The new EU Pensions Directive

A new European Pensions Directive (the Directive) came into force in January 2017. As with much of the recent financial sector legislation to emerge from the financial crisis of 2008, the Directive aims to improve governance and accountability in relation to workplace pensions.

A new European Pensions Directive (the Directive) came into force in January 2017. As with much of the recent financial sector legislation to emerge from the financial crisis of 2008, the Directive aims to improve governance and accountability in relation to workplace pensions.

Key points

  • Many of the new Directive’s provisions are aimed at better protecting the benefits of members and beneficiaries.
  • The rules for schemes operating cross-border have been tweaked, with a view to reducing barriers to cross-border activity.
  • The Directive does not include solvency measures for pension schemes, but we may not yet have heard the last of such proposals.
  • EU Member States have until 13 January 2019 to incorporate the Directive into national legislation.


The original Pensions Directive (also known as “IORP I”) introduced a number of new rules for “IORPs” (broadly, occupational pension schemes).

The latest Directive (also referred to as “IORP II”) was nearly three years in the making, with the EU Commission’s initial proposal for a new Directive having been published in March 2014.

Information requirements

One of the EU Commission’s main aims is to introduce clearer and more consistent member communications across EU Member States.

Aimed at both defined benefit (DB) and defined contribution (DC) schemes, the new “Pension Benefit Statement” will require standard key information to be given to each member, such as a benefit projection using standard assumptions.

Investment related changes

Environmental, social and governance (ESG) factors are firmly on the agenda in the Directive, as IORP II builds on the requirement for IORPs to invest in accordance with the “prudent person” principle. There will be a new obligation on Member States to “allow IORPs to take into account the potential long-term impact of investment decisions on environmental, social and governance factors”. Trustees’ investment decision making processes will also need to build in ESG factors and a scheme’s Statement of Investment Principles will need to state how the investment policy takes ESG factors into account.

Member States will have discretion (not an obligation as originally planned) as to whether to require DC schemes to appoint a depositary (custodian), with responsibilities that include the safekeeping of assets and oversight duties. However, if a custodian is not appointed, a scheme will need to make arrangements “to prevent and resolve any conflict of interest in the course of tasks otherwise performed by a depositary and an asset manager”.

Cross-border pensions

The Commission remains keen to encourage cross-border pension provision – a key aim of IORP I which, to date, has not been realised in any meaningful way.


Cross-border transfers of pension scheme assets and liabilities will be permitted (in whole or in part) provided that the costs are not passed on to the members and beneficiaries remaining in the transferring scheme, or those in the receiving scheme.

Such transfers will be subject to the prior approval of a majority of the transferring scheme’s members and beneficiaries (or, where applicable, their representatives) and that of the sponsoring employer (where applicable). They will also need the prior consent of the transferring scheme’s regulator, and must be authorised by the receiving scheme’s regulator. There will be a number of safety checks as part of the cross-border transfer process.

The “fully funded” requirement

The obligation for schemes operating cross-border to be fully funded at all times has always been contentious and one of the bigger obstacles to cross-border activity. It was therefore no surprise that the issue inspired much debate as the Directive was negotiated. The new provision which has emerged is therefore slightly more flexible, allowing schemes that operate cross-border to have a deficit and put a recovery plan in pace for a limited period, subject to regulatory supervision.


The Directive places much emphasis on improving governance and transparency in pension schemes. Overall, schemes will be required to have a proportionate, effective system of governance in place which provides for “sound and prudent management of their activities”. Risk assessment is an important element of the Directive’s governance focus, with the introduction of a requirement for an “own risk assessment”, under which schemes will need to identify long and short-term risks that could affect the scheme’s ability to meet its obligations.

The “fit and proper” test

Collectively, trustees will need to have suitable qualifications, knowledge and experience to enable them to carry out their role. There is not, as originally feared, any requirement for trustees to hold a professional qualification.

Remuneration policy

Schemes will need to establish and apply a “sound remuneration policy” for all those effectively involved in running a scheme, those who perform “key functions” (see below), and for “other categories of staff whose professional activities have a material impact on the risk profile of the IORP”. The policy will need to be publicly disclosed and reviewed every three years.

