Explanatory Memorandum to COM(2014)167 - Activities and supervision of institutions for occupational retirement provision (recast) - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2014)167 - Activities and supervision of institutions for occupational retirement provision (recast). |
|---|---|
| source | COM(2014)167  |
| date | 27-03-2014 |
European society is ageing. Pension systems across the European Union (EU) have to adapt in order to ensure adequate, safe and sustainable pensions. This is not a simple matter. Effectively addressing these challenges requires closely coordinated action by Member States. The proposed revision of Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (IORPs) i will make those institutions better governed, more transparent and increasing their cross-border activity, thereby strengthening the internal market.
In a number of respects the Directive's review is long overdue.
First, higher governance standards reflecting best practices at national level following the economic and financial crisis are needed to protect scheme members and beneficiaries, and facilitate safe cross-border provisioning. Some IORPs are large financial institutions, and their failure could impact on financial stability and have significant social consequences. This is particularly relevant as more and more occupational pensions are defined-contribution (DC) schemes. The pensions of the members of these schemes are at risk in case of possible insufficient risk governance or mismanagement.[2]
Second, regulatory divergences, overlapping requirements, and excessively burdensome cross-border procedures must be reduced. Commission's consultations have shown that these are one of the obstacles to develop cross-border occupational pensions markets, and reducing those obstacles would help companies, including SMEs and multinationals, to organise their pension provision on a European scale more efficiently.[3] Cross-border IORPs, such as the pan-European pension fund for mobile researchers or a planned cross-border scheme for Austrian employers are limited today. But the increasing pressure on the occupational pensions sector is likely to grow significantly in view of increasingly limited public pensions systems, and cross-border IORPs have the potential to represent an increasing share in occupational pension provision. In fact, new legislation has been introduced in several Member States aimed at positioning them as locations of choice for cross-border IORPs.[6]
Third, there is evidence of significant gaps in the level of information provided to scheme members and beneficiaries across the EU. Many scheme members are not aware that their pension rights are not guaranteed or even if accrued that they could be cut by IORPs, contrary to other financial contracts.[7] They are also often not aware that charges have a significant impact on pension rights.
This proposal builds on a number of initiatives launched in recent years such as the White Paper on pensions[8] and the Green Paper on long-term financing of the European economy.[9] Following on from this last Paper, the revision of the Directive also aims to strengthen the capacity of IORPs to invest in assets with a long-term economic profile and support the financing of sustainable growth in the real economy.
The IORP sector is being developed in many Member States where occupational pensions so far play a limited role, including by setting up regulatory frameworks. Failing to provide an up-to-date EU regulatory framework now entails the risk that Member States continue to develop diverging solutions, thereby exacerbating regulatory fragmentation. Furthermore, improvements to the performance of occupational pensions require long periods of time to materialise. Failing to act now would lead to lost opportunities in terms of cost savings and investment returns, and inadequate financial planning by millions of Europeans. It would also increase the burden disproportionately for younger generations and undermine inter-generational solidarity.
This proposal does not consider the introduction of new solvency rules, which are in any event not relevant for DC schemes. Moreover, a quantitative impact study[10] conducted by the European Insurance and Occupational Pensions Authority (EIOPA) in 2013 indicated that more complete data on solvency aspects are necessary before a decision can be taken on those aspects.
The general objective of this proposal is to facilitate the development of occupational retirement savings. Safer, more efficient occupational pensions will contribute to pension adequacy and sustainability by enhancing the contribution of complementary retirement savings to retirement incomes. It will also reinforce IORPs' role as institutional investors in the EU’s real economy and enhance the capacity of the European economy to channel long-term savings to growth-enhancing investment.
This proposal has four specific objectives: i removing remaining prudential barriers for cross-border IORPs, notably by requiring that the rules on investment and disclosure of information to members and beneficiaries are those of the home Member State, as well as by clarifying procedures for cross-border activities and clearly defining the scope of action of home and host Member State; i ensuring good governance and risk management; providing clear and relevant information to members and beneficiaries; and ensuring that supervisors have the necessary tools to effectively supervise IORPs.
The objectives of this proposal are consistent with the policies and objectives pursued by the Union. The Treaty on the Functioning of the European Union (TFEU) provides for action to ensure the establishment and functioning of the internal market with a high level of consumer protection, as well as the freedom to provide services.
