide to the general requirements with regard to the fitness and
propriety of persons who effectively run the IORP (as proposed in 'EIOPA’s Advice to the European Commission on the review of the IORP
Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 3)
We currently abide to the general requirements with regard to risk management
(as proposed in 'EIOPA’s Advice to the European
Commission on the review of the IORP Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 4)
We currently abide to the general requirements on ORSA (as proposed in 'EIOPA’s Advice to the European Commission on the review of the IORP
Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 5)
We currently abide to the general requirements on an internal control system
(as proposed in 'EIOPA’s Advice to the European
Commission on the review of the IORP Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 6)
We currently abide to the general requirements on internal auditing (as
proposed in 'EIOPA’s Advice to the European
Commission on the review of the IORP Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 7)
We currently abide to the general requirements on the actuarial function (as
proposed in 'EIOPA’s Advice to the European
Commission on the review of the IORP Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 8)
We currently abide to the general requirements on outsourcing (as proposed in 'EIOPA’s Advice to the European Commission on the review of the IORP
Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) 9)
We currently abide to the general requirements on depositories (as proposed in 'EIOPA’s Advice to the European Commission on the review of the IORP
Directive'): q Yes q
Partially (if no, please provide a description of the current system and fill
in the relevant cost parameters in the table below) q
No (if no, please provide a description of the current system and fill in the
relevant cost parameters in the table below) II. In
case your institution is not or only partially abiding to at least one of the
aforementioned requirements, briefly describe the current position of your
company for the respective requirement(s). In particular, please specify where
your institution differs from the relevant requirement. Brief
description of current position & areas of discrepancy:
III. In
case your institution is currently not, or only partially, abiding to at least
one of the aforementioned requirements, but is in the process of improving its governance
system (e.g. general governance
structure & functions, risk management & ORSA, internal control system) briefly describe this
process. In particular, please provide an estimation of the planned work or
project costs. Description
& broad estimation of the planned work or project costs: III.
Please make an estimate of the increment cost of complying with the relevant
governance requirement(s): Reference to relevant governance requirement || Total Labour Cost || Total Equipment costs (per year & per entity) || Total Outsourcing costs (per year & per entity) || Total Administrative Costs Average cost || Frequency Number of action || Description of required action(s) (based on typology) || Time per action (man-hours) || Required level of qualification? (ISCO) || Price per action (€ per hour) || One-off costs / on-going costs? (in case of recurrent costs, please indicate the appropriate frequency) || Total number of entities involved || || || 1. || || || || || || || || || 2. || || || || || || || || || 3. || || || || || || || || || 4. || || || || || || || || || 5. || || || || || || || || || 6. || || || || || || || || || 7. || || || || || || || || || 8. || || || || || || || || || 9. || || || || || || || || || 10. || || || || || || || || || Additional Comments (e.g.
general remarks, difficulties, shortcomings): | Section II: Reporting requirements I. Please make an estimate of the cost
parameters of the relevant reporting requirements in the following table: || Reporting Requirement: || I. General Governance structure & Functions || II. Fit & Proper || III. Risk management || IV. ORSA supervisory report Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Estimated current administrative cost? || || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || || Required level of qualification? (ISCO) || || || || Estimated hourly pay? || || || || Frequency of reporting requirement?[21] || || || || (If applicable) number of entities involved? || || || || Total estimated labour cost? || || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || || Total incremental cost? || || || || II. Please make an estimate of the
cost parameters of the relevant reporting obligations in the following table: || Reporting Requirement: || V. Internal Control System || VI. Internal audit || VII. Actuarial function || VIII. Outsourcing || IX. Depositories Current position || Does your institution currently abide by the following reporting? requirements (as set out in 'EIOPA’s Advice to the European Commission on the review of the IORP Directive) || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially || Yes/No/Partially Estimated current administrative cost? || || || || || Relevant cost parameters incurred to fully fulfil the reporting requirement (if the reporting requirement is already fulfilled, please leave blank) || Required man-hours? || || || || || Required level of qualification? (ISCO) || || || || || Estimated hourly pay? || || || || || Frequency of reporting requirement?[22] || || || || || (If applicable) number of entities involved? || || || || || Total estimated labour cost? || || || || || (If applicable) estimated cost of acquiring additional equipment & supplies? || || || || || (If applicable) estimated cost of outsourcing reporting requirement? || || || || || Total incremental cost? || || || || || III. In case a reporting
requirement consists of multiple administrative requirements, please fill in
the following table for the relevant requirement: Reference to relevant governance requirement || Total Labour Cost || Total Equipment costs (per year & per entity) || Total Outsourcing costs (per year & per entity) || Total Administrative Costs Average cost || Frequency Number of action || Description of required action(s) (based on typology) || Time per action (man-hours) || Required level of qualification? (ISCO) || Price per action (€ per hour) || Frequency per action (E=0,33; A=1; S=2) || Total number of entities involved || || || 1. || || || || || || || || || 2. || || || || || || || || || 3. || || || || || || || || || 4. || || || || || || || || || 5. || || || || || || || || || 6. || || || || || || || || || 7. || || || || || || || || || 8. || || || || || || || || || 9. || || || || || || || || || 10. || || || || || || || || || Additional Comments (e.g.
general remarks, difficulties, shortcomings): Figure B – Guidance documents accompanying the
questionnaire (a) Part I Assessing the Administrative Burden of an
IORP II proposal: Guidance Document I. Introduction 68 1.1 Administrative Cost Assessment 68 1.2. Proportionality 69 1.3 Outline of the EU Standard Cost Model 69 II. Step by Step Guide on the Questionnaire 70 2.1 Identification and classification of reporting
requirements 70 2.2 Identification of the frequency of reporting
requirements 70 2.3 identification of relevant cost parameters of
reporting requirements 70 2.3.1. General cost parameters 70 2.3.2 Identification of the required individual
administrative actions 72 2.4. Extrapolation to the EU level 73 III. Report 73 IV. Bibliography 74 V. Annexes 75 Annex A: Reporting Requirements to Supervisory
Authorities 75 Annex B: Reporting Requirements for Members &
Beneficiaries 77 Annex C: Current reporting frequency to Supervisory
Authorities 81
I. Introduction
The Commission Services are in the process
of preparing the impact assessment report that will accompany the legislative
proposal to review directive 2003/41/EC (IORP II proposal). A substantive
assessment of the impact of possible quantitative requirements (pillar 1) is
being performed with the Quantitative Impact Study carried out by EIOPA and
economic research carried out by the Commission’s Joint Research Centre and the
European Central Bank. This document focuses on the administrative
burden assessment of possible information disclosure requirements (Pillar 3).
It provides background information for the questionnaire to assess the
potential administrative burden of the technical advice presented by EIOPA, as
reflected in "EIOPA's advice to the European Commission on the review of
the IORP Directive 2003/41/EC" (EIOPA-BOS-12/015) dated 15.2.2012, as well
as further considerations concerning information disclosures to members and
beneficiaries. This document does not represent or
pre-judge the formal proposals of the European Commission.
