The Institutions for Occupational Retirement Provision Directive (IORP Directive) is the European pensions directive. Since 13 January 2019, the revised version of the IORP Directive, IORP II, has been in force. These regulations are part of the laws and regulations for pension institutions in the Netherlands. The revision aims to harmonise the supervision of European pension funds. It aims to increase transparency, facilitate cross-border activities and change governance requirements.
Consequences of IORP II for the Dutch pension sector
The IORP II directive has been transposed into national legislation by each EU member state. The main aim of IORP II is to promote the further development of second-pillar pensions in the European Union. In the Netherlands, 90% of employees already accrue pension through their employer. As a result, the revised directive will have less impact on the pension sector here than in other European countries.
In the Netherlands, IORP II mainly affects provisions on risk management and the so-called Own Risk Assessment (ERB). In particular, governance (especially the design of key functions), ESG and communication with pension beneficiaries. It also facilitates cross-border collective value transfers by strengthening the position of pension beneficiaries.
Setting up key functions
The core of IORP II lies in the separation of the so-called ‘three lines of defence’: administration, advice and control. These three functions may not be invested in one person. This means pension funds must appoint key functions and embed risk management in decision-making.
Under IORP II, European pension funds must have independent key officers for the three key functions: the actuarial function, the risk management function and the internal audit function. The law distinguishes between so-called ‘key function holders’ and ‘key functionaries’. Key function holders bear the ultimate responsibility of the function, while the officer performs the function tasks.
Supervisory authority DNB imposes strict requirements on key function holders (SFH). For instance, they must meet the requirements of suitability and reliability. This means that they have sufficient education, knowledge, work experience and skills to properly perform the key function. DNB has provided its insights via a Q&A regarding the filling of these functions.
Combining key functions is allowed for the time being, with the exception of the internal audit function. Outsourcing key functions is possible to a limited extent. In practice, the actuarial function is often outsourced to the certifying actuary, as the responsibilities of the SFH are almost identical to those of the certifying actuary. This outsourcing is not considered objectionable by the legislator. Outsourcing the SFH risk management and/or internal audit is not common and is considered mostly unacceptable by the regulator. These last two key functions are preferably filled by board members, but if this is not possible, a critical assessment will have to be made of whether embedding in the organisation is sufficiently guaranteed.
How exactly a key position should be filled is determined by the nature of the fund. Factors that weigh in the assessment are the size, internal organisation, scale and complexity (especially the investment portfolio and pension scheme) of the pension fund. In larger, more complex funds, heavier requirements are placed on the filling of key positions.
Own Risk Assessment (ERB)
With the implementation of the IORP II directive, conducting a so-called ERB is required at least once every three years. Conducting an ERB requires, among other things, identifying the material risks the fund faces, embedding risk management in the (strategic) decision-making process and assessing the quality of risk management. The ERB results in an independently readable report to be provided to the regulator within two weeks of its adoption by the board. Regarding the ERB and, in particular, the form and content of the report, a service document has been prepared by the Pension Federation. An important observation is that the components for ERB reporting are often already largely available at the funds in the form of Abtn, ALM studies, risk management policies, feasibility tests and the like. In addition to the federation’s service document, EIOPA has issued the necessary “Opinions”. In these, the European regulator provides guidance to local regulators on the requirements for risk governance and risk management.
Supervision
Supervisor DNB is in charge of the prudential supervision of pension funds. The AFM supervises behavioural supervision. For pension funds, this means that AFM looks in particular at communication to members and pensioners.
Want to know more?
Do you have questions about the implementation of the IORP II directive, or would you like advice on filling key positions? We would be happy to help. Feel free to contact us for a no-obligation consultation.