This proposal is in line with the White Paper on pensions. At the same time it is consistent with the Europe 2020 strategy, which calls for fiscal consolidation and long-term financial sustainability to go hand in hand with structural reform of pension systems in Member States.[11] Finally, this proposal is consistent with other initiatives in the field of financial services, such as Solvency II[12], AIFMD[13] and MiFID II[14]. As such it falls well within the scope of the Commission's agenda towards a stronger financial sector to support growth.[15]
The proposal promotes human rights by protecting retirement provision. It is in line with Article 25 of the Charter of Fundamental Rights of the EU which calls for recognition and respect for the rights of the elderly to lead a life of dignity and independence. The proposed actions would have a positive impact on consumer protection under Article 38 and freedom to conduct business under Article 16, in particular by ensuring a higher level of transparency of retirement provisioning, informed personal financial and retirement planning as well as facilitating cross-border business of IORPs and their sponsors. The general objective justifies certain limitations on the freedom to conduct a business (Article 16) as the proposal aims at ensuring the market integrity and stability.
This proposal builds on multiple public consultations regarding requirements on quantitative aspects, governance and information disclosures. Given the specific nature of the IORP activities, the consultations consistenly included the social partners (employers and trade unions). In July 2010, the Commission consulted on its Green Paper on pensions in which it outlined a number of its ideas regarding this review.[16] The consultation drew almost 1700 responses from across the EU, including 350 from Member States, national parliaments, business and trade union organisations, civil society and industry representatives.[17]
Taking into account the feedback on the Green Paper on pensions, the Commission Services asked EIOPA in April 2011 to provide technical advice on how to change the Directive. EIOPA recommended that - taking into account the principle of proportionality - the governance framework set out in the Solvency II Directive should apply to IORPs. The publication of the draft advice[18] was followed by an extensive consultation.[19] EIOPA delivered its final advice in February 2012, on the basis of which Directorate-General for Internal Market and Services organised an exchange of views amongst stakeholders during a public hearing on 1 March 2012. Subsequently, the Commission Services conducted a Quantitative Impact Study on the quantitative requirements, as well as a study on administrative burden for aspects relating to governance and information disclosures. Both studies built on the contributions from the industry and social partners.
This proposal is accompanied by an impact assessment report that considers a range of policy options and sub-options. The report was first submitted to the Impact Assessment Board on 4 September 2013. The Board asked for resubmission with additional information on the views of the different stakeholder groups, problem definition, subsidiarity and proporionality aspects, options and expected impacts. The report was revised accordingly and the main changes were: (i) a more comprensive description of the views of the Member States and different stakeholder categories; (ii) a more detailed explanation of the problems being addressed by the proposed action; (iii) as regards subsidiarity, a more detailed description of the case for EU action; (iv) a clarification that further harmonisation of supervisory reporting is not being proposed; (v) a new section on the impact of the initiative on small and medium-sized enterprises; and (vi) a more detailed description of the assumptions used in the calculation of the expected benefits and costs of the various options. The impact assessment was resubmitted on 16 October 2013. On 6 November the Board stated it could not issue a positive opinion and requested some further amendments.
Contents
- Legal elements of the proposal
- Budgetary implications
- 1.1. Objectives of the proposal
- 1.2. Consistency with other policies and objectives of the Union
- 2. Results of consultation with interested parties and impact assessment
- 3.1. Legal basis
- 3.2. Subsidiarity and proportionality
- 3.3. References to other directives
- 3.4. Detailed explanation of the proposal
- Title V - PRUDENTIAL SUPERVISION
This proposal recasts Directive 2003/41/EC. It simultaneously codifies its unchanged provisions and amends it. The legal bases of Directive 2003/41/EC are ex-Articles 47 i, 55 and 95 EC (currently Articles 53, 62 and 114 i TFEU).
The proposal maintains the legal bases of the Directive. It seeks both to establish the internal market by means of freedom to provide services and freedom of establishment when regulating the taking-up and pursuit of activities as self-employed persons and when establishing a high level of protection for consumers.
