International Pension Funds and their Advisers 2009/10
Foreword
Chris Verhaegen
Secretary General, European Federation for Retirement
Provision – EFRP
The very concept of occupational pension provision suggests a lengthy process of planning, saving and investment. Ensuring future financial income upon retirement has become a life long task and one which is all the more pressing in the demographic context of today. Yet it is not just the investment and saving aspects which are long term endeavours. Three years ago, our then Chairman Mr. Jaap Maassen contributed the foreword to the 2005/2006 edition of this admirable publication. Today, the topical issues facing the pensions industry remain more
or less unchanged, illustrating ever more the need for long term policy perspectives when dealing with private pension provision. We live in a Europe which is evolving, and workplace pensions, like almost every policy area, have undergone profound changes during the last
years. The particular characteristics of occupational pension provision mean that it is an area which is subject to influence from diverse sources – from taxation issues to discrimination and equal treatment. To understand the state of play of European private pension provision, it is
necessary to examine all sides of the coin.
The current environment is dominated by the potential of the IORP Directive to deliver for pan-European Pension provision. Pan-European provision addresses the needs of millions of European citizens and their employers. It provides a solution for both mobile and non-mobile
employees. EFRP strongly supports pan-European pension provision as we believe such a structure generates cost savings, enhances investment returns and promotes intangible benefits such as a consistent benefits philosophy and improved risk control – to the benefit of both employee and employer.
The Directive is a highly innovative piece of legislation which provides a roadmap for pan- European pension provision. It is an EU level constitution for private pension institutions. It also represents new generation of financial services regulation: slim-line and principles based. Crucially, it has introduced a system of mutual recognition of prudential supervisors – a hugely important step. Yet the potential of the Directive remains to be fully explored.
Recent reports from the market show that it is indeed too early to tell the full impact of the Directive, as it simply has not yet had time to fully prove itself1. The indicators that were available showed an overall positive experience post implementation. Evidence from Member States2 shows some 65 cases of pan-European pension provision, which points to the potential for growth. Notably, some Member States such as Belgium, Luxembourg and Ireland have profiled themselves and created suitable vehicles to provide cross-border services. However
despite the willingness to engage in pan-European provision, obstacles remain, such discriminatory taxation regimes. While efforts are being made to tackle such practices3 the area remains unclear and dissuasive to potential cross-border providers. Also of note is the
application of social and labour law in cross-border cases. The barriers which automatically face cross-border actors in knowing when and where to comply with particular views cannot be ignored.
Closer to home than cross-border issues is the fundamental question of solvency rules. In mid 2007 the European Commission presented a proposal for a Solvency II Directive4. The proposal involves on the one hand a recast of the existing 14 insurance Directives and on
the other hand proposes a complete overhaul of prudential regulation for insurers. On the technical side the approach is risk based leading to the need of scaling buffers. Presently, one aspect of debate centres on the possible application of these proposed Solvency rules to pension funds. Such a move would be highly detrimental to the health of European pensions: threatening financial stability; leading to scheme closures and dissuading employers from providing occupational pension schemes for their employees. Adequate solvency rules are unquestionably essential. The reality is however that pension funds already have an adequate set of rules which serve to protect scheme members. Creating the correct regulatory framework for IORPs now is essential to the provision of adequate, affordable and sustainable provision in the future.
As an interpreter of European legislation, the European Court of Justice has naturally delivered a number of judgements recently which hold impact on occupational pension provision in distinct ways. In a move which is of encouragement to cross border occupational pensions, ECJ in Commission v. Belgium5 found that provisions of the Belgian Income Tax Code which discriminated between domestic and foreign pension funds in terms of deductibility of contributions was found to be an obstacle and hindrance to the freedom to provide services and the free movement of persons. The case of F. Palacios de la Villa v. Cortefiel Servicios SA6 saw the ECJ hold that national legislation may implement compulsory retirement clauses based solely on the grounds of attainment of age and fulfilment of social security requirements, if these clauses are objectively and reasonably justifiable in the context of a legitimate aim relating to employment policy. The implications of this ruling are all the more curious, given the European demographic context. In Lindorfer7 the ECJ found that the use of factors which vary according to sex in order to calculate the number of additional years of pensionable service did constitute discriminatory practice, and moreover, could not be justified by a requirement for sound financial management. The ECJ noted that while the measure may have been intended to take into account life expectancy, it was not necessary to ensure the financial equilibrium of the scheme. Most recently in April 2008 the ECJ ruled in Maruko8 that a refusal to grant a surviving same-sex partner a survivors pension can amount to direct discrimination on grounds of sexual orientation, if surviving spouses and surviving partners can be said to be in a comparable situation as regards that pension. These examples the pension funds and their advisers who are faced with the impact of policy debates. This publication is an invaluable source of of recent case law illustrate exactly the complex and diverse issues which need to be factored into the provision of occupational pensions, and which providers need to be aware of.
Legal requirements related to the reporting requirements of pension schemes are no less complex. EFRP is currently treating the issue through examining amongst other topics the exclusion/inclusion of projected salary increases when calculating scheme liabilities or whether employers involved in multi-employer arrangements should account for their share of the fund’s liability. Commonly agreed accounting standards which enable a shared understanding of and confidence in balance sheets are essential to investors and scheme members.
Also of current relevance to providers is the draft Portability Directive. The original aim of the first proposal – facilitating transfers- certainly held promise. However, it was too complex an issue to reach agreement on and now, a second proposal9 centres on firming up rights by
shortening vesting periods and lowering the qualifying age for membership of schemes, a far cry from the original purpose. Agreement is proving difficult to reach in this instance also. Nonetheless, if agreement is reached and vesting periods are effectively harmonised, the impact in some Member States may be such as to necessitate even further reform. On the whole, the European pension landscape is witnessing an increased attention to the issue of retirement provision across EU policy areas. The loop is tightening around discriminatory taxation practices – this is indeed an area which EFRP has been very active in recent times. Efforts are centring on the individual – increasing financial education, greater protection for consumers. What needs to be acknowledged is that the individual approach, while certainly appropriate for areas such as financial education, is not necessarily the best track to follow in others. A balance needs to be struck, as prioritising the interests of individuals over the interests of the scheme as a whole, may ultimately be damaging for all. A common reference point is also necessary in our view. We support agreement on a three pillar model which would enable a greater understanding and comparison of pension structure across Member States.
These are all issues which are felt and experienced in the market and by the market as it is information for all those involved in the pension industry and I am extremely pleased to have been asked to contribute. I sincerely hope that future editions will report on positive advances
in the field of occupational pension provision.