EIOPA-CP-11/006

25 October 2011

Response to Call for Advice

on

the review of Directive 2003/41/EC: second consultation

EIOPA welcomes comments from interested parties on the following response to Call for Advice.

Please send your comments to EIOPA by email () by2.01.2012, indicating the reference "EIOPA-CP-11-006".

Please note that comments submitted after the deadline or not submitted in the provided template format in MS Word cannot be processed.

EIOPA will make all comments available on its website, except where respondents specifically request that their comments remain confidential.

EIOPA – Westhafen Tower, Westhafenplatz 1 - 60327 Frankfurt – Germany - Tel. + 49 69-951119-20;

Fax. + 49 69-951119-19; site: www.eiopa.europa.eu

© EIOPA 2011

Table of contents

1. Details of the consultation 6

1.1. Introduction 6

1.2. Background to the call for advice 6

1.3. Previous consultation 6

1.4. EIOPA’s approach to consultation 7

1.5. Structure of this consultation 7

1.6. Deadline for responses 7

2. Introduction to EIOPA’s advice 8

2.1. Why is the European Commission reviewing the IORP directive? 8

2.2 What advice is the Commission seeking from EIOPA? 8

2.3 What does EIOPA’s advice recommend? 8

2.4 Defined contribution schemes 8

2.5 Technical advice on harmonisation 8

2.6 Consistency across financial sectors 9

2.7 Preliminary impact assessment 10

2.8 Other issues 11

2.9 The process for delivery of the advice 11

3. Scope and definitions 13

4. CfA 1: Scope of the IORP Directive 14

4.1. Extract from the call for advice 14

4.2. Background 14

4.3. Explanatory text 17

4.4. Preliminary impact assessment 25

4.5. EIOPA’s advice 26

4.6. Questions for Stakeholders 27

5. CfA 2: Definition of cross-border activity 28

5.1. Extract from the call for advice 28

5.2. Background 28

5.3. Explanatory text 29

5.4. Preliminary impact assessment 34

5.5. EIOPA’s advice 35

5.6. Questions for Stakeholders 35

6. CfA 3: Ring fencing 36

6.1. Extract from the call for advice 36

6.2. Background 36

6.3. Explanatory text 43

6.4. Preliminary impact assessment 51

6.5. EIOPA advice 53

6.6. Questions for Stakeholders 56

7. CfA 4: Prudential regulation and social and labour law 57

7.1. Extract from the call for advice 57

7.2. Background 57

7.3. Explanatory text 58

7.4. Preliminary impact assessment 60

7.5. EIOPA’s advice 63

7.6. Questions for Stakeholders 64

8. Quantitative requirements 65

8.1. Introduction to CfA 5 and 6 65

8.2. CfA 6 on a similar approach for all types of IORPs 67

8.3. Holistic balance sheet approach 74

8.4. Questions for Stakeholders 85

9. CfA 5: Valuation of assets, liabilities and technical provisions 86

9.1. Extract from the call for advice 86

9.2. Background 86

9.3. Explanatory text 97

9.4. Preliminary impact assessment 146

9.5. EIOPA advice 147

9.6. Questions for Stakeholders 157

10. CfA 6: Security mechanisms 159

10.1. Extract from the call for advice 159

10.2. Background 160

10.3. Explanatory text 199

10.4. Preliminary impact assessment 247

10.5. EIOPA advice 247

10.6. Questions for Stakeholders 253

10.7. Annex: Benefit adjustment mechanisms 254

11. CfA 7: Investment rules 259

11.1. Extract from the call for advice 259

11.2. Background 260

11.3. Explanatory text 265

11.4. Preliminary impact assessment 287

11.5. EIOPA advice 288

11.6. Questions for Stakeholders 293

12. CfA 8: Objectives and pro-cyclicality 294

12.1. Extract from the call for advice 294

12.2. Background 294

12.3. Explanatory text 296

12.4. Preliminary impact assessment 301

12.5. EIOPA advice 301

12.6. Questions for Stakeholders 302

13. Governance and other qualitative requirements 303

14. CfA 9: General principles of supervision, scope and transparency and accountability 304

14.1. Extract from the call for advice 304

14.2. Background 304

14.3. Explanatory text 313

14.4. Preliminary impact assessment 316

14.5. EIOPA advice 318

14.6. Questions for Stakeholders 319

15. CfA 10: General supervisory powers 320

15.1. Extract from the call for advice 320

15.2. Background 320

15.3. Explanatory text 328

15.4. Preliminary impact assessment 332

15.5. EIOPA advice 333

15.6. Questions for Stakeholders 335

16. CfA 11: Supervisory review process and capital add-ons 336

16.1. Extract from the call for advice 336

16.2. Background 336

16.3. Explanatory text 340

16.4. Preliminary impact assessment 341

16.5. EIOPA advice 342

16.6. Questions for Stakeholders 343

17. CfA 12: Supervision of outsourced functions and activities 344