Key functions

A new concept of “key functions” is introduced in relation to risk management, internal audit and actuarial functions. Apart from the internal audit function (for which the person responsible must be independent), the key functions may be carried out by a single person or organisation. However, generally speaking, the person carrying out a key function cannot be performing a similar role for the sponsoring employer. But there is scope for exceptions, where the management of conflicts of interest is explained.

The common framework balance sheet

Part way through negotiations on the Directive, the proposed introduction of quantitative capital requirements for schemes was shelved. The Directive’s text now explicitly states that the further development of solvency models “is not realistic in practical terms and not effective in terms of costs and benefits, particularly given the diversity of IORPs within and across Member States”.

That said, with EIOPA still carrying out work on its “own initiative” on a “Common Framework for Risk Assessment and Transparency for IORPs” – a tool with the aim of enhancing risk assessment and transparency – it remains to be seen whether this element has been shelved for good.

Next steps

Member States have two years to bring the Directive’s provisions into national legislation. Click on the links below to see what various countries are planning: 

United Kingdom


Country perspective: Belgium

Belgium implemented IORP I with the IORP Act of 27 October 2006.  The IORP Act introduced a new and flexible legal framework for pension schemes. Belgium also granted domestic IORPs an attractive tax regime, in an attempt to promote itself as the prime location for pan-European pension schemes. In accordance with the prudent person principle, the IORP Act sets qualitative rather than quantitative rules, both for the determination of a scheme’s technical provisions and for the selection of its investments. IORP II does not require particular modifications of this qualitative approach since it does not include harmonised or additional solvency rules.

In 2007 the Belgian Pensions Regulator (FSMA) issued a circular on pension scheme governance. The governance requirements issued by the FSMA are broadly equivalent those imposed by IORP II, although they will need to be adapted slightly and incorporated in the Act.  The internal audit function and the actuarial function (for DB schemes) are not new for Belgian IORPs.  The risk management function is, however, a new key function.  It remains to be seen if, and to what extent, the function, role and responsibilities of the compliance officer (responsible for compliance with applicable legislation, regulations and the IORP’s governing documentation) will be reconciled with the function, role and responsibilities of the risk management function.

Some aspects of the “own risk assessment exercise” are already covered by the annual reporting of Belgian IORPs to FSMA and FSMA’s governance expectations (which require, for example, an identification of operational and investment risks). The concept of a structured triennial risk assessment exercise is, however, new. Some elements of the IORP II risk assessment (e.g. benefit reduction / indexation risk) are less relevant for Belgian schemes, and will generally only apply to pan-European schemes managing cross‑border annuity schemes that allow for benefit reduction.

The IORP Act does not specify rules on cross-border transfers of pension assets and liabilities. The rules for employee involvement / consent in the event of transfers (for schemes governed by Belgian social and labour law) are currently laid down in the social (and not the prudential) legislation on occupational pensions. The IORP II rules on cross-border transfers could therefore not only require a modification of the IORP Act, but also of the Act on Occupational Pensions (AOP), in order to align outgoing cross-border transfers with the IORP II procedures.  

The same applies to the transparency requirements and communication with members (including prospective members) and beneficiaries. Most of these provisions are currently laid down in the AOP, and therefore only apply to schemes that are subject to Belgian social and labour law. The information requirements for prospective and retired members imposed by IORP II are less relevant for these schemes, since employees are generally automatically enrolled upon entry into service and most plans provide for the payment of a lump sum instead of annuities upon retirement.


Country perspective: Cyprus

The current law in Cyprus regulating occupational pension schemes is the Establishment, Activities and Supervision of Institutions of Occupational Retirement Provisions Law of 2012 which largely reflects IORP I. Secondary legislation (Κ.Δ.Π. 204/2014) was adopted on 15 April 2014 which introduced, among others, regulatory provisions requiring more information to be provided to scheme members and beneficiaries, including some of the new IORP II requirements. New legislation will still be needed in Cyprus to deal with the information rights of prospective members and scheme members in their pre-retirement phase. Although there is already a requirement for information to be given to members at the end of each year, the current provisions will need to be modified to better reflect the new Pension Benefit Statement requirements of IORP II. In light of the size of schemes in Cyprus, it seems likely that the obligation to produce this information, free of charge, will be an administrative challenge for schemes.