Directive 2003/41/EC regulates areas such as the conditions of operations of IORPs, including a common approach to registration or authorisation, rules and procedures to be followed when IORPs wish to offer their services in other Member States, quantitative solvency rules, investment rules based on the prudent person principle, requirements on the effective management, including fit and proper requirements, the use of internal audit and actuarial services, risk management requirements, the use of depositories, information to be disclosed to members and beneficiaries and supervisory powers and reporting obligations.
This proposal further builds on these elements. As to the information to be disclosed by the IORP it, for example, introduces an EU-wide pension benefit statement. With regard to effective management of IORPs it lays down more detailed rules on fit and proper and key functions including risk management. The proposal also aims to facilitate cross-border activity.
The two objectives of Directive 2003/41/EC are retained. Neither of the objectives is secondary or indirect in relation to the other. For example, the professionalization of IORP management by defining the tasks and responsibilities of key management staff and the introduction of a forward-looking self-risk assessment strengthens consumer protection. Conversely, better information through the pension benefit statement empowers members and beneficiaries to hold IORP management more accountable. A higher level of harmonisation of those requirements facilitates cross-border activity by reducing transaction costs and stimulating market innovation.
EU level action in this field adds value because action by Member States alone will not: (i) remove obstacles to cross-border activities of IORPs; (ii) ensure a higher EU-wide minimum level of consumer protection; (iii) lead to scale economies, risk diversification and innovation inherent to cross-border activity; (iv) avoid regulatory arbitrage between financial services sectors; (v) avoid regulatory arbitrage between Member States; and (vi) take into account the interests of cross-border workers.
Under the proposed action, Member States retain full responsibility for the organisation of their pension systems. The revision does not call this prerogative into question. Neither does the revision cover issues of national social and labour, fiscal or contract legislation.
The proposal complies with the principle of proportionality, as enshrined in Article 5 of the Treaty on European Union (TEU). The selected policy options seek to strike a balance between public interest, the protection of members and beneficiaries, as well as the costs for institutions, sponsors and supervisors. The options have been carefully considered, crafted as minimum standards and tailored taken into account different business models. This is why, overall, the proposal will stimulate occupational retirement provision.
This proposal is a recast exercise and refers to Directives 2003/41/EC, 2009/138/EC, 2010/78/EU[20], 2011/61/EU and 2013/14/EU[21]. Directive 2003/41/EC will be repealed by this Directive.
As this is a recast of Directive 2003/41/EC, the detailed explanation below focusses solely on new provisions or provisions that are to be amended.
Title I – GENERAL PROVISIONS
Article 6 now includes new and/or clarified definitions of 'sponsoring undertaking', 'home Member State', 'host Member State', 'transferring' and 'receiving' institutions, 'regulated market', 'multilateral trading facility', 'organised trading facility', 'durable medium' and 'key functions'.
Article 9, in conjunction with Article 10, no longer list the conditions of operation separately but give responsibility to Member States to ensure that every institution is registered or authorised and that they have properly constituted rules for the pension scheme.
Article 12 is amended in three ways. First, it specifies that an institution carries out cross-border activity when it operates a pension scheme that is subject to the social and labour law of another Member State, including in situations where the institution and the sponsoring undertaking are located in the same Member State.[22] Second, paragraph 4 requires a reasoned decision by a competent authority of the home Member State, should the authority ban cross-border activity. Moreover, where a competent authority of the home Member State does not notify a competent authority of the host Member State, it shall give reasons for its refusal. Third, the host Member State may no longer impose additional information requirements on institutions carrying out cross-border activities. This is because the proposal introduces a standardised pension benefit statement (see Articles 40 to 54).
Article 13 lays down new rules for the cross-border transfer of pension schemes which must be subject to prior authorisation by a competent authority of the home Member State of the receiving institution. Unless national social and labour law on the organisation of pension systems provides otherwise, the transfer and its conditions shall be subject to prior approval by members and beneficiaries concerned or, where applicable, their representatives. Article 13 also includes rules on exchange of information concerning the applicable social and labour law under which the pension scheme must be operated. Should, following the transfer, the receiving institution carry out a cross-border activity, Article 12(8) and (9) apply. The institution will operate the pension scheme in accordance with the social and labour law of the host Member State[23], thereby not changing the level of protection of the members and beneficiaries concerned by the transfer.
