The objective of the IORPs Directive, otherwise known as the ‘pensions directive’ is to set a common minimum standard of pension scheme governance across EU member states. The directive applies to funded arrangements which provide retirement benefits and are separate legal entities to their sponsoring employers, that is, it applies to Institutions for Occupational Retirement Provision (IORPs). In Ireland most company pension schemes are IORPs.
The directive also seeks to facilitate pan-European pension arrangements. An employer in one EU member state may now contribute to a pension scheme established in a different member state. This opens up the possibility of a single European pensions market.
The Irish government’s objective is to establish Ireland as one of the major centres in Europe for centralised pension schemes. It aims to do so by pragmatic and flexible implementation of the directive.
The directive had to be implemented by each EU member state on 23 September 2005. Irish legislators met this deadline. Their aim was to provide the right regulatory and tax environment for the centralisation of pension funds by ensuring insofar as possible that no new supervisory requirements were added save for the essential aspects required by the directive.
In many respects Irish pensions legislation was already broadly consistent with the requirements of the directive. However some relatively minor changes were required in the areas of investment, disclosure and trustee knowledge and qualifications. Despite the minimalist approach taken by legislators, Irish legislation now imposes, as formal statutory obligations on pension scheme trustees, requirements which, until now, existed, if at all, as undefined general trust law requirements. For cross-border, pan-European IORPs, ie, the new centralised funds envisaged by the directive, a new framework was introduced accompanied by a set of applicable regulations.
The main impact on Irish IORPs is in three areas: investment, disclosure and trusteeship.
Investment: A pension scheme with more than 100 active and deferred members must now have a Statement of Investment Policy Principles (SIPP). A SIPP must cover the trustees’ investment objectives, investment risk measurement methods, risk management processes and asset allocation strategy. This requirement is a formal codification of the existing trust law obligation to invest assets properly and to obtain advice concerning that obligation.
In addition to the requirement to invest in accordance with the ‘prudent person rule’, which was the case under general Irish trust law in any event, specific rules now apply to pension fund investment regarding diversification, borrowing restrictions, liquidity and investment in regulated markets all of which impinge on trustees’ investment strategies. Again, this broadly reflects existing trust law requirements.
Disclosure: The revised disclosure requirements mainly come into force on 1 January 2007 and so the initial impact has been limited. One of the main immediate changes in this area involves the preparation of a ‘statement of reasonable projection’ of defined contribution benefits for those who leave service after 23 September 2005. From 2007, this will be a feature of annual benefit statements. Also, where members make defined contribution investment choices, the trustees must now disclose certain details. As with other changes, general trust law principles previously required the provision of information along these lines.
Trusteeship: The directive provides that trustees must be ‘persons of good repute’. Certain persons are disqualified by law from acting as trustees. These include undischarged bankrupts, any person disqualified from being a company director under the Irish Companies Acts and anyone convicted of an offence involving fraud or dishonesty. Also, trustees must now have ‘appropriate professional qualifications and experience’ or employ advisors who do about certain prescribed matters. Investment is the sole prescribed area at present. If trustees do not have ‘appropriate’ investment qualifications they must have a contract with a person or firm acting as an investment manager. Most Irish pension scheme assets are already invested by an investment manager or under an investment policy with a life office. In such cases, trustees are automatically regarded as having the requisite investment knowledge and experience.
Enabling tax provisions for cross-border IORPs and Irish members of non-Irish, cross-border IORPs, were included in the Finance Act 2005. Along with the authorisation procedures in the new legislation, a framework is in place for Irish-based, pan-European schemes.
Ireland has adopted a relatively open and flexible approach to cross-border IORPs. A cross-border IORP established in Ireland is regulated and supervised by the Pensions Board. Such an IORP must, in respect of its members working in other member states, comply with the ‘social and labour law’ of those other states. Certain provisions of the Irish Pensions Act are not applicable to cross-border members of an Irish based IORP. These include Irish preservation of benefits requirements and the jurisdiction of the Irish Pensions Ombudsman.
Irish legislators have, initially at least, specified a relatively small number of ‘social and labour laws’ to be addressed by cross-border IORPs established outside Ireland for Irish members. The current list is as follows: preservation, disclosure, pensions ombudsman and two technical provisions on integration with state pensions.
The directive requires that a cross border IORP “shall at all times be fully funded in respect of the total range of the pension schemes operated”. This is undoubtedly onerous. Funding issues are the subject of a separate article. However, one immediate impact of the directive has been to force UK/Ireland dual jurisdiction schemes to reassess their future. Some will inevitably divide in light of the funding requirements applicable to such schemes.
It is anticipated that the directive might also drive the consolidation of investment services such as asset management, custody and fund administration and the consolidation of pension services such as actuarial, legal, administration and compliance resulting in significant cost savings. It is still too early to tell. Initially, at least, as cross-border IORPs become established, there will be costs incurred by addressing complexities arising from differences in tax and regulatory regimes.
Ireland has built a reputation as one of the leading mutual funds administration centres in Europe and has considerable expertise in the area of funds, including pension pooling vehicles. The impact of the directive on Ireland-only IORPs to date has been relatively small, as a consequence of the Irish tendency to avoid over-regulation. The signs for cross-border IORPs are encouraging but it is still too early to see whether the well-prepared ground bears pan-European fruit.
Philip Smith is partner in law firm Arthur Cox and chairman of the Association of Pension Lawyers in Ireland

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