1.1
Administrative Cost Assessment
Administrative costs are defined as the
cost incurred by enterprises, the voluntary sector, public authorities and
citizens in meeting legal obligations to provide information on their actions,
either to public authorities or to private parties. In general these costs
consist of two distinct mechanisms: Firstly, the cost of implementing the
requirements (e.g. one-off administrative costs) and secondly once these
requirements are met, the on-going reporting obligations (e.g. recurring
costs). Furthermore, administrative costs consist
of two components: business-as-usual and administrative burdens. While business-as-usual
costs correspond to the costs resulting from administrative activities an
entity would continue if legal obligations were removed, administrative burdens
stem from activities which are done solely due to legal obligations.
11.1.
1.2. Proportionality
One of the key purposes of the
administrative burden assessment is to test the effectiveness and efficiency of
alternative policy options. The principle of proportionality,
which requires that any intervention is targeted and does not go beyond what is
necessary to achieve the objectives, needs to guide the process of identifying
different policy options and their comparison. In this regard it should be noted that none
of the proposed requirements by EIOPA in its "Advice to the European
Commission on the review of the IORP Directive 2003/41/EC" are set in
stone. For this administrative burden assessment, it is proposed to assume
an "upper bound scenario". Accordingly, for each of the
potential disclosure requirements, the burdens imposed by the most stringent
option will be tested. While it is possible that the initial results of this
exercise might indicate a burden, it will be possible through application of
the EU Standard Cost Model to assess the cost of other options.
1.3 Outline of the EU Standard
Cost Model
Administrative burden should be assessed on the basis of the
average cost of the required administrative activity multiplied by the total
number of activities performed per year. The average cost per activity will
be estimated by multiplying the average labour cost per hour by the time
required per action. The total number of activities will be calculated as the
frequency of required actions multiplied by the number of entities concerned. In
case of multiple relevant administrative activities per information obligation
these need to be summed up to calculate the administrative cost per information
obligation. If applicable, equipment costs and outsourcing costs (per
entity and per year) should also be included in the calculations. For each of these information obligations,
individual IORPs need to provide the relevant data. This data could be
collected at a country level and then extrapolated to the EU level. In order to
collect this data, a so-called capture-tool is required. In the IORP
Administrative Burden Assessment, a questionnaire has been prepared. In order to complete this questionnaire a
series of steps need to be taken. In the following section these steps will
briefly be described.
II. Step by Step Guide on the
Questionnaire
2.1 Identification and
classification of reporting requirements
The assessment of administrative burdens starts with a full mapping
of the existing and newly introduced information obligations. This comparative
mapping is presented in tabular form and includes a short description of the
information obligations and, if applicable, the regulatory origin and the
obligation frequency. Bearing in mind the specificity of the EU
Standard Cost Model, the costs of existing reporting requirements will not be
assessed since they are considered to be business as usual. Instead the focus
should be limited to the requirements that are likely to impose the most
significant administrative burden. As aforementioned, for the purpose of this exercise, the mapping
will be limited to the upper bound scenario implied by "EIOPA's
advice to the European Commission on the Review of Directive 2003/41".
The results of this mapping can be found in
Annex A & B of this guidance document.
2.2
Identification of the frequency of reporting requirements
In order to distinguish the administrative
burden from business as usual, it is necessary to identify whether some of the
proposed reporting requirements are already being reported by the IORPs in the
different Member States and at what frequency. The frequency of required actions is an
indication on how many times per year an action is required. If for instance
the information has to be submitted once a year, the frequency is 1; if is
every 6 months the frequency is 2; if every three years, it is 0,33. Some of the relevant data on this issue
that was put forward by recent studies can be found in Annex C of this
guidance document. Nonetheless, it is clear that this data is not sufficient.
It is therefore deemed advisable to integrate the following questions into the
questionnaire: Possible question(s): 1. What are the current information obligations to supervisors and members & beneficiaries at the national level? 2. What is the frequency of these requirements?
2.3 identification of relevant
cost parameters of reporting requirements
2.3.1.
General cost parameters
A next step is to determine the relevant
cost parameters of the information obligations. While "labour
costs" are primordial in this regard, other costs including "equipment
& supply" and "outsourcing" costs should not be
forgotten. The labour costs are determined by (a.) the
number of hours spent on a specific action, multiplied by (b.) the hourly pay
of those performing the action. This hourly pay should correspond to the gross
salary plus overhead cost (25% by default). It is clear that costs will
increase exponentially to the degree of qualification and seniority required to
perform the action. The cost parameters for equipment &
supplies, which are acquired to comply with information obligations and which
are solely used for that purpose alone, consist of the acquisition price and
the depreciation price. Outsourcing costs is what the service
provider charges on average per information obligation, per entity and per
year. With regard to the cost parameters, the
following questions are proposed: Possible question(s): Labour costs || 1. How many man-hours does your organisation need to fulfil these obligations? Labour costs || 2. What level of qualification and seniority is required to perform these obligations? (based on ISCO ranking) [23] Labour costs || 3. What is the estimated hourly pay? Labour costs || 4. Frequency of reporting obligation? Labour costs || 5. How many entities are involved? Equipment & Supply costs || 4. Does your organisation currently possess the required equipment & supplies to abide by these obligations? Equipment & Supply costs || 5. (If applicable) what is the estimated cost of acquiring additional equipment & supplies? Outsourcing costs || 6. Is your organization required to outsource these requirements? Outsourcing costs || 7. (If applicable) what is the estimated cost of outsourcing these requirements?
2.3.2 Identification of the required
individual administrative actions
Considering the likelihood that a specific
disclosure requirement consists of a multitude of relevant administrative
actions, it is deemed necessary that the IORPs indicate the number of
individual actions involved. Moreover, they are required to identify the
actions which are associated to specific information obligations, since this
makes it possible to distinguish the costs of implementing the requirements
from their associated reporting costs. With regard to possible obligations as outlined
in EIOPA’s advice the following typology could be used: Types of required action(s): 1. Familiarising with the information obligation 2. Training employees about the information obligations 3. Retrieving relevant information from existing data 4. Adjusting existing data 5. Producing new data 6. Designing information material (e.g. the Pension Benefit Statement) 7. Copying (e.g. reproducing reports, producing labels or leaflets) 8. Holding meetings (e.g. internal/external with an auditor, lawyer, etc.) 9. Submitting the information to the relevant authority (e.g. sending it to the relevant authority) 10. Filing the information 11. Buying (IT) equipment & supplies specifically used to fulfil information obligations 12. Other(s) The labour cost for each of these
individual actions will then need to be calculated separately as indicated in
section 2.3.1 and 3 of the Guidance Document. Finally, it should be reminded that for the
purpose of this exercise the focus should be limited to the net change in
costs. For example, an administrative action following a particular requirement
required by law, but corresponding to what you would normally do in absence of
any legal obligation should not be regarded in the calculations.
2.4.