The new cross-border transfer provisions of IORP II should be welcomed and adopted as they create a regulatory framework which does not currently exist under national law. This will offer clarity and certainty to all interested parties. In practice, the consent of both members and sponsors is already sought in practice, prior to any transfer taking place, and as such will not be new to the Cypriot Regulator.

The enhanced governance provisions of IORP II, including the introduction of requirements to keep a remuneration policy or own risk assessment, the separation of the key functions of risk management, internal audit (which should be independent) and actuarial functions, and the requirement that the persons undertaking such functions cannot be the same as the persons undertaking the same role in the sponsoring undertaking, will have an impact on most pension schemes in Cyprus and on the existing legislation, which does not currently contain similar provisions. As many schemes in Cyprus currently use their sponsor’s staff to meet their operational needs (due to their small size), it is to be expected that such schemes will try to take advantage of the exception offered under IORP II in connection with this matter in an effort to reduce cost.    

Lastly, the introduction of a number of new important and more “sophisticated” features, and the widening of the scope of the prudential supervision by competent authorities under IORP II, is likely to be a challenge for the Cypriot Regulator, which will need to be supported with additional expert personnel and/or change its current structure, in order to be able to effectively perform the supervisory review powers and to exercise all the duties and responsibilities given to it under IORP II, in order to fulfil the aims of the revised regulatory framework.


Country perspective: Greece

A general principle of IORP II is that, where relevant, IORPs shall take into account the aim of having an equitable spread of risks and benefits between generations.

This will certainly create some interesting questions in Greece and could be a significant factor for the Greek legislator in reviewing pension schemes’ activities.

As IORPs can manage collective schemes for employers that provide retirement benefits for their employees, IORP II is expected to strengthen their role in Greece as institutional investors, and help channel long-term savings to growth-enhancing investment.

Moreover, due to the fact that the Greek legislator adopted legislation which elaborates and clarifies both the letter and spirit of IORP I, the new Pensions Directive is expected to promote occupational insurance and enhance its role, compared with public and/or private insurance. 

Undoubtedly, one of the key changes in IORP II is the more prescriptive requirements on the governance of occupational pension schemes. While it is widely believed that these changes have been introduced, mainly because of the divergence in scheme governance policies across the EU, these may prove particularly challenging in Greece, where governance is not adequately regulated.

Finally, each IORP will be required to have in place an effective system of governance, which provides for the sound and prudent management of their activities. IORPs will be required, for example, to have in place written policies on risk management, internal audit and actuarial and outsourced activities; and to carry out a risk assessment at least every three years. While it is evident that many professional trustees will already have such policies in place, it is highly likely that there will be a lot of trustee boards in Greece whose existing procedures will not cover all of these areas.


Country perspective: Ireland

To date, there has been very little official reaction in Ireland to IORP II and no indication yet as to when it will be implemented here.  In the case of IORP I, the amendments to the Pensions Act and new supporting Regulations were not commenced until 21 September 2005, two days before the implementation period expired. 

For the past number of years, to combat historically low numbers of employees paying into pension schemes, the Irish Government has been considering the introduction of an auto-enrolment system.  Although there is no indication yet as to when this is likely to be introduced, the expectation is that there will be a considerable reduction in Irish pension schemes from the 67,000 currently registered here.

The sheer number of pension schemes is likely to come into sharp focus with the increased governance and risk requirements which are likely to be introduced.  Although the Pensions Authority has recently introduced new governance guidelines for defined contribution schemes, it remains to be seen whether these will need to be adjusted for IORP II.  The requirement to have a depository is also a departure for Irish schemes where this has tended to be optional.  

The requirement to provide annual benefit statements to deferred members will present considerable challenges in Ireland, which does not have a scheme tracing service.  It remains to be seen whether the Irish Government opts to establish one or whether the onus will be on employers and/or the Pensions Authority to maintain address records.

Ireland has a large proportion of the EU's cross-border schemes, many of them relating to the UK, with whom it shares a land border.  Of particular note for DB cross-border schemes will be the new rules on funding and in particular the use of recovery plans and limited periods for recovery.  Ireland already permits cross-border schemes to use recovery plans, often for extended periods of time.  It also permits the Pensions Authority to direct that the benefits of members (including those in receipt of pensions) can be reduced by up to 20% where there is a scheme deficit. 

