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FINANCIAL INSTITUTIONS
Insurance and Pensions
30.03.2011
Commission européenne, B-1049 Bruxelles / Europese Commissie, B-1049 Brussel - Belgium. Telephone: (32-2) 299 11 11.
http://ec.europa.eu/internal_market/
TABLE OF CONTENTS
1. INTRODUCTION ....................................................................................................... 3
ANNEX
2
1. INTRODUCTION
1.2. This Call for Advice (CfA) seeks to obtain advice from the European
Insurance and Occupational Pensions Authority (EIOPA) on how to improve
the IORP Directive. The Commission has foreseen a review of the IORP
Directive for three main reasons. First, there are currently less than 80 IORPs
operating across different Member States, which represents a very small
proportion of the around 140,000 IORPs existing in the EU. The
Commission intends to propose measures that simplify the legal, regulatory
and administrative requirements for setting-up cross-border pension
schemes. Employers, IORPs and employees should be able to reap the full
benefits of the Single Market. Second, the recent economic and financial
crisis has forcefully demonstrated the need for risk-based supervision. This is
the case already for IORPs in some Member States, but not at the EU level.
Building on the know-how and technology existing in Member States, the
Commission intends to propose measures that would allow IORPs to benefit
from the risk-mitigating security mechanisms at their disposal. Third, while
not very prevalent at the time of adopting the IORP Directive in 2003, today
nearly 60 million Europeans rely on a defined contribution (DC) scheme for
an adequate retirement income. DC schemes shift the risks – in particular
market risk, longevity risk or inflation risk – to individual households.
International discussions have shown that this raises important new policy
issues. The Commission therefore seeks advice on how to modernise
prudential regulation for IORPs that operate DC schemes.
3
on 16 March 2009.1 This was followed-up by a Public Hearing on 27 May
2009.2
1.5. Given the importance of pensions for the citizens in an ageing Europe, the
Commission subsequently decided to integrate issues relating to the solvency
rules for IORPs into the much broader consultation launched by the
Commission's July 2010 Green Paper on pensions.3 This decision was taken
to ensure that the regulation of the activities and the supervision of IORPs
are consistent with the overall economic, fiscal and social policy. The main
aim of public policy in the area of pensions is to ensure the sustainability of
public finances and an adequate retirement income. The Green Paper
consultation confirmed that completing the Single Market for occupational
retirement provision can make a significant contribution towards these
objectives. The Single Market can reduce the cost of financing pensions by
allowing for further efficiency gains through scale economies, innovation
and diversification. It can also enhance the safety of pension schemes
through effective and intelligent regulation. The best way for the Single
Market to support fiscal sustainability and pension adequacy is through the
facilitation of cross-border activity and the development of risk-based
supervision.
1.6. The European Parliament adopted its Report on the Green Paper on 16
February 2011. The Commission Services published a summary of all the
responses on 7 March 2011.4
1.7. The EIOPA advice should cover all the types of schemes operated by IORPs,
ranging from pure defined benefit (DB) schemes to pure defined contribution
(DC) schemes. A description of this spectrum of pension schemes is
contained in the EIOPA report on risk management.5 Pension schemes with a
minimum guarantee for the contributions paid and/or of the investment
returns are, depending on the Member States, considered to be DC, hybrid or
DB schemes.
1.8. This CfA has been informed by the significant work undertaken by the
EIOPA Occupational Pensions Committee (OPC) in support of supervisory
convergence since its creation in February 2004.
1.9. Against this background – and following the consultation of the Member
States through the European Insurance and Pensions Committee (EIOPC) in
March 2011 - the Commission Services request EIOPA to advise on the
1
http://ec.europa.eu/internal_market/consultations/docs/occupational_retirement_provision/feedback_state
ment_en.pdf
2
http://ec.europa.eu/internal_market/pensions/docs/hearing052009/summary_IORP_public_hearing_en.pdf
3
Green Paper - towards adequate, sustainable and safe European pension systems (COM(2010)365
final), 7.7.2010
4
http://ec.europa.eu/social/main.jsp?catId=700&langId=en&consultId=3&visib=0&furtherConsult=yes
5
Report on risk management rules applicable to IORPs (CEIOPS-OP-22-09), 6.11.2009.