Extrapolation to the EU level
In order to keep assessment of costs at a reasonable level it is
evident that it is not feasible to collect data on each of the approximately
120.000 IORPs. Instead the data provided by IORPs, who participate in the
questionnaire on a voluntary basis will be collected on a by Member State
basis. It is important to note however that due to likely substantial
discrepancies in the relevant cost parameters between Member States, the option
to extrapolate the provided data on a regional basis (e.g. Western Europe,
Central Europe, Eastern Europe) could be considered. In case data is not
available from a specific region, extrapolation -if deemed necessary- could be
on the basis of country distribution of administrative costs in a similar
sector or for a similar event; the "EU database on administrative
burdens" provides approximately 340 of these. In any case, the
assumptions required to make this extrapolation need to be clearly explained. Moreover, the data that will be collected needs to be critically
reviewed and obvious outliers need to be removed. Simply put, for the EU
Standard Model the assessment needs to be based on ideal types, the so-called "normal
efficient entity". Ranges of estimations are not possible and discrete
figures need to be provided. While calculating the median or average of
remaining data is likely to be sufficient, the standard deviation and variance
might be used occasionally to decide on the most appropriate method to identify
the performance of the "normal efficient entity".
III. Report
Once the data is collected and extrapolated
to the regional and/or EU level. The estimates need to be reported in a
standardised manner to allow for possible comparison and additions. It is
important to note that the common reporting sheet acts merely as a summary of
more detailed analysis. It does not prohibit from presenting more detailed data
in separate tables and texts. A draft version of a possible reporting sheet for
a specific requirement for the revision of the IORP Directive is presented
below. IORP II Reporting Sheet Proposed requirement || Number of action || Description of required action(s) (based on typology) || Time per action (man-hours) || Price per action (€ per hour) || Frequency per action (E=0,33; A=1; S=2; M=12)[24] || Total number of entities involved || Total Equipment costs (per year & per entity) || Total Outsourcing costs (per year & per entity) || Total Administrative Costs 1. || || || || || || || || 2. || || || || || || || || 3. || || || || || || || || 4. || || || || || || || || 5. || || || || || || || ||
IV. Bibliography
EIOPA (2012), 'EIOPA’s Advice to the European Commission
on the review of the IORP Directive 2003/41/EC', EIOPA-BOS-12/015. EIOPA (2011a), 'Report on Pre-Enrolment Information to
Pension Plan Members', EIOPA-BOS-11/039. EIOPA (2011b), 'Report on Reporting Requirements to
Supervisory Authorities', CEIOPS-OP-68-10 Rev5. CEIOPS (2008), 'Initial Review of Key Aspects of the
Implementation of the IORP Directive', CEIOPS-OP-03-08. References describing the EU Standard Cost Model are
available on: http://ec.europa.eu/dgs/secretariat_general/admin_burden/eu_scm/eu_scm_en.htm Enclosure: Annex A – Reporting
Requirements for Supervisors
Annex B – Reporting Requirements for Members & Beneficiaries
Annex C – Reporting Frequency to Supervisory Authorities
V. Annexes
Annex A: Reporting Requirements to
Supervisory Authorities
Table I: Current Reporting Requirements Nr. || Description of current reporting requirements || Reference to IORP Article || Shall/May in IORP Directive? || Frequency of reporting required? || Article 13 || || || 1 || All documents necessary for the purpose of supervision, including: || IORP Directive, Article 13, paragraph c || may || Regularly 1.1 || Internal interim reports || IORP Directive, Article 13, paragraph c (i) || may || Regularly 1.2 || Actuarial valuations and assumptions || IORP Directive, Article 13, paragraph c (ii) || may || Regularly 1.3 || Asset-liability studies || IORP Directive, Article 13, paragraph c(iii) || may || Regularly 1.4 || Evidence of consistency with investment-policy principles || IORP Directive, Article 13, paragraph c(iv) || may || Regularly 1.5 || Evidence that contributions have been paid in as planned || IORP Directive, Article 13, paragraph c(v) || may || Regularly 1.6 || Detailed auditor's report || IORP Directive, Article 13 || may || Regularly 1.7 || Certificate of the auditor || IORP Directive, Article 13 || may || Regularly || Other Articles || || || 2 || Annual accounts and annual reports for each pension scheme operated by the institution. The reports should give a true and fair view of the institution's assets, liabilities and financial position. || IORP Directive, Article 10 & 13 || shall || On request 3 || Statement of investment-policy principles (SIPP) which includes: investment risk measurement methods, the risk-management process implemented, the strategic asset allocation and asset-liability studies. || IORP Directive, Article 12 & 13 || shall || Regularly / At least every three years 4 || A certification or a report which reflect the adjusted development of the technical provision and changes in risk covered. || IORP Directive, Article 15, paragraph 3 || shall (in case the IORP decides to calculate TP every three years) || Intervening years || EIOPA Report on Reporting Requirements to Supervisory Authorities (2011b) || || || 5 || Whistle blow-report || EIOPA Report (2011b) || Not specified || Not specified 6 || Stress test || EIOPA Report (2011b) || Not specified || Not specified 7 || Further documents, including: || 7.1 || Composition of membership || EIOPA Report (2011b) || Not specified || Not specified 7.2 || Amount of contributions || EIOPA Report (2011b) || Not specified || Not specified 7.3 || Amount of benefits paid and transferred || EIOPA Report (2011b) || Not specified || Not specified 7.4 || Allocation of assets to different asset classes || EIOPA Report (2011b) || Not specified || Not specified 7.5 || Transaction if assets || EIOPA Report (2011b) || Not specified || Not specified 7.6 || Funding || EIOPA Report (2011b) || Not specified || Not specified 7.8 || Solvency requirements || EIOPA Report (2011b) || Not specified || Not specified 7.9 || Commissions to be paid || EIOPA Report (2011b) || Not specified || Not specified 7.10 || Return on investment || EIOPA Report (2011b) || Not specified || Not specified 7.11 || Investment income losses || EIOPA Report (2011b) || Not specified || Not specified 7.12 || Net asset value || EIOPA Report (2011b) || Not specified || Not specified 8 || Special register for assets covering TP || EIOPA Report (2011b) || Not specified || Not specified 9 || New Pension scheme || EIOPA Report (2011b) || Not specified || Not specified 10 || Cross-border information || EIOPA Report (2011b) || Not specified || Not specified Table II: Possible new reporting
Requirements Description of possible information requirements || EIOPA Advice on Review of IORP Directive || Detailed description || Shall/May in IORP II Directive? || Frequency of reporting required? 1. Information regarding the business of IORPs, including: || || || || 1.1 Information on the main trends || CfA Section 28.5 || The main trends and factors that contribute to the development, performance and position of the institution over its planning time horizon including any significant legal or regulatory issues; || shall (but proportionality needs to be taken into account) || At least annually 1.2 Information on objectives || CfA Section 28.5 || A description of the objectives of the institution, including the relevant strategies and time frames. || shall (but proportionality needs to be taken into account) || At least annually 2. Qualitative and quantitative information regarding IORPs performance, including: || || || || 2.1 Information on contributions and expenses || CfA Section 28.5 || Information on the institution's contributions and expenses relating to occupational retirement provision by material geographical areas; a comparison of the information with that reported on the previous reporting period and the reasons for any material changes; || shall (but proportionality needs to be taken into account) || At least annually 2.2 Information regarding the performance during reporting periods (net contributions) || CfA Section 28.5 || An analysis of the institution's overall performance during the reporting period (contributions minus expenses) || shall (but proportionality needs to be taken into account) || At least annually 2.4 Projections of the performance || CfA Section 28.5 || Projections of the institution's performance, with information on significant factors that might affect such performance, over its planning time horizon || shall (but proportionality needs to be taken into account) || At least annually 2.5. Information on risk mitigating techniques || CfA Section 28.5 || Information on any material risk mitigation techniques purchased or entered into during the reporting period. || shall (but proportionality needs to be taken into account) || At least annually 3. Qualitative and quantitative information regarding the performance of IORPs investments, including: || || || || 3.1. Information on income and expenses with respect to investment activities || CfA Section 28.5 || Information on income and expenses with respect to investment activities during the last reporting period, a comparison of the information with that reported on the previous reporting period and reasons for any material changes. || shall (but proportionality needs to be taken into account) || At least annually 3.2. Information on the overall investment