IORP II: a game-changer for trustees and employers (Sponsored)

Now that the IORP II Directive has finally been transposed into law, trustee boards must commence their journey toward compliance. Aon’s Caroline Rowan explains the details.

The Institutions for Occupational Retirement Provision II (IORP II) Directive was finally transposed into Irish law on 22 April 2021, more than two years after the 13 January 2019 deadline. The Directive will significantly impact both trustees and sponsoring employers, who will need to deal with the significant additional governance and resources required – along with increased associated costs. This may lead many sponsoring employers to consider outsourced or other alternative solutions.

While the Directive may only have been recently transposed into law, the Pensions Authority has made it very clear that preparations should already have commenced for it. It is apparent that the Pensions Authority believes that the Directive itself, and its own 2018 IORP II Considerations for Trustees paper, provide sufficient information on which to base preparations. Now the Directive has been transposed, the Pensions Authority is likely to take a dim view of any trustee board that has not started its journey towards compliance.

“The provisions of the Directive are in force now, and trustees and sponsoring employers need to prepare for it. Doing nothing is no longer an option,” says Aon’s Senior Retirement Consultant, Caroline Rowan. “IORP II is going to be a game-changer. It will fundamentally change the landscape for pensions in this country, how the industry goes about its work, how trustees and other stakeholders interact. We will see a lot of consolidation as a result, particularly among defined contribution (DC) schemes.”

The impact is not limited to DC schemes, however. “We could also see a number of defined benefit (DB) schemes being wound up,” she notes. “Certainly, sponsors of small DB schemes might consider this. The new requirements might be a step too far for them, and winding up now and moving employees to a DC master trust for future service might be the only viable option.”

But the changes should not necessarily be viewed in a negative light. “We are going to see fewer schemes that will be larger and better governed, and there will be a step up in standards overall,” says Rowan. “Pension schemes will be treated the same as corporations to a certain extent. That can’t be a bad thing, at least from a member perspective. It will be a bit of a shock to the system, of course. We have worked with the current model for a long time, and the changes will be too much for many. It will be a huge step up, and only the bigger schemes will find this relatively painless.”

Among the new requirements for pension schemes will be the appointment of qualified key function holders responsible for risk management and internal audit; a whole raft of new written policies covering areas such as remuneration, outsourcing, risk management, internal controls, fitness and probity, and administration; and new communications obligations in terms of benefit statements, ESG information, charges and performance, and the public disclosure of documents such as the remuneration policy.

Aon is working with clients to assist them in their preparations. “We are taking a very structured approach to assist clients in achieving compliance,” Rowan explains. “We have developed a methodology based on a four-step framework, which takes clients through discovery, development, delivery and review stages.

“It starts with the discovery piece,” she continues. “We have been working with some clients on this since last year. It involves a gap analysis to establish what areas need to be addressed. This is a key component of any preparation strategy. The next is to agree on a pathway forward and develop a project plan based on that.”

She points out that trustees will need to formally document how their scheme operates in the areas of risk and governance, and this is the focus of Aon’s development stage. “We are producing a suite of written policies for clients to help them with compliance, and these will be available by the end of the year.”

Another requirement is for governance to be tailored to meet the particular circumstances of the scheme. “The Pensions Authority says it doesn’t want to see boilerplate templates. The starting point can be the same, but the governance framework must be designed to serve the best interests of the scheme’s members.”

The next stage is delivery. This sees the completion of the development of the policies, charters and risk management system, the identification of the key function holders, and the launch of the new disclosure documents.

“Review is the final piece. We put in place a system for regular reporting and review of the delivery against project objectives and timelines.” In addition, a calendar system is created for regular review of policies, service providers and so on.

This framework will help companies comply with the new requirements, but that won’t be possible for all cases. “There are some obligations that many trustees and sponsoring employers won’t be able to take on. We have a master trust solution, The Aon Ireland MasterTrust, for defined contribution schemes. Master trusts are a great alternative for those DC schemes that will find the new requirements too great for them. DB schemes are a little trickier, however. Scheme merger activity is likely to increase as employers with multiple DB arrangements in Ireland seek to consolidate and avoid implementing the new requirements across multiple arrangements. Larger multinational firms may also have an option to move to a cross-border multi-employer vehicle, such as Aon’s United Pensions.”

But that switch to a cross-border vehicle may not be a straightforward process due to other changes brought in by the Directive. “The prior consent of the Pensions Authority is now required for schemes leaving Ireland instead of the sole approval of the receiving regulatory authority,” she points out. There is also a requirement for the trustees to have obtained prior approval for the transfer by a majority of members and beneficiaries before it can happen, but will it be separate majorities from each group? And what does majority mean? Will the absence of responses from members be considered passive approval?”

Another important change is the Pension Authority’s acquisition of new oversight powers. “The Pensions Authority has more teeth and will have the power to conduct supervisory reviews, and we are keen to see what the form and frequency of these reviews will be. They will also be able to issue advisory notices to compel trustees to take certain actions if they think that schemes are not complying or are at risk of not complying with the new provisions. Trustees will have to be forward-looking in their approach to governance and risk management. It is not enough to simply meet the compliance requirements; schemes must demonstrate how they comply today and how they will continue to comply.”

Looking ahead, Rowan hopes for increased clarity from the Pension Authority on how it expects schemes to meet the new requirements over the coming months. “We now have IORP II regulations in Ireland, which is great as we’ve been waiting a long time for them. However, we now need to understand the expectations of the Pensions Authority in terms of how it envisages schemes complying with the new requirements in a practical sense. The Codes of Practice, which are due to be finalised in November, are the last piece of the puzzle.”

Aon Solutions Ireland Limited, trading as Aon, is a private company limited by shares. It is authorised as an investment firm by the Central Bank of Ireland under the European Union (Markets in Financial Instruments) Regulations 2017 and as an intermediary under the European Union (Insurance Distribution) Regulations 2018. It is also a Registered Administrator with the Irish Pensions Authority.

For further information, please contact Caroline Rowan, Senior Consultant, Aon, at caroline.rowan@aon.com.

(This article is sponsored by Aon.)