Current Issues in Pensions - 16 April 2013: Review of session 'IORP II: a new European Directive?' presented by Dave Roberts

The European Commission wants to see an ‘IORP II’ directive, building on the original IORP (Institutions for Occupational Retirement) directive and based on the Solvency II regime for insurers.  The aims of the directive are to facilitate cross-border pension provision, to protect scheme members and to ensure a level playing field between occupational pension schemes and insurance providers.

The impact of an IORP II directive on pension schemes is unclear.  The range of opinions stretches from those who think it will come to nothing, to those who are convinced that it will destroy defined benefit pension provision in the UK. There are two main reasons for this uncertainty – it is not clear if IORP II will become law, and even if it does, it is not clear what impact it will have.

The process of the directive becoming law first requires the European Commission to produce the Level 1 draft, a relatively high-level text.  This is then considered by the Council of Ministers and the European Parliament.  If passed by both, the directive is returned to the Commission which completes the Level 2 text, filling in the detail.  The detailed text is not considered again by the Council of Ministers and the European Parliament.

A directive requires a qualified majority to be passed by the Council of Ministers, and a straight majority to be passed by the European Parliament.  The former is where a directive is most likely to be blocked, requiring 255 out of 345 votes to pass.  Each country has a certain number of votes, and the 5 countries likely to vote against IORP II (Germany, the UK, the Netherlands, Belgium and Ireland*) have 90 between them – 1 short of the number needed to block.  This means that the passage of the directive would be governed by the votes of countries for which it means very little directly, and who are therefore likely to be influenced by political horse-trading.

*These are the countries which would be affected in practice by IORP II i.e. those which have significant defined benefit pension schemes.

If the directive does make it into law, its effect is still unclear.  It has 3 pillars, being quantitative (explicit capital requirements), qualitative (supervisory and governance) and disclosure.  The first is the one with the most impact, potentially introducing very large new capital requirements for pension schemes with the ‘holistic balance sheet’.  As currently drafted, the solvency capital requirement (”SCR”) for a pension scheme would be that required to cover a 1-in-200 year outcome.  This is significantly more than the buy-out cost - the Commission’s ‘Quantitative Impact Study’ (QIS) estimated that the total deficit in UK schemes would be increased by potentially £200 billion.

It is still possible that this could be regarded as providing information rather than requiring explicit funding, in which case the impact would be relatively small.  Also, member states, when passing their own laws to give force to IORP II, will have the option to exclude schemes with less than 100 members.