July 10, 2019

EIOPA published four opinions to assist national competent authorities in the implementation of the Institutions for Occupational Retirement Provisions (IORP) II Directive. The topics addressed in the opinions are the use of governance and risk assessment documents in the supervision of IORPs, the practical implementation of the common framework for risk assessment and transparency for IORPs, and the supervision of the management of operational risks as well as the environmental, social, and governance (ESG) risks faced by IORPs. Two years after the publication of these opinions, EIOPA will look into the supervisory practices of the competent authorities with a view to evaluate supervisory convergence.

The opinion on the use of governance and risk assessment documents in the supervision of IORPs sets out expectations of EIOPA on minimum information content to describe how pension funds conduct their own-risk assessment and present results from their own-risk assessment. National competent authorities should review and ensure that the own-risk assessment is forward-looking, considering internal and external emerging developments likely to affect the future risk profile of pension funds. Annex 1 to this opinion provides guidance for competent authorities on the use of relevant governance documents in the supervision of IORPs’ investment policy. Annex 2 provides guidance for the competent authorities on IORPs’ own-risk assessment. Annex 3 provides an overview of the risk management rules within the system of governance in the IORP II Directive. Annex 4 provides an illustrative template for the voluntary use by competent authorities and IORPs.

The opinion on the practical implementation of the common framework for risk assessment and transparency for IORPs encourages national competent authorities to make IORPs aware of the availability of the common framework as a tool for risk assessment and to stand ready to support pension funds in the application of the tool. Annex 1 contains principles and technical specifications for IORPs to value the common framework’s balance sheet and perform the standardized risk assessment (SRA) calculations. The opinion is also accompanied by a calculation spreadsheet to assist IORPs in calculating, including through the provided simplifications, and aggregating the SRA (sub-)modules.

The opinion on the supervision of the management of operational risks faced by IORPs stresses the importance of forward-looking supervision. With the shift away from defined benefit pensions and the emergence of multi-sponsor IORP providers, national competent authorities should increasingly pay attention to pension funds' future viability and operational liabilities of defined contribution schemes. Although new market and regulatory developments should generally improve occupational pensions, they may also lead to greater complexity in retaining supervisory oversight of the full range of activities performed by pension funds or outsourced to service providers. Furthermore, the rapid evolution and transmissibility of cyber threats necessitate a forward-looking and cross-sectoral approach to the supervision of cyber risk faced by pension funds.

The opinion on the supervision of the management of ESG risks faced by IORPs provides an illustrative mapping of how ESG risks may arise in traditional prudential risks. As institutions tasked with a social purpose of providing retirement benefits, European pension funds should be exemplary leaders of responsible ownership. Thus, national competent authorities should encourage pension funds to consider the impact of their long-term investment decisions and activities on ESG factors through their stewardship role, as well as having regard to the impact of sustainability risks on pension fund liabilities. 

 

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Keywords: Europe, EU, Insurance, IORP II Directive, IORPs, Opinion, Governance, Risk Assessment, Operational Risk, ESG, Own-Risk Assessment, EIOPA

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