On 27 March 2014, the European Commission published a proposal for a new Occupational Pension Funds Directive. Key aims of the new Directive are to introduce clearer and more consistent member communications across EU Member States, to remove remaining barriers for cross-border IORPS1 as well as measures to support the EU Commission's roadmap to meet the long-term financing needs of the European economy. Originally posted on the Ius Laboris Knowledge Base: http://www.globalhrlaw.com. With thanks to our Belgian & UK member firms Claeys & Engels and Sackers.

1. Pensions back on the EU agenda
Publication Date: 23 April 2014 | Author(s): Georgina Beechinor (Sacker
and Partners, United Kingdom), An Van Damme (Claeys & Engels,
Belgium) Member Firm(s): Sackers (United Kingdom); Claeys & Engels
(Belgium)
On 27 March 2014, the European Commission published a proposal for a
new Occupational Pension Funds Directive.
Long awaited, the draft builds on the original 2003 Directive, with a view to
bringing occupational pensions into the more transparent era of good
governance that is emerging from the ashes of the global financial
crisis. As such, key aims of the new Directive are to introduce clearer and
more consistent member communications across EU Member States, to
remove remaining barriers for cross-border IORPS1
as well as measures
to support the EU Commission's roadmap to meet the long-term financing
needs of the European economy.
Key points
• The proposal for a new European Directive for occupational pension
schemes focuses on governance and risk management, transparency and
facilitating cross-border activity.
• With an eye to improving the long-term financing of the European
economy, the Commission anticipates that its proposal will better enable
pension schemes to invest in assets with a long-term economic profile.
• Provisions relating to solvency and capital requirements are not part of
the present proposals, although they are expected to make a comeback
later in the year.
It is anticipated that Member States will be required to implement the
Directive into national law by 31 December 2016.
Background
As with much of the new legislation relating to the financial sector, one of
the main drivers for the Commission's proposals on pensions is the 2008
financial crisis and the need to deal with the perceived lack of governance
and transparency. Set against the backdrop of individuals in some
Member States seeing their pensions reduced, scheme members
increasingly bearing the financial risk through greater use of DC, and an
ever ageing population, it is unsurprising that the draft Directive aims to

2. 2
ensure the security and adequacy of members' benefits in retirement.
The Commission is also keen to encourage greater take-up of cross-
border pensions, by making it easier for schemes to comply with the social
and labour law provisions of other Member States, and introducing a
procedure for transferring pension schemes (in whole or in part) between
Member States.
Objectives
The Commission's proposals are underpinned by four main objectives:
• removing remaining prudential barriers for cross-border IORPs,
• ensuring good governance and risk management,
• providing clear and relevant information to members and beneficiaries
• ensuring that supervisors have the necessary tools to effectively
supervise IORPs.
Moreover, the proposal wants to encourage occupational pension funds to
invest long-term in growth, environment and employment enhancing
economic activities.
Improving governance
The proposal provides for the following governance measures and
requirements:
• All persons who effectively run the IORP or have other key functions
need to be fit and proper for the role. It is suggested that such individuals
will have "professional qualifications, knowledge and experience which are
adequate to enable sound and prudent management" of the scheme and
that they "are of good repute and integrity”. Additional requirements on key
functions, including risk management, internal audit and, where relevant,
actuarial function and have in place written policies in these fields
• a requirement for schemes to have a remuneration policy, including for
outsourced activities
• have in place an effective risk-management system, as well as a self-
assessment of the risk management system (a “risk evaluation for
pensions’ or REP), to help schemes become more aware of their
commitments to scheme members and the buffers needed in this respect,
their funding risk, the assessment of the sponsor support - if any - , the
operational risks, the investment risks etc. .
• have in place an outsourcing policy, an effective internal control
system and a contingency plan
• a requirement for DC schemes to appoint a custodian, responsible for
the safe-keeping and oversight of the scheme's assets, with a view to

3. 3
reducing operational risk
• etc.
Member communications
The Commission is also proposing the introduction of a mandatory,
standardised, annual communication for occupational pension scheme
members across the EU (a pension benefit statement), to provide them
with clear and simple information about their individual pension
entitlement. The draft Directive sets out what information needs to be
included in the new pension benefit statement, with the aim of helping
members understand:
• what their replacement income will be after retirement
• what their investment risks are or will be.
Facilitating cross-border activity
The Commission has acknowledged the current complexities for schemes
operating cross-border, in particular the need for a scheme in one Member
State (referred to as the "home" Member State) to manage members
whose relationship with the scheme's sponsoring employer is subject to
the social and labour law of another Member State (the "host" state).
To remove the anomalies of a system which can result in more stringent
requirements for cross-border schemes compared with their local
counterparts, for example in terms of prudential regulation or investment
rules, the Commission is proposing to clarify the procedure for schemes
wishing to offer their services in other Member States and the respective
roles of the home and host Member States. It is also proposing to
introduce a procedure for transferring pension schemes (in whole or part),
to a scheme in another Member State.
Rather disappointingly, the rumoured removal of the requirement for cross-
border schemes to be fully funded at all times has not materialised.
Investment restrictions and long-term growth
Current restrictions on long-term investments are to be removed, unless
they can be justified on prudential grounds. For example, Member States
will not be able to restrict schemes from investing in long-term instruments
that are not traded on regulated markets, nor investment in non-listed
assets that finance low carbon and climate resilient infrastructure projects.
It is envisaged that this move will facilitate investment by pension funds in
assets with a long-term economic profile, therefore enabling them to play a

4. 4
greater role in supporting growth in the real economy.
Solvency and capital requirements
The most controversial elements of the original proposals for reform were
taken off the table in 2013 in the wake of considerable opposition from
around the EU. However, more work is being done behind the schemes
on the "Holistic Balance Sheet" (a measure for valuing pension schemes
which would require liabilities to be balanced by a mixture of assets,
contingent assets, sponsor support and possible access to compensation
schemes), and the need for schemes to maintain a risk-based funding
buffer. We expect to see further consultations on these measures in
autumn 2014.
Next steps
The draft Directive is significantly longer that the 2003 version and
contains additional requirements in the field of governance, risk
management, information and communication etc. Moreover, it changes
the procedure and also to a certain extent the terms and modalities for
cross-border IORPs and allows more flexibility in long-term investments.
Therefore, it is likely that in all EU member states changes will be
necessary.
It is expected that national states will be required to bring the Directive into
national law by 31 December 2016.
1
"Occupational or workplace pensions, formally referred to in the Directive as “Institutions
for Occupational Retirement Provision”
Originally posted on the Ius Laboris Knowledge Base:
http://www.globalhrlaw.com
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