performance || CfA Section 28.5 || An analysis of the institution's overall investment performance during the reporting period and also by relevant asset class. || shall (but proportionality needs to be taken into account) || At least annually 3.3. Projections of the expected investment performance || CfA Section 28.5 || Projections of the institution's expected investment performance, with information on significant factors that might affect such investment performance, over its business planning time horizon. || shall (but proportionality needs to be taken into account) || At least annually 3.4 Information on the key assumptions with regard to investment decisions || CfA Section 28.5 || The key assumptions which the institution makes in its investment decisions with respect to the movement of interest rates, exchange rates, and other relevant market parameters, over its planning time horizon. || shall (but proportionality needs to be taken into account) || At least annually 3.5. Information about any investments in tradable securities || CfA Section 28.5 || Information about any investments in tradable securities or other financial instruments based on repackaged loans, and the institution's risk management procedures in respect of such securities or instruments. || shall (but proportionality needs to be taken into account) || At least annually 4. Other reporting requirements, including: || || || || 4.1. Information on any material contributions and expenses || CfA Section 28.5 || Institutions shall report information of any material contributions and expenses, other than from occupational retirement provision or investment, over the institution's planning time horizon. || shall (but proportionality needs to be taken into account) || At least annually
Annex B:
Reporting Requirements for Members & Beneficiaries
Table I: Current Reporting Requirements Nr. || Description of current reporting requirements || Reference to IORP Article || Shall/May in IORP Directive? || Frequency of reporting required? || Article 11 (DC & DB schemes) || || || 1 || Any relevant information regarding changes to the pension scheme || IORP Directive, Article 11, paragraph 2 (b) || shall || On request/Regularly 2 || The target level of the retirement benefit & The level of benefits (in case of cessation of employment) || IORP Directive, Article 11, paragraph 4 (a) || shall || On request 3 || The level of benefits in case of cessation of employment || IORP Directive, Article 11, paragraph 4 (b) || shall || On request 4 || The arrangements relating to the transfer of pension rights to another institution for occupational retirement provision in the event of termination of the employment relationship. || IORP Directive, Article 11, paragraph 4 (d) || shall || On request 5 || Brief particulars of the situation of the institution || IORP Directive, Article 11, paragraph 4 (d) || shall || Annually 6 || Current level of financing individual members accrued entitlements || IORP Directive, Article 11, paragraph 4 (d) || shall || Annually 7 || Data on the benefits which are due and the corresponding payment options (on retirement or when other benefits become due) || IORP Directive, Article 11, paragraph 5 || shall || On request || Article 11 (DC schemes) || || || 8 || The range of investment options || IORP Directive, Article 11, paragraph 4 (c) || shall || On request 9 || The actual investment portfolio || IORP Directive, Article 11, paragraph 4 (c) || shall || On request 10 || The risk exposure || IORP Directive, Article 11, paragraph 4 (c) || shall || On request 11 || The costs related to investments || IORP Directive, Article 11, paragraph 4 (c) || shall || On request || Other Articles (DB & DC schemes) || || || 12 || The rights and obligations of parties involved in the pension scheme || IORP Directive, Article 9,f(i) || shall || Not specified 13 || the financial, technical and other risks associated with the pension scheme || IORP Directive, Article 9,f(ii) || shall || Not specified 14 || the nature and distribution of those risks || IORP Directive, Article 9,f(iii) || shall || Not specified 15 || Annual accounts and annual reports for each pension scheme operated by the institution. The reports should give a true and fair view of the institution's assets, liabilities and financial position. || IORP Directive, Article 10 || shall || On request 16 || Statement of investment-policy principles (SIPP) which includes: investment risk measurement methods, the risk-management process implemented and the strategic asset allocation and asset-liability studies. || IORP Directive, Article 12 || shall || At least every three years / On request 17 || A plan which represent a concrete and realisable way to re-establish the required amount of assets to cover fully the technical provision in due time. || IORP Directive, Article 16 || shall || In case the IORP has insufficient assets to cover the Technical Provisions 18 || Any requirements imposed by the competent authorities of the host member state on institutions located in that member state (in case of cross-border activity) || IORP Directive, Article 20 || shall || Regularly Table II: Possible Pension Benefit
Statement Description of possible new reporting requirements || EIOPA Advice on Review of IORP Directive || Detailed description || Shall/May in IORP II Directive? || Frequency of reporting required? 1. GENERAL SECTION (DB and DC) || || || || 1.1. Identification of the individual IORP || CfA Section 29.5., specific sub-CfA 23.1 || The name (number) of the individual IORP and the name of the competent authority that supervises the IORP. || shall (but proportionality needs to be taken into account) || At least annually and on request 1.2. Pension scheme guarantees: || CfA Section 29.5. || A description of the nature of guarantees, including of the right and obligations of the parties involved in the pension scheme; and a description of possible adjustment benefit mechanisms. || shall (but proportionality needs to be taken into account) || At least annually and on request 1.3. Current balance || CfA Section 29.5., specific sub-CfA 23.1 || The accrued balanced and a summary of inflows and outflows with particular reference to the contribution arrangements and the charges actually levied. The current level of financing of individual members accrued individual entitlements should be particularly clear. || shall (but proportionality needs to be taken into account) || At least annually and on request 1.4. Pension Projections || CfA Section 29.5., specific sub-CfA 23.1 || The target level of the retirement benefit and a personalized pension projection. || shall (but proportionality needs to be taken into account) || At least annually and on request 1.5. Practical information || CfA Section 29.5., specific sub-CfA 23.1 || Cross-reference to other documents deemed relevant, including a link to the IORP website. || shall (but proportionality needs to be taken into account) || At least annually and on request 2. MODULAR SECTION (DC only) || || || || 2.1. Detailed breakdown of costs || CfA Section 29.5. || Detailed breakdown of costs and associated charges. || shall (but proportionality needs to be taken into account) || At least annually and on request 2.2. Information on investment options & risk profile || CfA Section 29.5., specific sub-CfA 23.1 || Brief description of the objectives and investment policies, including the range of investment options, the actual investment portfolio and the associated risk exposure; a synthetic indicator consisting of a series of categories on a numerical scale with the individual investment option assigned to one of the categories and finally a risk/reward profile and/or the time horizon adopted for the investment policies. || shall (but proportionality needs to be taken into account) || At least annually and on request 2.3 Information on past performance || CfA Section 29.5., specific sub-CfA 23.1 || Descriptive and graphical (by means of a bar-chart) overview of the past performances. This includes performance scenarios for years where there is no relevant data. || shall (but proportionality needs to be taken into account) || At least annually and on request
Annex C: Current reporting
frequency to Supervisory Authorities
Table I: Frequency per country Table II: Frequency of reporting
requirement (b) Part II Assessing the Compliance Costs of an IORP
II proposal: Guidance Document
I. Introduction
The Commission Services are in the process
of preparing the impact assessment report that will accompany the legislative
proposal to review directive 2003/41/EC (IORP II proposal). A substantive
assessment of the impact of possible quantitative requirements (pillar 1) is
being performed with the Quantitative Impact Study carried out by EIOPA and
economic research carried out by the Commission’s Joint Research Centre and the
European Central Bank. This document focuses on the compliance
cost assessment of possible governance requirements (Pillar 2). It provides
background information for the questionnaire to assess the potential compliance
costs of the technical advice presented by EIOPA, as reflected in "EIOPA's
advice to the European Commission on the review of the IORP Directive
2003/41/EC" (EIOPA-BOS-12/015) dated 15.2.2012, as well as further
considerations concerning governance requirements. The method used to assess governance cost
is analogous to the one presented in the Administrative Burden Assessment
Guidance Document. Nonetheless, there are some minor discrepancies. The purpose
of this document is too briefly point out these differences. This document does not represent or
pre-judge the formal proposals of the European Commission.
