Prudential Supervision

Objective of prudential supervision

The main objective of prudential supervision is to protect the rights of members and beneficiaries and to ensure the stability and soundness of schemes and trust RACs.

A scheme or trust RAC shall be subject to prudential supervision by the Pensions Authority including the supervision by the Pensions Authority of the following where applicable:

• the conditions of operation;
• technical provisions;
• funding of technical provisions;
• regulatory own funds;
• available solvency margin;
• required solvency margin;
• investment rules;
• investment management;
• system of governance; and
• information to be provided to members and beneficiaries.

General principles of prudential supervision

The Pensions Authority is  responsible for the prudential supervision of schemes and trust RACs. It shall carry out prudential supervision of schemes and trust RACs –

• based on a forward-looking and risk-based approach, and
• in a manner that comprises an appropriate combination of off-site activities and on-site inspections.

The Pensions Authority shall apply the functions under the IORPs Regulations in a manner which is proportionate to the size, nature, scale and complexity of the activities of the scheme or trust RAC.

The Pensions Authority shall take into consideration the potential impact of its actions on the stability of the financial systems in the European Union, particularly in emergency situations when it is performing its functions

Powers of intervention and duties of Pensions Authority

The Pensions Authority shall require every scheme and trust RAC registered to have in place –

• sound administrative procedures,
• sound accounting procedures, and
• adequate internal control mechanisms.

Where the Pensions Authority decides to prohibit or restrict the activities of a scheme or trust RAC, it shall set out in that decision detailed reasons for it and shall notify the scheme or trust RAC concerned of that decision and without prejudice to the generality of the foregoing,

The Pensions Authority shall notify EIOPA where it has –

• revoked an authorisation, or
• given a direction.

Supervisory review process

The Pensions Authority shall, review the strategies, processes and reporting procedures established by the trustees of a scheme or trust RAC to comply with the IOPRs legislaiton1) (‘supervisory review’).

When carrying out a supervisory review the Pensions Authority shall consider –

• the size, nature, scale and complexity of the activities of the scheme or trust RAC, and
• the circumstances in which the scheme or trust RAC is operating and, where relevant, the person (if any) carrying out the outsourced key functions or any other activity for the trustees of the scheme or trust RAC.

A supervisory review shall comprise the following:

• an assessment of the qualitative requirements relating to the system of governance;
• an assessment of the risks that the scheme or trust RAC faces;
• an assessment of the ability of the scheme or trust RAC to assess and manage those risks.

The Pensions Authority shall determine the minimum frequency and scope of the supervisory review referred to in this section having regard to the size, nature, scale and complexity of the activities of the scheme or trust RAC concerned.

Where the Pensions Authority carries out a supervisory review of a scheme or trust RAC –

it may request information for the purposes of carrying out that review from

• the trustees of that scheme or trust RAC or an employee of that scheme or trust RAC,
• a person who is an agent and
• the employer or an officer or employee of the employer

A person to whom a request has been made shall provide information to the Pensions Authority as the Pensions Authority may request in the course of carrying out the supervisory review.

Monitoring Tools for Financial Compliance

The Pensions Authority shall have in place one or more monitoring tools that enable it to identify deteriorating financial conditions in a scheme or trust RAC and to monitor how that deterioration is remedied.

Where, in the application of a monitoring tool  the Pensions Authority requires information for the purposes of that application in respect of a scheme or trust RAC, the trustees of such scheme or trust RAC shall provide the Pensions Authority with information requested by it for the purposes of that application.

Stress-test

The  Pensions Authority may, by notice in writing, require the trustees of a scheme or trust RAC to carry out a stress-test, or cause a stress-test to be carried out, in respect of the scheme or trust RAC concerned for the purposes of enabling the identification of deteriorating financial conditions in that scheme or trust RAC and to monitor how that deterioration is remedied.

A notice shall state –

information relating to the stress-test that is to be carried out in respect of the scheme or trust RAC,  having regard to the matters to be assessed –

• one or more methodologies to be used in the stress-test,
• different sets of economic circumstances, and
• the reporting arrangement,

that are to be applied, by the trustees of the scheme or trust RAC in the stress-test. It shall state the date, on which the trustees shall notify the Pensions Authority of the results of the stress-test.

A stress-test shall assess –

the adequacy of the methods and practices of the scheme or trust RAC designed to identify possible events or future changes in economic conditions that could have an adverse effect on the overall financial standing of the scheme or trust RAC, and

the ability of the scheme or trust RAC to withstand those possible events or future changes in economic conditions.

The date on which the results of a stress-test shall be notified to the Pensions Authority shall be  not later than 3 months from the date of receipt of the notification under or a date specified by the Pensions Authority.

• carry out the stress-test, or cause the stress-test to be carried out, and
• notify the Pensions Authority of the results of the stress-test not later than – 3 months from the date of receipt of that notice, or where a date was specified in that notice, that date.