4
further development of EU legislation for the activities and supervision of
IORPs, in line with the mandate set out in this CfA. The remainder of this
CfA is structured as follows. Section 2 relates to the scope of the IORP
Directive. Section 3 focuses on the facilitation of cross-border activity.
Section 4 provides guidance for the main features for the risk-based
supervision of pension funds. Section 5 outlines specific features to manage
and supervise risks in pure DC schemes. Section 6 provides guidance for a
quantitative impact study and data related issues. Finally, Section 7 provides
further guidance on the reporting modalities and the deadline.
1.10. The Annex of this CfA sets out more detailed guidance and specific
instructions. It seeks to contribute to the EIOPA advice in two ways. First, it
provides for each topic detailed information about the current provisions in
the IORP Directive and, where relevant, the corresponding articles in
Directive 2009/138/EC (Solvency II). Second, it makes reference to the main
reports prepared by the EIOPA Occupational Pensions Committee (OPC)
over the past years.
2.1. The IORP Directive deals only with occupational retirement provision.
However, not all occupational pension schemes are covered. Occupational
retirement provision, operating on a funded basis, is delivered through
different financing vehicles and under different legal regimes in Member
States. As regards book reserve schemes, it should be noted that Article 8 of
Directive 2008/94/EC requires Member States to protect employees’ rights,
in particular outstanding supplementary occupational pension claims, in the
event of the insolvency of their employer. Following the Green Paper
consultation, the Commission is currently assessing the need to review this
directive.
2.2. DC schemes existing in some Member States either do not fall under any EU
prudential regulation or Member States have chosen to subject them to
national legislation that is inspired from the provisions of EU prudential
regulation for similar financial products (e.g. the IORP Directive itself or the
UCITS Directive). The advice should include an assessment of the
provisions in the IORP Directive that could be extended to occupational DC
schemes that are currently not covered.
3.1. The main purpose of the IORP Directive is to enable an employer in one
Member State to sponsor an IORP located in another Member State. The
legal definition of cross-border activity should be clear in this respect.
3.2. The IORP Directive provides that, in general terms, IORPs are subject to the
prudential supervision of the competent authorities from the home Member
State, while the social and labour law (SLL) of the host Member State is
applicable in this respect. The distinction between prudential legislation and
SLL should be clear and as consistent as possible across Member States.
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3.3. Even though the IORP Directive does not contain a definition of the term
ring-fencing, it refers to this concept at various instances. Legal clarity of
the concept at the EU level may enhance the effectiveness of ring-fencing
measures in protecting pension benefits in the case of cross-border activity of
IORPs and in stressed situations.
4.1. The supervisory system should provide supervisors with the appropriate
tools and powers to assess the overall financial position of an IORP based on
an economic risk-based approach. The aim is to reflect the true risk
position of the IORP. The supervisory system should not only consist of
quantitative elements, but also cover qualitative aspects that influence the
risk-standing of the institution (managerial capacity, internal risk control and
risk monitoring processes, etc.).
4.2. The supervisory system should be designed in a way that encourages and
gives an incentive to the supervised institutions to measure and properly
manage their risks. In this regard, common EU principles on risk
management and supervisory review should be developed. Furthermore, the
supervisory requirements should cover the quantifiable risks to which a
supervised institution is exposed.
4.3. The supervisory system should be able to allow for interactions between
quantitative and qualitative supervision, as well as with the role of
disclosure. It should therefore be based on three pillars:
4.4. EIOPA's advice on the future regulation for IORPs should be provided on the
basis of the particular characteristics of occupational pension schemes in the
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EU. The aim of the Commission is to develop a sui generis risk-based
supervisory system for IORPs. EIOPA should therefore take the IORP
Directive as the starting point for the development of its advice. This
notwithstanding, the EIOPA advice should also endeavour to maintain
consistency across financial sectors. Pension schemes and pension products
containing similar risks should be subject to similar regulatory requirements.
The new supervisory system for IORPs should be constructed in a way that
avoids regulatory arbitrage between and within financial sectors.