17.1. Extract from the call for advice 344

17.2. Background 344

17.3. Explanatory text 346

17.4. Preliminary impact assessment 350

17.5. EIOPA advice 352

17.6. Questions for Stakeholders 353

18. CfA 13: General governance requirements 354

18.1. Extract from the call for advice 354

18.2. Background 354

18.3. Explanatory text 357

18.4. Preliminary impact assessment 361

18.5. EIOPA advice 363

18.6. Questions for Stakeholders 363

19. CfA 14: Fit and proper 365

19.1. Extract from the call for advice 365

19.2. Background 365

19.3. Explanatory text 368

19.4. Preliminary impact assessment 372

19.5. EIOPA advice 373

19.6. Questions for Stakeholders 374

20. CfA 15: Risk management 375

20.1. Extract from the call for advice 375

20.2. Background 375

20.3. Explanatory text 378

20.4. Preliminary impact assessment 383

20.5. EIOPA advice 384

20.6. Questions for Stakeholders 386

21. CfA 16: Own risk and solvency assessment 387

21.1. Extract from the call for advice 387

21.2. Background 387

21.3. Explanatory text 389

21.4. Preliminary impact assessment 392

21.5. EIOPA advice 393

21.6. Questions for Stakeholders 394

22. CfA 17: Internal control system 396

22.1. Extract from the call for advice 396

22.2. Background 396

22.3. Explanatory text 398

22.4. Preliminary impact assessment 401

22.5. EIOPA advice 403

22.6. Questions for Stakeholders 403

23. CfA 18: Internal audit 404

23.1. Extract from the call for advice 404

23.2. Background 404

23.3. Explanatory text 405

23.4. Preliminary impact assessment 408

23.5. EIOPA advice 409

23.6. Questions for Stakeholders 410

24. CfA 19: Actuarial function 411

24.1. Extract from the call for advice 411

24.2. Background 411

24.3. Explanatory text 413

24.4. Preliminary impact assessment 418

24.5. EIOPA advice 420

24.6. Questions for Stakeholders 421

25. CfA 20: Outsourcing 422

25.1. Extract from the call for advice 422

25.2. Background 422

25.3. Explanatory text 424

25.4. Preliminary impact assessment 427

25.5. EIOPA advice 428

25.6. Questions for Stakeholders 429

26. CfA 21: Custodian / depository 430

26.1. Extract from the call for advice 430

26.2. Background 430

26.3. Explanatory text 444

26.4. Preliminary impact assessment 453

26.5. EIOPA advice 458

26.6. Questions for Stakeholders 462

27. Disclosure requirements 464

28. CfA 22 Information to supervisors 465

28.1. Extract from the call for advice 465

28.2. Background 465

28.3. Explanatory text 469

28.4. Preliminary impact assessment 472

28.5. EIOPA advice 473

28.6. Questions for Stakeholders 474

29. CfA 23: Information to members / beneficiaries 475

29.1. Extract from the Call for Advice 475

29.2. Background 476

29.3. Explanatory text 478

29.4. Preliminary impact assessment 503

29.5. EIOPA advice 504

29.6. Questions for Stakeholders 508

30. Collated questions for stakeholders 509

1.  Details of the consultation

1.1.  Introduction

1.1.1.  This consultation is on EIOPA’s draft advice to the European Commission on the review of Directive 2003/41/EC (the IORP directive). The deadline for responses is Monday 2 January 2012.

1.2.  Background to the call for advice

1.2.1.  In April 2011 the European Commission asked EIOPA for advice by mid-December 2011 on the EU-wide legislative framework for IORPs. Although the deadline was later extended the timetable meant that this consultation is on a document which is a work in progress. We wanted however to give stakeholders the earliest possible opportunity to consider the entire call for advice.

1.2.2.  Advice is sought on the scope of the IORP directive, on certain cross-border aspects and on three other areas. Firstly, what quantitative requirements should apply to IORPs and how should these be measured. Secondly, what should be the qualitative requirements, particularly in respect of the governance of IORPs. Thirdly, what information should be provided in respect of IORPs to members and beneficiaries, and to supervisory authorities.

1.2.3.  Advice is sought on the extent to which the legislative framework for IORPs should be similar to that for other financial institutions and products, in particular the Solvency II framework for insurance and also the UCITS IV Key Investor Information Document.

1.3.  Previous consultation

1.3.1.  EIOPA consulted between 8 July and 15 August 2011 on the scope, cross-border activity, prudential regulation and several governance aspects of the call for advice. 49 responses were received. We are grateful to all those who took the trouble to respond.