The Pensions Authority shall review the results of a stress-test provided to it.

Advisory Notice and External Report

The Pensions Authority may for the purposes of prudential supervision, serve a notice (‘Advisory Notice’) on the trustees of a scheme or trust RAC where –

in the opinion of the Pensions Authority, the trustees of the scheme or trust RAC concerned are failing to act in a manner that would enable the trustees concerned to satisfy certain statutory requirements  or where  following a supervisory review and having considered that review, it is of the opinion that there are one or more weaknesses or deficiencies (or both) in the scheme or trust RAC concerned for which a remedy is required to address, for the purpose of advising the trustees concerned of the action that is required to be taken to satisfy a requirement or provide a remedy to address the weakness or deficiency (or both)).

An Advisory Notice shall –

• state the opinion, of the Pensions Authority,
• specify –the requirements, referred to or the weakness or deficiency (or both)
• specify the reasons for the opinion
• advise the trustees concerned of the action that is required to be taken or  provide a remedy to address the weakness or deficiency (or both)
• specify a date by which the action referred is to be taken by the trustees concerned, and
• specify a date on which the trustees concerned shall notify the Pensions Authority as to the steps taken by them to carry out the action referred to.

Where the Pensions Authority proposes to serve an Advisory Notice, it shall –

• notify the trustees concerned, in writing, of its intention to serve an Advisory Notice,
• inform the trustees, in respect of such proposal, of the opinion in respect of which it is proposed to serve the Advisory Notice,  the requirements to be satisfied, or as the case may be, the weakness or deficiency (or both),
• the reasons for that opinion, and
• the actions which would be required to take as a remedy to ensure the satisfaction of the requirements or address a weakness or deficiency referred to (or both), and
• inform the trustees concerned that they may make a submission, in writing, on the matters specified in the notification, to the Pensions Authority within 21 days.

Where a submission is made to the Pensions Authority within the period referred to, it shall consider the submission and having had regard to all the circumstances of the scheme or trust RAC concerned, it may –f it is satisfied that it is reasonable to do so, serve an Advisory Notice on the trustees of the scheme or trust RAC concerned, with or without modification of any matter specified in the notification and the Advisory Notice may include any matter set out in, or arising from, the submission or  if it is not satisfied that it is reasonable to do so, decide not to serve the Advisory Notice and it shall notify, in writing, the trustees concerned of its decision.

The absence of the submission shall not operate to prevent the service of the Advisory Notice after that period has elapsed.

Where the Pensions Authority is of the opinion that the trustees of a scheme or trust RAC, on whom an Advisory Notice has been served, have taken the action specified in the Advisory Notice, it shall withdraw the Advisory Notice and notify the trustees accordingly.

The Advisory Notice and the information, if any, provided by the trustees shall be admissible in evidence in legal proceedings.  The trustees of a scheme or trust RAC may appeal an Advisory Notice served on them under this section to the High Court.

Notice to trustees to provide External Report

Where the Pensions Authority is in the course of a supervisory review, following receipt of a stress-test or  following receipt of compliance statement  of the opinion that the information provided to it by, or pursuant to, the supervisory review, stress-test or Part VIB compliance statement –

• is not sufficient for it to determine, for the purposes of the prudential supervision of a scheme or trust RAC, that the scheme or trust RAC is, or the trustees of such scheme or trust RAC are, in compliance with one, or more, of the provisions specified or
• has given grounds for concern as to whether the scheme or trust RAC is, or the trustees of such scheme or trust RAC are, for the purposes of prudential supervision of a scheme or trust RAC,

the Pensions Authority may, by notice in writing given to the trustees of the scheme or trust RAC concerned, require the trustees, within a period specified in the notice, to provide the Pensions Authority with a report on the matters set out that is prepared by an External Report reviewer (in the IORPs Regulations referred to as ‘External Report’) for the purposes of the prudential supervision of that scheme or trust RAC.

The External Report shall, for the purposes of prudential supervision, examine the compliance by the scheme or trust RAC concerned or the trustees of such scheme or trust RAC and decide of such compliance in respect of one or more provisions.

A notice shall state –

• the date of the notice,
• the period within which the trustees of the scheme or trust RAC concerned shall nominate a person to the Pensions Authority for approval,
• the purpose of the External Report,
• the scope of the External Report,
• the timetable for completion of the External Report,
• the matters, that are required to be reported on,
• whether the External Report is to include recommendations,
• the form of the External Report,
• where appropriate, the methodology to be used in the preparation of the External Report, and
• any other matter to which the Pensions Authority, having regard to the requirements of the prudential supervision of a scheme or trust RAC under this Part, considers appropriate.