Accordingly, the general layout of the supervisory system should, to the
extent necessary and possible, be compatible with the approach and rules
used for the supervision of life assurance undertakings subject to Directive
2009/138/EC (Solvency II). When reference is made to this directive, the
EIOPA advice should however carefully take into account lessons learnt
from the European regulatory discussions that took place after the adoption
of this directive in 2009. This relates, in particular, to the illiquidity risk
premium in the discount rate, to the need to better reflect long-term
guarantees and to possible simplifications.
(a) The valuation of assets, technical provisions and other liabilities of the
IORP should be market-consistent and based on sound economic
principles.
(c) In addition, Article 15(6) of the IORP Directive provides that "[w]ith a
view to further harmonisation of the rules regarding the calculation of
technical provisions which may be justified - in particular the interest
rates and other assumptions influencing the level of technical provisions
- the Commission, drawing on advice from EIOPA, shall, every 2 years
or at the request of a Member State, issue a report on the situation
concerning the development in cross-border activities." The advice from
EIOPA should therefore also support the Commission in its assessment
as to whether it "shall propose any necessary measures to prevent
possible distortions caused by different levels of interest rates and to
protect the interest of beneficiaries and members of any scheme."
(d) An IORP that itself, and not the sponsoring undertaking, underwrites
the liability to cover against biometric risk, or guarantees a given
investment performance or a given level of benefits, remains subject to
own fund requirements. The new supervisory system should provide
for a Solvency Capital Requirement (SCR) and a Minimum Capital
Requirement (MCR).
7
(e) The amount of own funds eligible to cover the SCR and MCR should
be determined on the basis of three criteria: availability, classification
and eligibility.
(f) The SCR reflects a level of capital that enables an institution to absorb
significant unforeseen losses and that gives reasonable assurance to
members/beneficiaries. The SCR should be calculated in such a way
that the quantifiable risks to which an institution is exposed are taken
into account and based on the amount of economic capital
corresponding to a specific ruin probability and time horizon. The
appropriate ruin probability and time horizon to be used and the
implications for the calculation of the SCR on a going-concern basis
require analysis. The EIOPA advice should consider a suitable
calibration, including a Value at Risk measure with a 99.5% confidence
level over a one year period, that is consistent with the nature of IORPs.
(g) The technical provisions and/or own fund requirements should take into
account additional risk-mitigating security mechanisms for pension
schemes. In particular, on the liabilities side, pension funds may have
the possibility to call on additional contributions from members and/or
sponsors, reduce or suppress the indexation of pension rights or reduce
the pension liabilities (i.e. the technical provisions themselves) in going
concern. On the asset side pension funds may have recourse to sponsor
covenants, contingent assets outside the balance sheet of the IORP, or to
reinsurance from a pension guarantee fund.
(h) The risks addressed in the capital requirements should include at least
underwriting risk, market risk, counterparty default risk and
operational risk. To the extent that these risks are not quantifiable they
will be taken into account in Pillar 2.
(i) The standard approach to calculate the SCR shall be to add the
following three items: a basic SCR, a capital requirement for
operational risk and an adjustment for the loss-absorbing capacity of
technical provisions and deferred taxes.
(k) The MCR reflects a level of capital below which ultimate supervisory
action would be triggered. It is calculated in a more simple and robust
manner than the SCR as this kind of action may need authorisation by
national courts. The MCR shall be contained within an interval of 25%
to 45% of the institution's SCR.
8
(l) Technical provisions should be fully funded. When the amount of assets
no longer covers the amount of technical provisions, or when the own
fund requirements are no longer met, IORPs should set up concrete and
realisable recovery plans. The recovery periods should be consistent
across Member States and prudentially sound.
5.1. Specific attention should be paid to defined contribution (DC) schemes that
do not offer a principal and/or investment guarantee. These schemes have
become much more prevalent in the EU since the adoption of the IORP
Directive in 2003. It is important to consider whether the IORP Directive
needs to be adjusted to better address the specific needs for the regulation
and supervision of DC schemes.