1.1
Compliance costs
Compliance costs generally consist of broadly two parts. Firstly,
the one-off costs and secondly the recurrent costs. Analogously, for the purpose of this exercise IORPs are required to
make an estimation of the total compliance work or project expenses split by
costs which they already have or have at least planned to do and additional
expenses due to the IORP II compliance.
1.2. Proportionality
The principle of proportionality,
which requires that any intervention is targeted and does not go beyond what is
necessary to achieve the objectives, needs to guide the process of identifying
different policy options and their comparison. In this regard it should be noted that none
of the proposed requirements by EIOPA in its "Advice to the European
Commission on the review of the IORP Directive 2003/41/EC" are set in
stone. For this compliance costs assessment, it is proposed to assume an "upper
bound scenario". Accordingly, for each of the potential governance
requirements, the costs imposed by the most stringent option will be tested.
While it is possible that the initial results of this exercise might indicate a
cost, it will be possible through application of the EU Standard Cost Model to
assess the cost of other options.
II. Step by Step Guide on the
Questionnaire
2.1 Identification and
classification of requirements
Correspondingly, the assessment of compliance starts with a full mapping
of the existing and newly introduced obligations. As aforementioned, for the purpose of this exercise, the mapping
will be limited to the upper bound scenario implied by "EIOPA's
advice to the European Commission on the Review of Directive 2003/41".
The results of this mapping can be found in
Annex A of this guidance document
2.2. Cost parameters &
Administrative actions
The cost parameters used for the administrative burden assessment
are deemed appropriate for this assessment. However, due to the inherent
complexity and the likelihood that a specific governance requirement consists
of a multitude of relevant administrative actions, IORPs are required to
identify the individual actions which are associated to specific requirement. As guidance, IORPs are encouraged -albeit not obliged- to use the
typology provided in the Administrative Burden guidance document. In addition,
for each of these administrative actions, IORPs are asked to indicate whether
the associated costs are one-off or recurring. By doing so, IORPs are expected to make a
more accurate estimation of the incremental costs of a relevant governance
requirement.
III. Annexes
Annex A: Governance Requirements
Table I: Existing Governance
Requirements Description of current reporting requirements || Reference to IORP Article || Detailed description || Shall/May in IORP Directive 1. General governance requirements || || || 1.1 Conditions of operation || Article 9, paragraph 1 (c) || "Each Member State shall, in respect of every institution located in its territory, ensure that: properly constituted rules regarding the functioning of any pension scheme operated by the institution have been implemented and members have been adequately informed of these rules." || shall 1.2 Sound procedures and adequate internal control mechanisms || Article 14, paragraph 1 || "The competent authority shall ensure that every institution in their territory to have sound administrative and accounting procedures and adequate internal control mechanisms." || shall 1.3 Legal separation || Article 8 || "There shall be a legal separation of the sponsoring undertaking and the institution for occupational retirement provision." || shall 2. Fit and proper || || || 2.1 Conditions of operation || Article 9, paragraph 1 (b) || "Each Member State shall, in respect of every institution located in its territory, ensure that: the institution is effectively run by persons of good repute who must themselves have appropriate professional qualifications and experience or employ advisers with appropriate professional qualifications and experience." || shall 3. Risk management || || || 3.1. Statement of investment policy principles || Article 12 || "Each Member State shall ensure that every institution located in its territory prepares and, at least every three years, reviews a written statement of investment policy-principles. This statement contains at least such matters as…the risk-management processes implemented." || shall 3.2. Investment rules || Article 18 || The investment rules in Article 18 presuppose the existence of an effective risk management system. || shall 4. Own Risk and Solvency Assessment (ORSA) || || || || N/A || N/A || N/A 5. Internal Control System || || || 5.1. Internal control mechanism || Article 14, paragraph 1 || "The competent authority shall ensure that every institution in their territory to have sound administrative and accounting procedures and adequate internal control mechanisms" || shall 6. Internal audit || || || || N/A || N/A || N/A 7. Actuarial function || || || 7.1. Technical Provisions || Article 9, paragraph 1(d) & Article 15, paragraph 4 || Each Member State shall, in respect of every institution located in its territory, ensure that: (the calculations for) all technical provisions are computed (executed) and certified by an actuary or, if not by an actuary, by another specialist in this field, including an auditor, according to national legislation, on the basis of actuarial methods recognised by the competent authorities of the home Member State; || shall 8. Outsourcing || || || 8.1 Entrusting management to other entities || Article 9, paragraph 4 || “A Member State may permit or require institutions located in its territory to entrust management of these institutions, in whole or in parts to other entities operating on behalf of those institutions.” || May 8.2 Appointing investment managers || Article 19, paragraph 1 || “Member States shall not restrict institutions from appointing, for the management of the investment portfolio, investment managers established in another Member State and duly authorised for this activity, in accordance with Directives 85/611/EEC, 93/22/EEC,2000/12/EC and 2002/83/EC, as well as those referred to in Article 2(1) of Directive 2003/41/EC.” || May 8.3 Appointing custodians || Article 19, paragraph 2 || “Member States shall not restrict institutions from appointing, for the custody of their assets, custodians established in another Member State and duly authorised in accordance with Directive 93/22/EEC or Directive 2000/12/EC, or accepted as a depositary for the purposes of Directive 85/611/EEC. The provision referred to in this paragraph shall not prevent the home Member State from making the appointment of a depositary or a custodian compulsory.” || May Table II: Possible new Governance Requirements Possible new governance requirements || EIOPA Advice on Review of IORP Directive || Comment(s) 1. General governance requirements || || 1.1 System of governance || CfA section 18.5, points 1 and 2 || 1.3. Remuneration policy || CfA section 18.5, point 3 || See Annex B of the Compliance Costs Guidance Document 2. Fit and proper || || || CfA section 19.5 || 1. 3. Risk management || || || CfA section 20.5, point 10 || 4. Own Risk and Solvency Assessment (ORSA) || || || CfA section 21.5, points 1 to 4 || The ORSA should cover DB and DC schemes. 5. Internal Control System || || 5.1. Internal control || CfA 22.5, point 1-3 || 5.2. Compliance || CfA 22.5, point 4 || 2. 5.3. Whistle-blowing || CfA 22.5, point 5 || 3. 6. Internal audit || || 6.1. Internal audit function description || CfA 23.5, points 1-6 || 4. 6.2. Whistle-blowing || CfA 23.5, point 7 || 5. 7. Actuarial function || || 7.1. Actuarial function description || CfA 24.5, points 1-7 || 7.2. Whistle-blowing || CfA 24.5, point 8 || 8. Outsourcing || || || CfA 25.5, points 1-5 || 6. 9. Depositories || || 7. || CfA 26.5, point 3 ||
Annex B: Remuneration Policy
1.