1.3.2.  Reasoned feedback by EIOPA on the responses to the consultation is being published simultaneously and is available via the EIOPA website. The responses themselves are also being published. In both cases the three respondents who asked for their response to be confidential are excluded. The draft advice reflects as appropriate the responses received. In many cases EIOPA’s reasoned feedback is brief. This is for two principal reasons. Firstly, a substantial part of many responses were on issues which were not part of the consultation on this occasion such as capital requirements. Or the points raised went beyond the technical advice which it is EIOPA’s remit to provide e.g. suggestions that providers of services covered by other directives should come under the IORP directive. Secondly, our judgement was that what really mattered was that all the responses were read and considered before writing the next draft of the advice, even if that meant feedback on responses, in the time available, could only be brief.

1.3.3.  This response is on the entire call for advice. As such, EIOPA is re-consulting on the areas covered by the first consultation.

1.4.  EIOPA’s approach to consultation

1.4.1.  EIOPA will adhere in its consultation to the principles established in EIOPA’s Public Statement of Consultation Practices[1]. One motivation for consulting in two stages was Article 3.2 of the Public Statement, to consult at a sufficiently early stage to enable EIOPA to take the responses into account.

1.4.2.  Article 3.3 of the Public Statement says EIOPA will aim at allowing a three month consultation period. However, imposition of an external timetable is given as one reason to shorten the consultation period, which is the case on this occasion. The consultation period has been slightly shortened to ten weeks.

1.5.  Structure of this consultation

1.5.1.  Each chapter of the call for advice is considered under the following headings:

·  Extract from the call for advice

·  Background

·  Explanatory text

·  Preliminary impact assessment

·  EIOPA advice

·  Questions for stakeholders

1.6.  Deadline for responses

1.6.1.  The deadline for responses is Monday 2 January 2011. Please note in addition the need for responses to be submitted in MS Word on the template provided. It would be greatly appreciated if respondents could please restrict general comments only to those issues which are not covered in the questions for stakeholders which follow each part of the call for advice and which are repeated, for convenience, at the end of this document.

2.  Introduction to EIOPA’s advice

2.1.  Why is the European Commission reviewing the IORP directive?

2.1.1  The Commission gave three main reasons for reviewing the IORP directive.

2.1.2  Firstly, in order to propose measures which simplify the setting-up of cross-border pension schemes. According to the CfA there are currently fewer than 80 out of around 140,000 IORPs in the EU operating cross-border; EIOPA’s more recent Market Development Report gave a figure of 84 cross-border IORPs[2]. Secondly, in order to propose measures that would allow IORPs to benefit from risk-mitigation mechanisms. Thirdly, to secure modernisation of prudential regulation for IORPs which operate DC schemes.

2.2  What advice is the Commission seeking from EIOPA?

2.2.1.  The Commission is seeking advice from EIOPA on how to improve the IORP Directive. The current directive provides for prudential regulation of IORPs based on minimum harmonisation and mutual recognition.

2.3  What does EIOPA’s advice recommend?

2.3.1.  The Commission’s call for advice covered 23 topics. EIOPA has provided technical advice on each of those topics. The advice recommends in summary:

[A summary will be added when the advice is finalised]

2.4  Defined contribution schemes

2.4.1.  The Commission stated that “It is important to consider whether the IORP Directive needs to be adjusted to better address the specific needs for the regulation and supervision of DC schemes”.

2.4.2.  EIOPA’s aim is that members should have confidence in their DC IORP regardless of where in the EU it is located.

2.4.3.  [A summary of what is advised on DC schemes will be added when the advice is finalised].

2.5  Technical advice on harmonisation

2.5.1.  The Commission’s aim is “to attain a level of harmonisation where EU legislation does not need additional requirements at the national level”[3]. Elsewhere the Commission states it is seeking increased harmonisation in the calculation of technical provisions, and greater consistency in recovery periods across member states.

2.5.2.  EIOPA acknowledges the Commission’s view that the internal market in pensions is underdeveloped in terms of the number of institutions where the employer and the IORP are in different member states. EIOPA shall contribute to improving the functioning of the internal market[4].

2.5.3.  EIOPA’s advice implies greater harmonisation of IORP’s regulation in some areas EIOPA’s advice is that greater harmonisation in the IORP directive would be technically possible. EIOPA emphasises that the proposals for greater harmonisation follow from the CfA’s objective of increasing the level of harmonisation. The advice demonstrates which proposals are technically possible without challenging future political decisions in this respect. Increasing harmonisation of occupational pension provision is principally an area which requires a political steer.

2.5.4.  The areas where greater harmonisation is recommended on technical grounds are: [the areas will be added when the advice is finalised].

2.6  Consistency across financial sectors

2.6.1.  The Commission’s view is that EIOPA’s advice “should endeavour to maintain consistency across financial sectors….the general layout of the supervisory system should, to the extent necessary and possible, be compatible with the approach and rule used for the supervision of life assurance undertakings subject to Directive 2009/138/EC (Solvency II[5])”.