5.3. Although relevant to all types of pension schemes, the areas where DC
schemes may require particular attention include at least the following:
– Investment risk and in particular liquidity risk, i.e. the risk that
investments could be insufficiently liquid to meet requirements to
pay out balances or benefits to members without incurring
avoidable losses. Regulation should ensure that the risk
management system of the pension fund is adequately structured
and well supervised (see risk management in the Annex);
– Costs: Regulation should ensure that costs and fees are disclosed
fully and transparently (see information to members/beneficiaries
in the Annex). Other possible approaches to deal with high costs
include an "unreasonable test", capping fees, requiring competitive
bidding and centralisation (clearinghouses).
6.1. EIOPA is also requested to run a Quantitative Impact Study (QIS) and
provide related data with a view to informing the impact assessment analysis
that will accompany the Commission's proposals to review the IORP
Directive.
6.2. The timetable for the QIS exercise is challenging. EIOPA may therefore wish
to focus on the impact of its advice on particular Member States and use, as
far as possible, approximations based on existing data. Simplifications
should be used when they are possible. EIOPA is also encouraged to work
with other stakeholders.
6.3. The aim of the QIS exercise is twofold. First, to provide all stakeholders
with detailed information on the quantitative impact of EIOPA's advice on
the prudential balance sheet of IORPs in comparison with the current
situation. The current situation is reflected in the requirements and practices
existing already both at the national and institution level (baseline scenario),
including legal obligations that stem directly from the existing IORP
Directive, obligations imposed through national laws or by supervisors, as
10
well as practices institutions voluntarily abide by for both internal and
external purposes ("business as usual" practices). Second, to collect
quantitative and qualitative data to support the analysis of different policy
options in the impact assessment of the Commission.
– Which elements are the most important sources of own funds for
IORPs?
– Where own funds are required, what is the impact on the solvency
ratio (coverage of SCR and MCR)?
– Are internal models used by IORPs and can they reduce the
required level of funding or capital?
6.5. EIOPA should also seek to provide an indication of the impact of its advice
on administrative costs, using as far as possible the approach set out in the
EU Standard Cost Model.
7.1. The aim is to attain a level of harmonisation where EU legislation does not
need additional requirements at the national level. The Commission Services
intend to use the Lamfalussy approach to financial legislation, i.e. recast the
existing IORP Directive into a Level 1 Framework Directive and develop, at
a later stage, Level 2 implementing measures. This CfA only concerns advice
in relation to the Level 1 Framework Directive.
7.2. EIOPA should also consider whether its advice needs to be formulated in the
form of several policy options with an explanation of their respective merits.
11
7.3. EIOPA should consider how the envisaged rules can be applied in a manner
that is proportionate to the nature, scale and complexity of the IORP.
Simplifications should be used whenever possible.
7.4. The EIOPA advice should incorporate - as far as possible - the principles and
guidelines on private pension funds developed by the OECD, the
International Organisation of Pension Supervisors (IOPS) and the Groupe
Consultatif Actuariel Européen / International Association of Actuaries
(IAA).
7.6. EIOPA should provide the Commission with its final advice, including the
results from the QIS exercise, by Friday, 16 December 2011. EIOPA is
encouraged to deliver its advice, including interim reports if necessary, in
regular stages.
7.7. In the interests of transparency, the Commission will publish this Call for
advice on its website.
EUROPEAN COMMISSION
Internal Market and Services DG
FINANCIAL INSTITUTIONS
Insurance and Pensions
30.03.2011
12
ANNEX
Call for Advice from EIOPA for the review of Directive 2003/41/EC
(IORP II)
13
TABLE OF CONTENTS
14
8. SCOPE OF THE IORP DIRECTIVE
8.1. Introduction
DC schemes existing in some Member States either do not fall under any EU
prudential regulation or Member States have chosen to subject them to
national legislation that is inspired from the provisions of EU prudential
regulation for similar financial products (e.g. the IORP Directive itself or the
UCITS Directive). The advice should therefore include an assessment of the
provisions in the IORP Directive that could be extended to occupational DC
schemes that are currently not covered.
8.2. References
• International:
• European Commission:
15
8.4. Specific Call for Advice
The Commission Services would like EIOPA to advise on the scope of the
IORP Directive, covering at least the following issues:
– The provisions that would need to be amended or added (if any) in order to
suit the needs for the supervision of those occupational pension funds.
