In fact, given that the UK is obliged to implement new EU legislation as long as it remains an EU member state, and given that the Brexit process looks unlikely to move quickly, the PLSA’s advice to pension schemes is to get to grips with the new directive’s requirements in case they have to follow them at some point.

In a nutshell, IORP II sets out extensive new requirements on good governance and risk management within pension schemes, plus provisions on clear communications to members and the removal of barriers to crossborder schemes. The good news is that a solvency-based funding regime for defined benefit pension schemes was very strongly ruled out even before the start of the process. 

IORP II is expected to come into force in late 2016, after a vote in the European Parliament. Member states will then have two years to implement the law. Observant readers will already have done the sums on how this squares with the Article 50 process.

Cross-border schemes

One of the most interesting new provisions is a significant and welcome outcome in the long-running battle over funding of cross-border schemes. Article 15.3 of the new directive still requires these to be fully funded at all times, but the text now continues: “If this condition is not met, the competent authority of the home member state shall promptly intervene and require the IORP to immediately draw up appropriate measures and implement them without delay in a way that members and beneficiaries are adequately protected”. 

The text still requires full funding at all times for cross-border schemes, but it also allows them to have deficits and put recovery plans in place. Although the wording is an awkward compromise, the outcome is, in practice, a major improvement on what went before

Fit and proper management

As long expected, the new Article 23 on fit and proper management says the requirement for professional qualifications only applies to those who carry out actuarial or internal audit functions. Other persons with key functions, such as trustees, are not subject to the professional rule. This protection for lay trustees was a major lobbying victory by the PLSA and its allies.

The new Own Risk Assessment will have to be compiled by schemes at least every three years or following any significant change to the scheme’s risk profile. This will cover the scheme’s risks, conflicts of interest and ESG factors.

Cross-border beneficiaries 

Throughout the negotiation process the PLSA had been concerned that the wording of the new directive would see schemes deemed cross-border simply by virtue of having beneficiaries (as opposed to active members) in another member state. 

This would have turned any scheme with pensioners in Spain or another EU country into a cross-border scheme. Recital 5c now states clearly that IORPs will not become cross-border simply because they have beneficiaries in another member state. 

Depositories A further victory for common sense can be seen in Article 35, which now says member states “may” require DC schemes to appoint a depository to oversee and safeguard assets. So it will be up to member states to decide whether to require DC schemes to appoint a depository. If equivalent protections are already in place, then Article 35 can be waived. 

IORP II and Brexit 

As with any EU issue, the referendum outcome is a major factor. Strictly speaking, the UK will be obliged to work towards implementation of IORP II as long as we remain a member of the EU. In practice, it is difficult to see the UK making this much of a priority when we are edging towards the exit door – especially as the deadline for final implementation of IORP II might fall a matter of weeks or months before departure. 

For all these reasons, the PLSA’s best guess is that the status of IORP II in the UK will – at some point – become one of the many loose ends to be resolved in the Article 50 exit negotiations. In the meantime, the sensible course is to get abreast of the new requirements and monitor events.