When establishing and applying the
remuneration policy referred to in Article X, institutions shall comply with at least the
following principles: a.
the remuneration policy and remuneration
practices shall be established, implemented and maintained in line with the institution's
business and risk management strategy, its risk profile, objectives, risk
management practices and the long-term interests and performance of the institution
as a whole and shall incorporate measures aimed at avoiding conflicts of
interest; b.
the remuneration policy promotes sound and
effective risk management and shall not encourage risk-taking that exceeds the
risk tolerance limits of the institution; c.
the remuneration policy applies to the institution
as a whole, and contains specific arrangements that take into account the tasks
and performance of the administrative body, management body and supervisory
body, persons who effectively run the institution, holders of key functions and
other categories of staff whose professional activities have a material impact
on the institution's risk profile; d.
the administrative, management or supervisory
body of the institution establishes the general principles of the remuneration
policy for those categories of staff whose professional activities have a
material impact on the institution's risk profile and is responsible for the
control of its implementation; the administrative or management body of the institution
is responsible for the implementation of the remuneration policy which support
sound, prudent and effective management of institutions; e.
there shall be clear, transparent and effective
governance with regard to remuneration, including the definition of the
remuneration policy and its oversight; f.
an independent remuneration committee shall be
created, where appropriate in relation to significance of the institutions in
terms of size and internal organization, in order to periodically support the
administrative, management or supervisory body in overseeing the design of the
remuneration policy and remuneration practices, their implementation and
operation; g.
the remuneration policy shall be disclosed to
each member of the institution's staff. 2.
When establishing and applying the
remuneration policy referred to in Article X for the categories of staff
including the administrative, management or supervisory body, persons who
effectively run the institution, holders of key functions and other categories
of staff whose professional activities have a material impact on the institution’s
risk profile, institutions shall comply with the following principles: a.
where remuneration schemes include both fixed
and variable components, such components shall be balanced so that the fixed or
guaranteed component represents a sufficiently high proportion of the total
remuneration to avoid employees being overly dependent on the variable
components and allowing the institution to operate a fully flexible bonus policy,
including the possibility of paying no variable component; b.
where variable remuneration is
performance-related, the total amount of the variable remuneration is based on
a combination of the assessment of the performance of the individual and of the
business unit concerned and of the overall result of the institution or the
group to which the institutions belongs. The variable part of remuneration of
the staff engaged in the functions referred to in Articles X to Y shall be
independent from the performance of the operational units and areas that are
submitted to their control; c.
the payment of a substantial portion of the
variable remuneration component, irrespective of the form in which it is to be
paid, shall contain a flexible, deferred component that takes account of the
nature and time horizon of the institution’s business. The deferral period
shall not be less than three years and the period shall be correctly aligned
with the nature of the business, its risks, and the activities of the employees
in question; d.
when assessing an individual’s performance, not
only financial but also non-financial criteria shall be taken into account; e.
the measurement of performance, as a basis for
variable remuneration, shall include a downwards adjustment for exposure to
current and future risks, taking into account the institution’s risk profile
and cost of capital; f.
termination payments shall be related to
performance achieved over the whole period of activity and be designed in a way
that does not reward failure; g.
members of staff subject to the remuneration
policy should commit to not using any personal hedging strategies or
remuneration and liability-related insurance which would undermine the risk
alignment effects embedded in their remuneration arrangement. 3.
The actions to be taken in paragraph 2
shall take into account the internal organization of the institution. Figure C – Simplified version of the
questionnaire Brussels,
8.4.2013 Results
template to assess the administrative burden of an IORP II proposal Q1.
Please specify the administrative burden in the table below in EUR currency. || Current burden || Likely burden due to IORP II proposal || Recurrent || One-off implementation || Recurrent Compliance with governance requirements || || || Reporting to supervisors || || || Pension Benefit Statement (reporting to members and beneficiaries) || || || Q2. Where the
administrative burden is likely to increase due to the IORP II proposal, please
explain the reason(s). You may wish to focus on the most important reasons and
use the tables in the annex. Q3. If the figures from Q1
reflect the situation for large IORPs, please provide advice on how to adjust
these figures for smaller IORPs. Please indicate also the cut-off point between
large and small. Q4. Please indicate if you
think that the IORP II proposal could lead to a reduction in the administrative
burden. Q5. Other comments and
suggestions. Notes:
1.
Figures should reflect the IORP II proposal
based on the information available today, as contained in the two guidance documents
and the two detailed questionnaires. Where the information available today does
not provide an explicit indication that a requirement might be tightened or
loosened in comparison with the current practice, no burden should be reported.
2.
The figures should not anticipate on how
national legislators and regulators could implement new requirements agreed at
the EU level. 3.
Respondents should focus on the questions
in this short results template. Respondents might wish to responds as well to
some or all of the questions in the two more detailed questionnaires to the
extent that it helps informing the responses in the short results template. 4.
Please indicate only those costs which are
an administrative burden. The cost which would be incurred by the IORP even in
the absence of regulation (business-as-usual costs) should not be taken into
account in this exercise. 5.
Please focus the likely burden on costs
relating to the IORP II proposal. The current burden should focus on costs
relating to national legislation and regulation. This is because in many cases
national approaches have gone beyond the current IORP Directive. 6.
Please focus on the administrative burden
for IORPs, unless borne predominantly by the sponsoring undertaking. In the
latter case please specify that the administrative burden is predominantly
borne by the sponsoring undertaking. 7.