16
9. DEFINITION OF CROSS BORDER ACTIVITY
9.1. Introduction
Three different approaches are used by Member States when defining cross-
border activity of IORPs: location of the sponsoring undertaking, nationality
of the social and labour law (SLL) and nationality of the scheme.
Because of the differing national approaches, situations can arise where two
(or more) Member States potentially involved in a cross-border activity come
to different conclusions whether or not the proposed activity is actually a
cross-border activity. This hampers IORPs' willingness to engage in cross-
border activities.
9.2. References
• European Commission:
17
9.4. Specific Call for Advice
The Commission Services would like EIOPA to advice on how the wording
of the IORP Directive needs to be amended in order to clarify that cross-
border activity arises only when the sponsoring undertaking and the IORP
are located in two different Member States.
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10. RING FENCING
10.1. Introduction
The IORP Directive does not contain a definition of the term ring-fencing
but refers to the concept in Recital 38 and Articles 3, 4, 7, 8, 16(3), 18(7) and
21(5). Uncertainty exists about the legal conditions and practical
consequences of employing ring-fencing measures, since they are applied
differently by Member States.
10.2. References
19
– The text of an article to be inserted into the Directive with the aim of
establishing the general principles which warrant ring-fencing measures in
the case of stress situations, including the legal implications and common
safeguards, which would improve adequate protection of pension benefits.
20
11. PRUDENTIAL REGULATION AND SOCIAL AND LABOUR LAW
11.1. Introduction
11.2. References
• European Commission:
21
12. VALUATION OF ASSETS, LIABILITIES AND TECHNICAL PROVISIONS
12.1. Introduction
The IORP Directive contains some references to valuation rules, but they
remain vague. Article 10 requires that IORPs give a "true and fair" view of
their assets and liabilities in accordance with national law. In most cases this
will be national GAAP (generally accepted accounting principles).
Given the importance of technical provisions, the rules in the IORP Directive
are somewhat more specific. Article 15 requires IORPs to establish an
adequate amount of liabilities corresponding to the financial commitments
arising out of the pension contracts (point 1). Where IORPs cover against
risk, they are required to establish technical provisions (point 2). The
minimum amount of these technical provisions is to be calculated on a
forward-looking going-concern basis, including a margin for adverse
deviation (point 4a). The directive does not require a risk-free discount rate.
It allows the use of asset-based rates, high-quality corporate bond yields and
government bond yields (point 4b). Biometric tables are scheme-specific
(point 4c).
Moreover, the home Member State may make the calculation of technical
provisions subject to additional and more detailed requirements (Article
15(5)).
The Directive also requires the Commission to issue a report at least every
two years on the need to harmonise technical provisions to facilitate the
development of cross-border activity (Article 16(6)). A first report was
issued on 30 April 2009 (see references). The second report will be delivered
in the context of the Commission proposal to review the IORP Directive. In
its Report on the Pensions Green Paper, the European Parliament
underlines Article 15(6) of the IORP Directive, which states that with regard
to the calculation of technical provisions, ‘the Commission shall propose any
necessary measures to prevent possible distortions caused by different levels
of interest rates and to protect the interest of beneficiaries and members of
any scheme’.
An EIOPA report (see references) has shown that IORPs use different
methods to calculate technical provisions. Some Member States provide for
the use of a market-consistent risk free discount rate and biometric tables
without additional prudence (e.g. for longevity risk). Some Member States
require IORPs to take account of future inflation and salary increases and
make an allowance for future expenses (e.g. cost for administration and asset
management). Risk margins are not calculated explicitly. While the EIOPA
report shows that Member States have adopted the principles set out in the
IORP Directive, it also underlines that there are stark differences in the
method to calculate technical provisions. A stylistic illustration in the
22
EIOPA report (pg. 24-26) shows that the differences in the discount rate used
and in the approaches to inflation/salary indexation (mandatory or not) have
a large impact on the level of technical provisions across Member States.