Title II – QUANTITATIVE REQUIREMENTS
Article 20 on investment rules is modified in three ways. First, the host Member State may no longer impose additional investment rules on institutions carrying out cross-border activities. This facilitates the organisation of investment management, in particular for defined contribution schemes. This does not undermine the protection of members and beneficiaries because it is matched by strenthened governance and supervisory rules. Second, Article 20(6)(a) has been updated to reflect the terminology used in Regulation (EU) No …/… [MiFIR]. Third, it replaces the ambiguous term risk capital markets (Article 20 (c)) with a terminology that better reflects the original meaning of this provision, namely that Member States cannot restrict institutions from investing in long-term instruments that are not traded on regulated markets. Moreover, investment rules should not restrict investment in non-listed assets that finance low carbon and climate resilient infrastructure projects.
A further harmonisation of rules relating to the financial solvency situation of the institution is not being proposed.
Title III – CONDITIONS GOVERNING ACTIVITIES
For small IORPs, the proposal maintains the possibility for Member States to exclude institutions managing schemes which together have less than 100 members in total. For other IORPs, specific measures, for instance on the key functions and risk evaluation, ensure that governance requirements are proportionate.
CHAPTER 1 – System of governance
Except for Articles 31 and 32 (ex Articles 10 and 12), this Title is new to the Directive and lays down new detailed governance requirements for IORPs.
Article 21 sets out that the administrative, management or supervisory body of the IORP is ultimately responsible for the IORP's compliance with the laws, regulations and administrative provisions adopted pursuant to this Directive. The rules on governance of IORPs are without prejudice to the role of social partners in their management.
Article 22 establishes that institutions need to have in place an effective system of governance which provides for sound and prudent management of their activities. This system shall be proportionate to the nature, scale and complexity of the activities of the IORPso as to ensure that the governance requirements will not be too burdensome for example for small institutions.
Article 23 requires IORPs to ensure that all persons who effectively run the IORP or have key functions have professional qualifications, knowledge and experience which are adequate to enable sound and prudent management of the IORP or to properly perform their key functions (fit) and that they are of good repute and integrity (proper).
Article 24 sets out that institutions must have a sound remuneration policy and that this policy is disclosed publicly. The article also proposes to empower the Commission to adopt a delegated act.
Article 25 sets out the general principles on key functions. IORPs may allow a single person or organisational unit to carry out more than one key function, but shall at all times allocate the risk management function to a different person or organisational unit than the internal audit function.
Article 26 states that IORPs need to have in place an effective risk-management system which is necessary to identify, monitor, manage and report on a continuous basis all risks, including those related to outsourced or subsequently re-outsourced activities, to which they are or could be exposed, and their interdependencies. The risk management should be proportionate to the size, internal organisation and the nature, scope and complexity of the institution's activities.
Article 27 provides for an effective internal audit function which evaluates the adequacy and effectiveness of the internal control system and other elements of its system of governance, including outsourced or subsequently re-outsourced activities. The internal audit function is to be assumed by at least one independent person, inside or outside of the institution.
Article 28 requires an effective actuarial function to co-ordinate and oversee the calculation of technical provisions as well as to assess the appropriateness of the methodologies and underlying models, where members and beneficiaries do not bear all the risks.
Article 29 sets out that institutions need to produce a risk evaluation for pensions regularly and without delay following any significant change in the institution's risk profile. The evaluation needs to demonstrate the compatibility of a number of elements in line with national requirements. The evaluation should include new or emerging risks relating to climate change, use of resources and the environment. The risk evaluation for pensions should be proportionate to the size, internal organisation and the nature, scope and complexity of the institution's activities.
Article 30 proposes to empower the Commission to adopt a delegated act with regard to the risk evaluation for pensions.
CHAPTER 2 – Outsourcing and investment management
Article 33 lays down the rules for contracting to third parties (outsourcing), including re-outsourced activities.
CHAPTER 3 – Depositary
Articles 35 to 37 set out that IORPs need to appoint a single depositary for safe-keeping of assets and oversight duties if members and beneficiaries fully bear the investment risk.