The main innovation foreseen for reporting
to members and beneficiaries is the introduction of a short individualised
Pension Benefit Statement (PBS) following a standard template of around 2
pages. The first page would contain general information for all types of
pension schemes, including information about an individual’s personal situation
(e.g. accrued pension rights and projections). A second page would contain generic
information for defined-contribution schemes about risk, returns and costs in
order to help individuals take investment decisions. The provision of the PBS
would be mandatory, but the information it contains would not be legally
binding. More detailed information, either on request or automatically, would
be available at the national level. It is currently not envisaged that IORP II
will propose substantial changes to the more detailed information. The PBS
builds on and extends corresponding EIOPA advice. 8.
The focus of this exercise is on governance
and reporting (pillars 2 and 3). For the sake of simplicity, qualitative
requirements (pillar 1) should be taken as those that prevail today in national
approaches. For example, the own risk and solvency assessment (ORSA) is a
possible new pillar 2 measure requiring IORPs to document how the technical
provisions are calculated. If current national legislation does not require the
inclusion of an explicit risk margin in the technical provisions, then, for the
purpose of this exercise, the ORSA should not document the calculation of such
a margin either. 9.
No changes are foreseen to the meaning of
members and beneficiaries. ANNEX – BREAKDOWN OF
BURDEN I. Compliance with
governance requirements || We currently abide to the general requirements of EIOPA’s CfA || Current burden || Likely burden due to IORP II proposal || || Recurrent || One-off implementation || Recurrent 1. General Governance structure & Functions || q Yes q Partially q No || || || 2. Fit & Proper || q Yes q Partially q No || || || 3. Risk Management || q Yes q Partially q No || || || 4. ORSA supervisory report || q Yes q Partially q No || || || 5. Internal Control System || q Yes q Partially q No || || || 6. Internal Audit || q Yes q Partially q No || || || 7. Actuarial Function || q Yes q Partially q No || || || 8. Outsourcing || q Yes q Partially q No || || || 9. Depositories || q Yes q Partially q No || || || II. Reporting to
supervisors || We currently abide to the general requirements of EIOPA’s CfA || Current burden || Likely burden due to IORP II proposal || || Recurrent || One-off implementation || Recurrent Information on the main trends || q Yes q Partially q No || || || Information on objectives || q Yes q Partially q No || || || Information on the contributions and expenses from occupational retirement provision || q Yes q Partially q No || || || Information regarding the performance relating to occupational retirement provision || q Yes q Partially q No || || || Projections of the performance || q Yes q Partially q No || || || Information on risk mitigating techniques || q Yes q Partially q No || || || Information on income and expenses with respect to investment activities || q Yes q Partially q No || || || Information on the overall investment performance || q Yes q Partially q No || || || Projections of the expected investment performance || q Yes q Partially q No || || || Information on the key assumptions with regard to investment decisions || q Yes q Partially q No || || || Information about any investments in tradable securities Information on any material contributions and expenses || q Yes q Partially q No || || || III. Pension Benefit Statement
(reporting to members and beneficiaries) || Current burden || Likely burden due to IORP II proposal || Recurrent || One-off implementation || Recurrent Information on pension scheme guarantees (all schemes) || || || Information on current balance (all schemes) || || || Information on pension projections (all schemes) || || || Practical information (all schemes) || || || Detailed breakdown of costs (DC only) || || || Information on investment options & risk profile (DC only) || || || Information on past performances (DC only) || || || 2. RESULTS Pensions Europe provided preliminary results on 24 May 2013 (for
most participating MSs) and the Commission Services asked national supervisors
to carry out an informal plausibility check. The final results were provided by
Pensions Europe on 18 July 2013 (PensionsEurope, 2013). The results of the exercise were largely qualitative because the
IORP industry could not systematically quantify the administrative burden even
for the current national regulation. The PensionsEurope survey, nevertheless, pointed
to a number of common trends in relation to recurrent burden and one-off
implementation burden. 2.1. Recurrent costs A systematic quantification of the burden was not provided by
Pensions Europe, but the responses from individual IORPs suggest that the
additional recurrent burden of the proposed action could range, depending on
the MS, between 13% and 65% of the current recurrent burden (Figure D). The
weighted average across MSs for which data are available amounted to 18% of the
current recurrent burden. Figure D – Potential additional recurrent burden from the IORP II
proposal (full Call for Advice basis) || Additional recurrent burden (in percentage of current burden) || Assets (€ billions, end-2011) || Weight (in percent of total) DE || 1.50 || 138.6 || 9.2 ES || 1.59 || 31.8 || 2.1 AT || 1.65 || 14.5 || 1.0 FI || 1.31 || 4.4 || 0.3 UK || 1.13 || 1,319.9 || 87.5 Total || - || 1,509.2 || 100 Average || 1.44 || || Weighted average || 1.18 || || Source: PensionsEurope (2013), Commission
Services The Commission Services have carefully examined this result with the
aim of reducing the potential recurrent burden for the IORP industry. This has
led to several decisions to put forward a proposed action that is considerably
more proportionate than what was envisaged at the time of launching the
PensionsEurope survey. Answers from IORPs to the PensionsEurope survey
suggested that most of the increase in the recurrent burden would arise from
the reporting of harmonised quantitative requirements in the own risk and
solvency report (ORSA), the introduction of the Solvency II functions and the
standardisation of the Pension Benefit Statement. The proposed action has taken
into account proportionality for two out of those three items. First, the risk
evaluation for pensions (REP) report fully replaces the ORSA and does not
require reporting of harmonised quantitative requirements. Second, the proposed
action reduces the number of governance functions in comparison to Solvency II.
As a result, the estimate additional recurrent burden of 18% implied by the
Pensions Europe survey was reduced by two-thirds to 6% (Figure E). Figure E – Potential additional recurrent burden from the IORP II
proposal (adjusted for proportionality) || Additional recurrent burden (in percentage of current cost) Weighted average (full Call for Advice basis) || 1.18 Weighted average (adjusted for proportionality by two-thirds || 1.06 Source: PensionsEurope (2013), Commission
Services A quantitative indication of the recurrent burden of the proposed
action for the IORP industry as a whole could be derived by adding insights from
the OECD’s data on operating expenses, comprising all costs arising from the
general administration of the pension fund, notably those relating to administration
and investment management. For the EU MS, the OECD data suggest that operating
expenses range between 0.1% and 1.3% of total assets depending on the country.
This suggests that the current operating expenses of the IORP industry in the
EU are of the order of €5.6 billion a year (Figure F). As is the situation for any financial institution much of those
operating expenses are business-as-usual costs. An IORP that wants to operate a
pension scheme will, even in the absence of regulation, seek professional
advice, carry out risk management and disclose information to members. The
actual administrative burden, i.e. the expenses incurred by the IORP because of
regulation, is difficult to disentangle from the business-as-usual costs.
