The past few years, and especially after the Greek debt crisis, there have been in depth discussions in the Greek market about alternative vehicles to group pension insurance programs, for funding employer pension benefits.

The reasons are mainly focused on optimizing risk management and delivering the added value for the specific benefits, by applying best practices in governance, investment management and members’ communication.

Why do IORPs appear to be gaining ground over group insurance programs?

There are both qualitative and quantitative reasons. Specifically:

a. Risks mitigation and enhanced risk management

Counterparty risk: In the case of group insurance policy, the assets of the contract are under the name of the insurance company. Any problem related to the solvency of the insurance company, which may be due to insured risks that do not related to the retirement plan, entails the transfer of members’ accounts to the liquidation process of the company, without priority against the other policy holders or guaranteed refunding of the total reserve. In IORPs, the specific risk does not exist especially in the case that the only purpose of the fund is the financing of defined contribution benefits.

Investment risk: The regulatory framework of the IORP provides strong governance of investments and supervision by the Hellenic Capital Market Commission. Governance of investments in group insurance programs is weak.

b. Maximization of benefits

Return on investment: The traditional way of investing the assets of group insurance programs was through guaranteed investment return products. Due to the significant fall in interest rates and the regulatory framework of insurance companies, it is no longer expensive for insurance companies to provide guaranteed returns. Also, insurance companies have not invested resources in creating a framework of investment options or in managing investment strategies. IORPs, due to the investment governance framework and the required professional management, have achieved significant returns, in relation to the limited risks they take.

Tax Framework: Lumpsum benefits are delivered by an IORP tax-free and are not subject to a contribution in the sense of a solidarity levy.

Members’ communication: IORPs require transparency in communicating transactions and expenses and provide extensive information to the members, through multiple communication channels (fund website, individual benefit statement, call centers) which increase their appreciation for the benefits offered. There is no corresponding requirement in group pension insurance policies.

c. Pension benefits policy

Early and/or partial redemption is provided by the group insurance policies. In this case, the benefits are more like a savings plan rather than a retirement plan. On the contrary, the aim of IORPs is the supplement of the pension income; thus, benefits are paid only upon the fulfillment of the conditions for granting the entitlement, which are foreseen in the deed of the IORP. IORPs therefore fit to benefit policies aimed at rewarding and retaining talent.

d. Optimal benefit management

Framework: in relation to group pension insurance, there is a significant improvement in governance through a coherent legal framework and multifaceted supervision (national actuarial authority, capital market committee, etc.)

Multi-employer IORP: According to European Legislation, there is the possibility of joining a multi-employer IORP, which is established in another EU country and carries out cross-border activity. This solution is ideal for employers of small and medium-sized companies or for employers who do not desire to be involved in the management of retirement benefits but want to realize the advantages of an IORP. Unfortunately, in Greece there is no framework for the creation of multi-employer IORP, but employers may seek such solutions in other EU countries.

Are IORPs an expensive solution that adds significant workload to human resources departments?

Taking into account the total cost of administration and investments’ management, IORP is the preferred solution, especially for employers of medium or large size companies.

A thorough analysis of the relative total expense ratio of group pension contracts, leads to rates between 1.5% -2.5% on the individual account. The total cost for the IORP is significantly lower than that of the group programs, especially for funds with assets of 10million euros and above.

According to the market practice, all the functions of the IORP are assigned by the fund’s Board of Directors to specialized third-party providers, who generally use digital platforms and communication tools (internet platforms and interfaces with payroll departments) that greatly reduce the workload of the human resources departments.

What is the process for establishing an IORP?

The establishment process provides for the preparation of a relevant file for approval by the supervisory authorities. The file contains the articles of association of IORP and the founding actuarial study.

The Articles of Association of an IORP comprise the main governing text of the fund, which mainly includes following:

The eligibility criteria to become a member of the fund and the reason for losing the insurance status.
The composition and responsibilities of the Board of the fund.
The rights and obligations of the members of the fund.
The income resources, i.e. the contribution structure, such as the categories and the contribution rates.
The vesting conditions.
The conditions for granting a benefit.
The process of dissolution & liquidation of the fund.

Drafting the deed is not very time consuming, as it can be based on the experience of relevant deeds from IORPs that are in operation.

In summary, I consider that establishing an IORP is for the business community a modern tool for financing pension benefits, which offers strong incentives to attract talent from both the domestic and the European market, as it is fully harmonized and compatible with the provisions of the relevant European guidelines and modern human resource practices and policies.