12.2. References
(5)International:
(7)European Commission:
Article 15 of the IORP Directive has to be amended in the light of the new
supervisory regime and in order to facilitate cross-border activity. The
following two articles of Directive 2009/138/EC could be applied, at least as
a starting point, mutatis mutandis, to the IORP Directive:
24
13. SECURITY MECHANISMS
13.1. Introduction
What is important to establish precisely is who bears the risk and in which
way the pension schemes enable the IORP or the sponsoring undertaking to
reduce benefits on a going-concern basis. The EIOPA report on risk
management (see references) provides detailed information about eight types
of risk-sharing features, focusing in particular on which entity (IORP,
sponsor or member/beneficiary) takes on the risk (investment and biometric)
and if necessary provides support (either in terms of more contributions or
less benefits). The most common types of risk-sharing are pure DB schemes
in which either the sponsor or the IORP itself bears all the risk and pure DC
schemes in which the members/beneficiaries bear all the risk. In between
these extremes, there are pension schemes with a minimum guarantee on
asset returns during the accumulation phase (where the risk is borne by either
the IORP or the sponsor), while the risks during the payout phase are borne
by the member/beneficiary.
The EIOPA advice should also address recovery plans. Article 16(2) of the
IORP Directive allows underfunding subject to a concrete and realisable
recovery plan for a limited period of time. Article 16(3) suggests that for
cross-border activity the recovery period might be shorter. The strength and
especially the length of recovery plans can have a significant impact on the
effectiveness of supervision. Moreover, the EIOPA report (see references)
has highlighted that there are large differences between the rules set out in
Member States.
25
13.2. References
• International:
• European Commission:
• Other:
Article 17 of the IORP Directive has to be amended in the light of the new
supervisory regime and in order to facilitate cross-border activity. The following
articles of Directive 2009/138/EC could be applied, at least as a starting point,
mutatis mutandis, to the IORP Directive:
26
(10) Articles 100-127 of Directive 2009/138/EC contains the
provisions on the SCR to cover unexpected losses with the following main
features:
The Commission Services would like EIOPA to advise, in close cooperation with
the actuarial profession, on detailed rules by which supervisors can ensure that
IORPs have proper rules to protect pension liabilities.
– Where the IORP itself covers risk (in the meaning of Article 17(1) of the
IORP Directive):
– Where the risk (in the meaning of Article 17(1) of the IORP Directive) is
covered by the sponsoring undertaking:
– The treatment of operational risk where the investment risk is borne by the
scheme member or beneficiary;
28
14. INVESTMENT RULES
14.1. Introduction
The investment rules in the IORP Directive are based on the prudent person
principle (Article 18) complemented with mandatory and optional
quantitative restrictions.
EIOPA has made a first assessment of the investment rules in Article 18 (see
references) which has shown that only a few Member States have
implemented a pure prudent person rule. There is a persistence of
quantitative investment limits (see also the annual surveys of the OECD
mentioned in the references). Moreover, there is a lack of common
understanding on the scope of the single issuer rule in Article 18(1)(e) and
the definition of "risk capital markets" in Article 18(5)(c). The need to
continue to monitor the operation of the investment rules also in the light of
any lessons to be learnt from the economic and financial crisis was taken up
in the Report from the Commission of April 2009 (see references).
14.2. References
• International:
29
– OECD Survey of investment regulation of pension funds, October 2010.
• European Commission:
Article 18 of the IORP Directive may need to be amended in the light of the
new supervisory regime and the more recent approach taken in Directive
2009/138/EC as regards the prudent person principle.
The Commission Services would like EIOPA to advise on detailed rules by which
supervisors can ensure that IORPs have proper investment rules.
– The necessity from a prudential perspective to maintain Article 18(5) first and
second sub-paragraphs of the IORP Directive enabling Member States to lay
down more detailed investment rules;
6
http://www.EIOPA.org/
30
– The necessity from a prudential perspective to maintain Article 18(5)(b) of
the IORP Directive enabling IORPs to invest up to 30% in foreign
currencies;
31
15. OBJECTIVES AND PRO-CYCLICALITY
15.1. Introduction
The current IORP Directive does not contain references to the main objective
of supervision and the potential pro-cyclicality of supervisors' actions.