However for the purposes of this impact assessment, the administrative burden
is assumed to range around 5% to 15% of the total operating costs. This
suggests that the current administrative burden for the IORP industry amounts
to around €280 and 850 million a year (Figure F). Figure F – Operational expenses and estimate of current
administrative burden || Operational expenses (in percentage of total assets, 2011*) || Assets (in € millions, end-2011) || Operational expenses (in € millions) || Estimate of current administrative burden (in € millions) || || || || 5% of operating expenses || 15% of operating expenses BE || 0.5 || 15,910 || 79.7 || 4.0 || 12.0 DK || 0.1 || 7,060 || 7.1 || 0.4 || 1.1 DE || 0.5 || 138,570 || 277.1 || 13.9 || 41.6 ES || 1.3 || 31,758 || 412.9 || 20.6 || 61.9 LU || 0.1 || 970 || 0.1 || 0.0 || 0.1 NL || 0.1 || 774,060 || 774.1 || 38.7 || 116.1 AT || 0.5 || 14,500 || 72.5 || 3.6 || 10.9 PL || 0.5 || 390 || 2.0 || 0.1 || 0.3 PT || 0.2 || 19,071 || 38.1 || 1.9 || 5.7 SI || 0.9 || 1,835 || 16.5 || 0.8 || 2.5 SK || 0.4 || 1,145 || 4.6 || 0.2 || 0.7 FI || 0.4 || 4,419 || 17.7 || 0.9 || 2.7 UK || 0.3 || 1,319,930 || 3,959.8 || 198.0 || 594.0 Total || || || 5,662.7 || 283.1 || 849.4 Source: OECD, Commission Services. Note: * or latest data available. Taking into account that the PensionsEurope survey, as mentioned
above, could be considered to suggest that the proposed action increases the
recurrent administrative burden in the order of 6% (see Figure E above), the potential
increase of the recurrent burden would be of the order of around €17 to 51
million a year, or 27 to 80 cents per member/beneficiary per year (see Figure
G). Even doubling the assumed rate of increase of the administrative burden due
to the proposed action from 6% to 12% is not likely to impose a
disproportionate administrative burden on the IORP industry (see Figure G). Figure G – Estimate of current and potential additional recurrent
burden from the IORP II proposal || Current recurrent burden (in € millions) || Potential recurrent burden from the IORP II proposal (in € millions) || Potential increase in the recurrent burden || || || || (in € millions) || (in € per member/beneficiary*) || || 6% of current burden || 12% of current burden || 6% of current burden || 12% of current burden || 6% of current burden || 12% of current burden Estimate of current administrative burden: 5% of operating expenses || 283.1 || 300.1 || 317.1 || 17.0 || 34.0 || 0.27 || 0.53 Estimate of current administrative burden: 15% of operating expenses || 849.4 || 900.4 || 951.3 || 51.0 || 101.9 || 0.80 || 1.59 Source: Commission Services Note: *) for 64 million pension scheme
members/beneficiaries. 2.2. One-off implementation costs There is no systematic estimate of the one-off implementation cost
of the proposed action but the Pensions Europe survey suggests that this cost
depends on national circumstances. Figure H illustrates that the indications
from the Pensions Europe survey suggest that in some MSs one-off costs are not
expected to be material (e.g. BE). This is because much of the cost was reduced
by taking proportionality into account. In other MSs the implementation costs
could be more important and the range from the Pensions Europe survey is wide.
Without taking into account the highest and lowest values (to avoid outliers),
the simple average of the one-off costs amounts to around €205,000 per IORP. Applied
to the EU as a whole - for the around 7,000 IORPs that are subject to the IORP
Directive - this suggests that the one-off cost of implementing the proposed
action could be expected to be of the order of around €1.4 billion, or, on
average, €22 per member/beneficiary. Figure H – Potential one-off implementation cost of the IORP II
proposal (full Call for Advice basis) || One-off implementation cost (€ per IORP) || IORPs with more than 7,000 members (number, 2012) || One-off implementation cost || (€ millions) || (€ per member/beneficiary***) BE || 0* || || || DE || 879,121 || || || ES || 100,196 || || || IT || 12,000 || || || UK || 500,000 || || || Simple average** || 204,065 || 7,000 || 1,428 || 22 Source: PensionsEurope (2013), Commission
Services Note: * not
material; ** excluding highest and lowest value; *** for 64 million pension
scheme members/beneficiaries.
ANNEX J – PRELIMINARY AND ILLUSTRATIVE
EXAMPLE FOR THE PENSION BENEFIT STATEMENT
[1] IORPs are generally not-for-profit institutions so
that greater investment returns are not likely to lead to lower contributions
for sponsors. [2] Although there are many IORPs each of them operate as
a quasi-monopolist because there is no competition amongst IORPs. This gives
market power to the employers and enables them to pass-on costs to employees.
The market power is somewhat limited by opt-out clauses and agreements amongst
the social partners. [3] This corresponds to half of the total recurrent
burden calculated in Annex I. The other half of the total burden is expected to
reflect the introduction of the REP (see section 5.4). [4] See footnote 35. [5] This corresponds to one-third of the expected one-off
implementation cost of the proposed action calculated in Annex I. The other two-thirds
are expected to reflect one-off implementation costs relating to the governance
functions and the REP. [6] The survey covers 13 multinationals, including
employers located in IE, FR, NL and the UK. [7] Hewitt surveyed in February 2010 14 major financial
service providers, including the largest insurance undertakings. [8] The
former is referred to as "administrative burden" whereas the letter
is referred to as "business as usual". [9]
Where every three years (=0,33); annually (=1), semi-annually (2), etc. In case
you feel like your labour costs are not linearly related to the frequency,
please comment on this in the appropriate section. [10] For
the purpose of this exercise the frequency will be set as 1. [11] Where
every three years (=0,33); annually (=1), semi-annually (2), etc. In case you
feel like your labour costs are not linearly related to the frequency, please
comment on this in the appropriate section. [12] For
the purpose of this exercise the frequency will be set as 1. [13] Where
every three years (=0,33); annually (=1), semi-annually (2), etc. In case you
feel like your labour costs are not linearly related to the frequency, please
comment on this in the appropriate section. [14] For
the purpose of this exercise the frequency will be set as 1. [15] Where
every three years (=0,33); annually (=1), semi-annually (2), etc. In case you
feel like your labour costs are not linearly related to the frequency, please
comment on this in the appropriate section. [16] For
the purpose of this exercise the frequency will be set as 1. [17] Where
every three years (=0,33); annually (=1), semi-annually (2), etc. In case you
feel like your labour costs are not linearly related to the frequency, please
comment on this in the appropriate section. [18] For
the purpose of this exercise the frequency will be set as 1. [19] Where
every three years (=0,33); annually (=1), semi-annually (2), etc. In case you
feel like your labour costs are not linearly related to the frequency, please
comment on this in the appropriate section. [20] For
the purpose of this exercise the frequency will be set as 1. [21] For
the purpose of this exercise the frequency will be set as 1. [22] For
the purpose of this exercise the frequency will be set as 1. [23] Where ISCO 1= legislators,
senior officials & managers; ISCO 2= professionals; ISCO 3= technicians and
associate professionals; ISCO 4= Clerks; ISCO 5= service workers and ISCO 9= elementary
occupations. [24] Where E= every three years; A = annually;
S=semi-annually; M=monthly