External Report reviewer

An External Report shall be prepared by a person (in the IORPs Regulations referred to as the ‘External Report reviewer’) who is nominated by –

• the trustees of the scheme or trust RAC concerned, within the period specified in the notice or
• the Pensions Authority, where no person is nominated by the trustees within the period specified in the notice given or the Pensions Authority is not satisfied with the person nominated

The External Report reviewer shall be a person appearing to the Pensions Authority to have the skills that are necessary to prepare an objective report on the matters concerned and, without prejudice to the generality of the foregoing, may be an auditor, actuary, accountant, investment manager, lawyer or any other person with relevant business, technical or technological skills required for the purpose of preparing the External Report.

The trustees of a scheme or trust RAC shall nominate a person to be an External Report reviewer and submit that nomination to the Pensions Authority for approval of that nomination and when considering whether to approve a nomination or make a nomination the Pensions Authority shall have regard to the circumstances giving rise to the requirement for the External Report and whether the person it proposes to approve or nominate appears to have –

• the competence and capabilities and knowledge necessary to prepare an External Report on the matters concerned,
• the ability to complete the External Report within the period specified by the Pensions Authority in the notice given,
• any relevant specialised knowledge, including specialised knowledge of the operation of a scheme or trust RAC and the matters to be reported on, and
• any potential conflict of interest in reviewing the matters to be reported on and has sufficient detachment, having regard to any existing professional or commercial relationships, to give an objective opinion.

The Pensions Authority may approve a nomination and where it approves the nomination, or makes a nomination it shall notify the trustees of the scheme or trust RAC concerned, in writing, as soon as practicable.

Contract with External Report reviewer

Where an External Report reviewer is approved or nominated by the Pensions Authority, the trustees of the scheme or trust RAC concerned shall enter into a written contract with the External Report reviewer.

It shall be a term of the contract that –

• the External Report reviewer is required to prepare, for the trustees of the scheme or trust RAC concerned, an External Report in accordance with the notice given and to provide that External Report to the trustees as soon as practicable after it is completed,
• that any duty owed by the External Report reviewer to the trustees concerned which might limit the provision of information or opinion by those trustees to the External Report reviewer in preparing an External Report under the IORPs Regulations shall be waived,
• that the contract is not varied or rescinded in such a way as to extinguish or alter the provisions included in the contract under this subsection.

The contract that the External Report reviewer is required and permitted to provide to the Pensions Authority the following where the Pensions Authority so requests –

• periodic updates on progress and issues arising,
• interim reports,
• documents and working papers,
• copies of any draft of the External Report given to the trustees concerned, and
• specific information about the planning and progress of the work to be undertaken (which may include project plans, progress reports including the amount of work completed, details of time spent, costs to date and details of any significant findings and conclusions)

The External Report reviewer is required and permitted to provide to the Pensions Authority the following where the Pensions Authority so requests –

• periodic updates on progress and issues arising,
• interim reports,
• documents and working papers,
• copies of any draft of the External Report given to the trustees concerned, and
• specific information about the planning and progress of the work to be undertaken (which may include project plans, progress reports including the amount of work completed, details of time spent, costs to date and details of any significant findings and conclusions), and

If the Pensions Authority considers it appropriate, it may request the trustees of the scheme or trust RAC in respect of which the External Report is being made, to give to the Pensions Authority a copy of the draft contract before it is made with the External Report reviewer and the Pensions Authority may require modifications to be made to the draft contract as it considers appropriate.

Completion of External Report

When the External Report reviewer has completed the External Report, he or she shall deliver it to the trustees of the scheme or trust RAC concerned.

The trustees shall as soon as practicable deliver a copy of the External Report to the Pensions Authority not later than the date specified in the notice given under section 26N(1).

Where the External Report reviewer is unable to deliver the External Report to the trustees on or before the date referred to, the External Report reviewer shall notify the trustees of the scheme or trust RAC concerned and the Pensions Authority as soon as practicable of the delay and provide an estimate of time required to deliver the External Report.

The Pensions Authority shall, on receipt of the External Report, have regard to it and examine the information set out in it and consider whether, in respect of one or more provisions set out in the notice referred , the scheme or trust RAC or the trustees of a scheme or trust RAC –

• is, or are, in compliance with those provisions,
• is, or are, not in compliance with those provisions, or
• is, or are, in compliance with some of those provisions and not in compliance with some of them.

External Report: supplemental provisions

The costs of, and any costs incidental to, the preparation of the External Report shall be borne by the scheme or trust RAC.

The trustees of a scheme or trust RAC in respect of which an External Report is prepared shall give all such assistance to the External Report reviewer as he or she may reasonably require for the purposes of the preparation of an External Report.

The Pensions Authority shall not be bound by the content of an External Report and an External Report shall not be taken to be a decision or opinion of the Pensions Authority for any purpose.

The Pensions Authority shall not be liable for any acts or omissions of an External Report reviewer.