15.2. References
(15) International:
– The inclusion of the principle to take into account the potential pro-
cyclicality into the IORP Directive.
33
16. GENERAL PRINCIPLES OF SUPERVISION, SCOPE AND TRANSPARENCY AND
ACCOUNTABITY
16.1. Introduction
16.2. References
• International:
• European Commission:
34
17. GENERAL SUPERVISORY POWERS
17.1. Introduction
17.2. References
35
• The Commission Communication on Reinforcing sanctioning regimes in the
financial services sector (COM(2010) 716 final of 8 December 2010) sets out
how further convergence could be reached in the sanctioning regimes
applicable to infringements of the provisions of EU financial services
legislation. These principles could be applied t the IORP Directive.
36
18. SUPERVISORY REVIEW PROCESS AND CAPITAL ADD-ONS
18.1. Introduction
18.2. References
• International:
• European Commission:
38
19. SUPERVISION OF OUTSOURCED FUNCTIONS AND ACTIVITIES
19.1. Introduction
The EIOPA report on outsourcing (see references) has illustrated that most
supervisors have powers vis-à-vis third party service providers, although the
approaches differ. Moreover, the report mentions that the IORP Directive is
not very clear on what should be considered the relationship between IORPs
and third-party service providers (Article 13b).
19.2. References
39
– Other rules to supervise outsourced functions and activities, if any: e.g.
location of main administration, sub-contracting of the transferred activity
by the third-party service provider (chain outsourcing).
40
20. GENERAL GOVERNANCE REQUIREMENTS
The subsequent sections will look at requirements for specific governance aspects
including, risk management, ORSA, internal controls, internal audit, actuarial
function and outsourcing.
20.1. Introduction
The IORP Directive does not contain rules concerning the clear allocation of
responsibilities, written documentation of key governance functions or
contingency plans.
A recent EIOPA report (see references) illustrates that Member States have
developed national rules cover management board responsibilities, lines of
responsibility and accountability, as well as conflicts of interest.
20.2. References
• International:
• European Commission:
42
21. FIT AND PROPER
21.1. Introduction
A person must hold the necessary qualifications and/or experience (fit) and
be of good repute (proper). Fit and proper requirements are one of the key
aspects of corporate governance and of particular importance in financial
services. In pension schemes, the confidence of scheme members is essential
because the contributions are paid long before the benefits are received.
The current IORP Directive already contains the general principle that
management must be fit and proper (article 9b). The application of these
requirements varies in the EU as documented in several EIOPA reports (see
references below). It seems necessary to define the scope of these criteria
more precisely and, possibly, extend them in order to increase the level of
harmonisation.
21.2. References
• International:
• European Commission:
(22) Scope: to whom should the fit and proper criteria be applied? The
current directive states that it applies to the persons that "effectively run"
the IORP. Should it apply only to the management board members or also
43
to other people such as those carrying out functions: risk management,
internal control, internal audit, compliance, actuarial and outsourced.
(25) What powers should the supervisor exercise when fit and proper
requirements are not fulfilled?
44
22. RISK MANAGEMENT
22.1. Introduction
A recent EIOPA survey (see references) illustrated that most Member States
have risk management rules for IORPs, but that there are considerable
differences.
22.2. References
• International:
• European Commission:
45
22.4. Specific Call for advice
46
23. OWN RISK AND SOLVENCY ASSESSMENT
23.1. Introduction
23.2. References
• European Commission:
47
24. INTERNAL CONTROL SYSTEM
24.1. Introduction
The current IORP Directive already contains the general principle that
"competent authorities shall require every institution located in their
territories to have sound administrative and accounting procedures and
adequate internal control mechanisms" (article 14(1)). There is currently no
explicit requirement for a compliance function.
24.2. References
• International:
• European Commission:
48
function. This article could be applied, at least as a starting point mutatis
mutandis to the IORP Directive.
49
25. INTERNAL AUDIT
25.1. Introduction
At the national level, most Member States have rules on an internal audit
function, although in practice they vary from one country to another (see
EIOPA references below). It seems necessary to define the scope of the
internal audit function more precisely in order to increase the level of
harmonisation.
