Some EU Member State pension funds systems already out in front of IORP II on sustainable investing. The final draft of the new Institutions for Occupational Retirement Provision (IORP II) was voted through by the European Parliament in December, and will be implemented in January 2019.
IORP II sets out how pension funds should be governed, for example setting out the role of trustees, risk management and prudential requirements. But it will also for the first time require pension schemes to set out their approach to sustainable investing.
The extent to which IORP II will significantly affect current national law varies according to each Member State, and in the case of The Netherlands the main impact is expected to be on the information requirements for the annual statements to pension fund members.
The Code of the Dutch Pension Funds is published by the Federation of the Dutch Pension Funds and the Labour Foundation, which is the national consultative body of the central organisations of both employers and employees. The Code forms part of the overall system of legislation, and sets out how pension boards should conduct themselves.
Pension funds must take sustainable investment into account, and also consider good corporate governance. The Board of Trustees is “responsible for ensuring that the investment policy includes an explanation of how the fund takes account of the environment and climate, human rights, and social relationships.”
“The Dutch Code, and the legislation regarding the boards of pension funds contained in the Pension Act, are already ahead of almost all the new IORP II requirements, for example on the structure and responsibilities of the Board,” explains Marthe van den Broek, pension lawyer at Bergamin Pensions Law in Rotterdam.
“The Netherlands, and also some Scandinavian countries, are ahead of IORP II on social guidelines and responsible investment,” she adds. “A requirement to consider sustainable investment was included in the revised Code, which was introduced in January 2014, and is now one of the areas of focus of the supervisor—the central bank DNB.”
The Dutch Code says that, regarding the sustainable investment policy, it is essential that support is created through a dialogue with supervisors. It also adds that the factor determining the effectiveness of the Code is the way in which the pension funds interpret the intention of the Code—not the degree to which they abide by the letter of the Code (ie simply treat it as a box ticking exercise).
IORP II says that Member States should require IORPs to explicitly disclose where environmental, social and governance factors are considered in their investment decisions.
However, this does not preclude an IORP from satisfying the requirement by stating that ESG factors are not considered in its investment policy, or that the costs to the system to monitor the relevance and materiality of such factors, and how they are taken into account, are disproportionate to the size, nature, scale and complexity of its activities.
Source: Rules & Regulations, March 21, by Michael Marray