The EU’s IORP II Directive is drastically changing the landscape of pension plan management and trustees. But what are the changes, and what are the impacts of these regulations? Munro O’Dwyer dives in.
The IORP II Directive (IORP II) is reshaping the management of pension plans and represents a perfect opportunity for employers to challenge the status quo.
Employers are rethinking how they can deliver a quality pension plan that makes a real impact for employees with a focus on design, performance and support.
The status quo
The management of pension plans involves time, resources and money. The ultimate responsibility lies with the trustees, whose fiduciary duty is to act in the interests of the pension scheme members. Employers, as sponsors, will nevertheless have a vested interest in the overall management of the plan and the appointed service providers.
In an IORP II world, we will see the need for more trustee and subcommittee meetings, newly established risk and internal audit functions, own risk assessments, assessments of fitness and probity, and a comprehensive suite of policies and procedures that must be maintained. Employers must also factor in the additional time needed to prepare for supervision and/or intervention by the Pensions Authority as it rolls out its inspections.
The additional level of work—and possibly cost—required to coordinate these services should not be underestimated. This cost will be borne on top of the usual annual compliance costs that come with benefit statements, the trustees' annual report and accounts, audit and European Central Bank (ECB) reporting, for example.
This begs the question: could an alternative approach to managing pension plans be at least as, if not more, effective? Employers deciding to transition to a master trust see the change as a means to revisit their pension governance model.
A new (and improved?) governance model
So, what would pension plan management look like in a model where all the regulatory burden is dealt with by a master trust? In brief, very different.
Let's consider some of the key differences:
1. Outsourced regulatory compliance
This is fully outsourced to the master trust trustee board, which is supported by advisors from the master trust founder. The trustees will oversee compliance, and the Pensions Authority will look to regulate master trusts closely as they continue to scale.
2. Reduced regulatory workload
There would be an immediately reduced workload as services are bundled through the master trust.
For example, there would no longer be a requirement to produce an audited trustee annual report and accounts. Nor would there be ECB reporting requirements or a need to appoint key function holders – all of which would be addressed by the master trust.
3. Monitoring and oversight
This takes on a new light as a newly established pension committee can focus on the performance of the pension arrangement and the benefit it is delivering for employees and pension scheme members. Employers can spend time creating a pension proposition for staff and ensuring that the master trust remains market-competitive.
4. Clear separation
In a master trust framework, there can be a greater division between those providing the advice and those providing the solution. This avoids potential conflicts of interest and allows for a more independent monitoring framework, which can be created through an employer-established, non-statutory pension committee.
The reduced regulatory workload allows for the time invested in supporting pension provision to be focused on the employee experience – ensuring that communication programmes are tailored, that engagement levels are high and that the pension arrangements are delivering the outcomes expected.
There is now an opportunity for employers to challenge the status quo and rethink how their pension plans will be managed. In doing so, it could bring about positive change for all stakeholders.
Munro O'Dwyer is Pensions Partner at PwC.