Title IV – INFORMATION TO BE GIVEN TO THE PROSPECTIVE MEMBERS, MEMBERS AND BENEFICIARIES
CHAPTER 1 – General provisions
This Chapter lays down the details of the information to be provided to members, prospective members, and after retirement, beneficiaries and building on former Article 11.
Article 38 sets out the general principle for information disclosures.
Article 39 lays down the type of information that members (and beneficiaries) need to receive, such as the rights and obligations of the parties, the risks and investment options and whether these are default or not. The conditions of the particular pension scheme must be published on a website by the institution concerned.
Article 40 places an obligation on IORPs to provide, every twelve months, a pension benefit statement (‘PBS’) for the individual in the clearest possible way, also as a basis to feed information into a potential pension tracking service as described in the White Paper on pensions.[24] Where Member States already provide for comprehensive information to individuals covering one or more pension pillars, they will maintain the flexibility to design their pension information systems, as long as they comply with the requirements of this proposal.
CHAPTER 2 – Pension Benefit Statement
Articles 40 to 44 lay down general provisions for the PBS - which is intended for active members of the pension scheme. The idea of the PBS is based on EIOPA’s Advice to the European Commission on the review of the IORP Directive, draws on national best practices in several Member States and international work developed by the OECD[25]. The PBS ensures comparability with information required by legislation in other financial sectors such as the key investor document for open investment funds (UCITS), while taking into account the specificites of the occupational pensions sector. Moreover, the PBS leaves sufficient leeway for Member States to introduce more specific requirements and integrated systems allowing for comparability between different pillars of the pension system.
The standardisation of the PBS should enable automatisation of the regular production of the PBS and its potential outsourcing, thereby keeping costs low in particular for smaller institutions.
Articles 46 to 53 lay down the components of the PBS which shall be read together with Article 45. The compenents are as follows:
· personal details of the member;
· identification of the institution;
· guarantees;
· balance, contributions and costs;
· pension projections;
· investment profile;
· past performance; and
· supplementary information.
Article 54 proposes to empower the Commission to adopt a delegated act with regard to the PBS.
CHAPTER 3 – Other information and documents to be provided
This Chapter relates to information that should be provided by IORPs to members and beneficiaries in different pension stages such as just before enrolment, just before retirement or during the pay-out phase.
Article 55 lays down specific rules for IORP to provide information to prospective members prior to joining the IORP 's pension scheme.
Article 56 lays down the information to be given to members before retirement. This should be provided in addition to the PBS, at least two years before retirement, whether that is predefined or not.
Article 57 details the information to be given to beneficiaries during the pay-out phase. This information to beneficiaries should replace the PBS.
Article 58 lays down information to be given on request by members and beneficiaries.
CHAPTER 1 – General rules on prudential supervision
Article 59 designates the protection of scheme members and beneficiaries as the main objective of prudential supervision.
Article 60 defines which areas are to be understood as belonging to prudential supervision in the context of this Directive. This Article takes away the legal uncertainty for IORPs caused by differences in scope of Member States’ prudential regulation.
Article 61 sets out the general principles of prudential supervision. It, for example, lays down that the competent authority of the home Member State has the sole responsibility for the prudential supervision of all IORPs authorised or registered in its jurisdiction. The article furthermore establishes the principle that supervision of IORPs needs to be prospective and risk-based, as well as timely and proportionate.
Article 63 introduces the supervisory review process which aims to identify IORPs with financial, organisational or other features susceptible to producing a higher risk profile.
Article 64 ensures that all the new requirements introduced by this prosposal are reflected in the power attributed to competent authorities with regard to the provision of information.
Article 65 sets out that competent authorities need to conduct their tasks in a transparent and accountable manner.
CHAPTER 2 – Professional secrecy and exchange of information
Articles 66 to 71 make provisions and lay down the conditions for the exchanges of information between competent authorities and authorities and bodies which help to strengthen the stability of the financial system.
Title VI – FINAL PROVISIONS
Articles 73 to 81 lay down cooperation and reporting obligations, conditions for the processing of the personal data. They include evaluation and review of the Directive, amendment of the Solvency II Directive 2009/138/EC, the implementation deadline of the Directive, repeals and addressees.
Specific budgetary implications are assessed in the legislative financial statement and relate to tasks allocated to EIOPA.
ê 2003/41/EC