The emergence of political agreement— after a period of deadlock—on the draft European Union (EU) pension fund directive has been greeted as modest progress rather than a momentous event. At a June 4, 2002 meeting, the ministers of Economics and Finance (ECOFIN) reached political agreement (‘agreement to agree’) on a proposed directive on the activities of institutions for occupational retirement pro-vision (IORPs).

That the proposed directive is modest in its thrust is a reflection of the complexities and the long-term nature of the endeavour. Politicians are only ready to move so far— opening the doors to the perceived onslaught of the Anglo-Saxon financial-services industry and expatriation of capital are residual fears. Distrust in the ability of ‘foreign’ authorities to meet the same standards as domestic supervision or the fear of smothering red tape are the other main concerns.

After the Council of the European Union sends its ‘common position’ to the European Parliament (EP), the EP will begin its second reading. It is highly un-likely this will be concluded by year-end but adoption could be in spring 2003 under the Greek presidency.

The main tenets of the agreement are continued adherence to the principle of the prudent person, allowing optimal diversification and performance in a liberalized investment environment. The prudent person rule plus (rather than product restrictions) was part of the compromise that made agreement possible under the Spanish presidency, overcoming opposition from some southern countries. (The prudent person rule plus is a hybrid of qualitative and quantitative approaches.)

The Brussels-based European Federation for Retirement Provision (EFRP) regrets that the option for quantitative restrictions is left with member states and hopes that the EP’s amendment to phase out quantitative restrictions on investments over a five-year period will be considered again in the next stages of the legislative process. (The EFRP has members in all EU member states, except for Greece.)

The agreement also confirms the principle of mutual recognition of member states’ supervisory regimes and aims to guarantee a high degree of security for occupational pensions.

Worthy that the proposed directive (harmonising rules encouraging the development of both supplementary and cross-border pensions) is, it is salutary to remember that Germany, France and Italy, the Continent’s major economies, have crushing unfunded pension liabilities. Even with the European Commission’s initiative, true pan-European pension mobility (with a single pan-European pension scheme for each multinational) is also impossible under current national tax legislation.

Tax obstacles will need to be eliminated, either by evolution or litigation. In the latter case, Pan-European Pensions Group (PEPGO), which includes Mercer Human Resource Consulting, has launched a test case that could force the issue in law. PEPGO has submitted the test case to the United Kingdom’s Inland Revenue in relation to a U.K. employee of AMS Management Systems, who wishes to be in a Dutch scheme. The granting or denial of tax approval is awaited; PEPGO hopes to have been referred to the European Court of Justice during 2003. (Although the percentage of the EU workforce moving from one member state to another is small, it is expected to grow.)

The proposed directive also remains unclear on the cross-border aspect of IORPs, namely whether licences will be granted on a country or scheme-by-scheme basis. Once a firm has received initial approval from its own authorities, say, in Sweden, it is free to operate everywhere. But each time a U.K. pension fund, for instance, wants to accept a new sponsor with members based in another EU country, it must go through a fresh notification procedure. The freedom of the so-called European passport for pension funds will, however, offer the possibility to lower administration and investment costs.

The wording of Article 15 (technical provisions) is judged to be strongly reminiscent of regulations governing insurance companies. The capital adequacy regulation in Article 17 (whenever biometric risk coverage or performance guarantees are involved) refers to Article 19 of the first directive on life assurance companies of 1979, thereby requiring some 4% of the sum guaranteed to be held as own funds.

This will likely raise costs for providers and impact on performance, militating against a true level playing field. Equally, some believe that the text is too heavily influenced by the assumption that pensions are provided by traditional pension funds, such as those in the United Kingdom.

Source: Cerulli Edge Retirement Issue – August 2002