It will be interesting to see whether the amendments introduced by IORP II are regarded as sufficiently broad so as to encompass Ireland's existing funding regime.


Country perspective: Netherlands

According to Dutch government, the impact of the IORP II Directive on existing pensions legislation will be limited. The government is preparing an action plan, expected in spring 2017, to bring Dutch legislation into line with the new Directive. The main focus will be on cross-border transfers, information requirements and the requirement to have in place an internal audit function.  

A cross-border transfer, in the sense of article 12 of the Directive, qualifies as a collective transfer under the Dutch Pensions Act. The Pensions Act already provides certain requirements for collective transfers, which apply equally to domestic and cross-border transfers. On such occasions, the accountability council (“Verantwoordingsorgaan”) has the right to advice. Individual members and beneficiaries can object to a collective transfer (unless the transferring pension institution is in liquidation). Individuals remain in the old scheme if they explicitly object to the transfer

Article 12 of the Directive requires prior approval for cross-border transfers by the majority of the members and beneficiaries concerned (or their representatives). Evidence of such prior approval must be sent to the competent authority as part of the application for authorisation of the transfer. Does this leave room for the Dutch legislator to opt for implied consent (as now) for cross-border transfers or does it imply that an explicit, prior, approval is required? And who would represent the members and beneficiaries of the IORP? Potentially, this could be the works council, the unions, or even perhaps the accountability council.  

Also interesting in relation to implementation of the Directive, is whether or not the IORP II requirements will apply only to cross-border transfers, or also to domestic collective transfers. While Article 12 refers to “cross-border transfers”, differentiating between cross-border and domestic transfers may lead to an obstruction of free movement, especially if a cross-border transfer is indeed subject to explicit prior approval from members and beneficiaries.

The information requirements may provide another hiccup for the Dutch implementation process. The Pensions Act has been thoroughly revised recently, introducing extensive rules for communication. Under these new rules, the pension provider is no longer obliged to provide pension benefit projections in the annual pension benefit statement (or UPO). This information can be found in the Pension Register, a digital platform. How the Directive will affect the new legislation in this regard is not yet clear.

The Directive further requires that IORPs have an effective internal audit function, “in a manner that is proportionate to their size and internal organisation, as well as to the size, nature, scale and complexity of their activities”. The internal audit function (currently not yet required for Dutch pension funds) is considered a key function that, due to the requirement for independence, cannot be combined with another key function within the IORP. Perhaps the Netherlands and Belgium can compare notes regarding implementation of the key functions, as the Belgians are already familiar with the internal audit function, whilst the Dutch, in ,turn already have experience of risk management functions for pension funds. 


Country perspective: United Kingdom

With the Directive’s implementation period running slightly ahead of, but largely in parallel to, the UK’s Brexit negotiations, it is not yet clear how (if at all) its provisions will be introduced into UK law. However, until the UK actually exits the EU, it remains under an obligation to do so.

IORP I was implemented in the UK through the Pensions Act 2004. The then new rules included the statutory funding objective and enhanced supervisory powers for the new Pensions Regulator, from 6 April 2005.

Whilst some of the new governance provisions are already catered for in existing UK legislation, for example the requirement for schemes to make available their annual report and accounts, others are new or likely to require some tinkering with existing provisions.

By way of example, the existing requirement for pension scheme trustees to have knowledge and understanding of the law relating to pensions and trusts and the principles relating to funding and investment, as well as being conversant with their scheme’s documentation and policies (“the TKU requirements”), already address the fit and proper requirements of the Directive to some extent. Following a 2016 consultation on 21st century trusteeship and governance by the UK Pensions Regulator, this issue is already clearly on the radar.

The new Pension Benefit Statement requirements are less prescriptive than the original proposals, something which was warmly welcomed by those involved in UK pensions. However, the new requirements could prove more onerous in some respects than those which currently apply in the UK.

Given work in recent years by the UK Government and the Pensions Regulator to improve standards of governance, particularly in the DC sphere, many of the Directive’s requirements are already covered, at least to some extent, by existing UK pensions legislation.

Whilst we wait to learn how (and if) the UK Government will implement provisions not already established in UK law, there are no immediate actions for trustees or employers, except to maintain a watching brief.

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