25.2. References
• International:
• European Commission:
51
26. ACTUARIAL FUNCTION
26.1. Introduction
Actuaries are key resources for IORPs because they provide expertise for the
calculation of technical provisions and the establishment of sound risk
management and funding policies.
26.2. References
• International:
• European Commission:
52
– The material elements of Article 48 of Directive 2009/138/EC that should
be amended or removed to adequately address the specificities of IORPs in
relation to the actuarial function;
53
27. OUTSOURCING
27.1. Introduction
The functions that can be outsourced are left to the Member States and the
EIOPA report has shown that there are many national differences. This may
be an issue where IORPs are prevented to use a service provider in another
Member State (e.g. risk management or payment of benefits).
What is important is that the IORP retains final responsibility for outsourced
activity and that supervisors are informed about outsourced activity in an
accurate and timely manner.
27.2. References
• International:
• European Commission:
54
27.3. Background: preliminary proposal for principles for draft Directive
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28. CUSTODIAN/DEPOSITORY
28.1. Introduction
The EIOPA report (see references) has found that there are differences across
Member States in relation to the appointment of a custodian, the type of
body which is appointed to fulfil this role and the function that it performs.
Diversity also exists around the role of competent authorities, some of whom
play a role in the process of the custodian's appointment. The Commission
Report (see references) takes note of the analysis carried out by EIOPA, but
does not exclude that there may be a need for legislative change at a later
stage.
28.2. References
• International:
56
– OECD/IOPS Good Practices for Pension Funds’ Risk Management
Systems, January 2011: Good practice 6 (control and monitoring
mechanisms).
• European Commission:
Articles 19(2) and 19(3) of the IORP Directive may need to be reviewed in
order to ensure that the custodians/depositories of IORPs, irrespective of
their location within the EU, adequately protect the interest of the
members/beneficiaries.
57
29. INFORMATION TO SUPERVISORS
29.1. Introduction
The EIOPA report (see references) has shown that reporting requirements
differ widely between Member States. This difference concerns the amount
of information, its content and timing. While in most Member States the
information needs to be submitted by the IORP itself, the reporting
obligations can also be attributed to other parties (e.g. fund manager,
administrator or custodian). Most of the Member States have gone beyond
the minimum requirements in the IORP Directive (e.g. whistle-blowing
reports, composition of membership, benefit payments, return on investment
based on standardised formulae, stress tests, projections, asset allocation and
commissions).
29.2. References
• International:
• European Commission:
59
30. INFORMATION TO MEMBERS/BENEFICIARIES
30.1. Introduction
The EIOPA report (see references) showed that, as far as Article 11 of the
IORP Directive is concerned, most Member States have gone beyond the
minimum requirements and that the approaches differ widely. The report
concluded that more work is needed to ensure a level playing field.
(33) The KII Document is the benchmark for the process of developing
improved mandatory disclosures for retail investment products. This is
stated in the Commission Communication of 30 April 2009 on Packaged
Retail Investment Products (PRIPs). The Commission is committed to
introducing a new horizontal approach to the regulation of sales and pre-
contractual disclosures for these products, so as to ensure a level playing
field between different types of investment products offered in the retail
market. The aim is to ensure that consumer protection measures are
60
effective and appropriate. Following the Communication, the Commission
will focus on developing specific legislative proposals for this new
horizontal approach, possibly in spring 2011.
30.2. References
• International:
• European Commission:
61
Investor Information Document (Ref. CESR/10-673), 1 July
2010.
The Commission Services do not make a firm proposal at this stage. As far
as pre-contractual information disclosures are concerned, it should be
envisaged to build on the work done for the KII Document for UCITS. But
this is not the only solution. Regarding public disclosure, inspiration could
be found in Articles 51-56 of the Solvency II Directive 2009/138/EC.
– The extent to which the KII Document can be used for IORPs as regards
pre-contractual information disclosure. This includes advice on the
material elements of Articles 78-82 of Directive 2009/65/EC that should be
amended or removed to adequately address the specificities of IORPs with
a view to replacing Article 9c and 9f of Directive 2003/41/EC;
62