UK: Pensions Directive - Cross-Border Aspects

(UK Pensions - Pensions Directive)
Last Updated: 12 October 2004
Article by Rosalind Knowles and Jayne Hidderley

This article deals with the impact of the Pensions Directive on UK schemes with cross-border aspects.

Focus on UK schemes

Member states have until 23 September 2005 in which to implement the Pensions Directive into their local laws.

The Directive sets:

  • minimum standards for the provision, funding and regulation of pension schemes that will have to be met in each member state; and
  • for the first time a common legal regime for operating pan-European or cross-border pension schemes – this means a multinational employer can operate a single pension scheme in one member state to cover all its employees within the EU.

This new regime for cross-border schemes will apply to UK schemes with cross-border elements, for example, overseas employers with UK pension schemes and "posted workers" or existing dual membership schemes (for example, UK/Irish employees).

The UK government has consulted on how it might implement the Directive and proposals for cross-border schemes are contained in Part 7 of the Pensions Bill.

What does the Directive say:

  • Funding rules
  • Registration/social and labour laws
  • Investment rules

Funding rules

This is likely to be the most significant aspect of the Directive for UK schemes. Member states must ensure all schemes have sufficient assets to cover their actuarially-calculated liabilities. Deficiencies may be allowed for a short time but the home member state authorities must require the scheme to adopt a recovery plan (to be made available to members). If there is cross-border activity there is a requirement for full funding at all times.

What does this mean - issues

  • "Full funding at all times" for cross-border schemes is particularly onerous and practically impossible to guarantee for a UK scheme, particularly if the scheme invests in assets such as equities. As worded it does not seem likely that the ECJ would interpret this generously – the best that could be hoped is that any underfunding would have to be addressed in a very short timescale.
  • Existing cross-border arrangements will need to watch that they are not caught by the provisions of the Pensions Bill (for example, overseas banks with UK pension schemes and "posted workers" or existing dual membership schemes, for example, UK/Irish employees) and the requirement that these be "fully funded". The government has been advised of this and it is hoped it will amend the draft legislation; we are monitoring the government’s response.
  • It is currently still unclear how the UK’s Pension Protection Fund would apply to a UK based pan-European scheme; if the government intends that only the obligations due to the UK members are covered then assets could be ring fenced but this may reduce the attractiveness of having any cross-border element.
  • Schemes with an existing "cross-border" element will need to monitor the development of the Pensions Bill closely and review whether they can continue existing arrangements, if they have to meet the requirement to be "fully funded at all times".

Registration/social and labour laws

A scheme that complies with the Directive’s requirements is permitted to register in one member state and automatically be recognised in other member states. The scheme will need to comply with the social and labour laws of each member state.

What does this mean - issues

  • This means that a cross-border scheme will need to have separate sections, each of which complies with the social and labour laws of the jurisdiction in which the members are employed.
  • There is no guidance within the Directive as to what constitutes social/labour laws and there are obviously major variations between member states.
  • The Directive does not cover how to address the differing compliance requirements between member states, for example what proportion of the governing board (for example trustees) of the scheme must be elected by the scheme membership. Employers could deal with this by "ratcheting up", adopting a governing board which complies with all the relevant requirements, for example 50% member representation would satisfy both UK and Dutch law – but employers may still need to ensure they comply with the detail of the legislation.

Investment rules

There is a three-tier system of investment rules applying to cross-border schemes:

  • All plans including cross-border, are subject to common minimum standards, including the "prudent person" rule and the requirement that investment shall be in "the best interests of the members and beneficiaries". The generic restrictions on investments in derivatives, unlisted assets, sponsoring employers, and borrowing for investment purposes, also apply to cross-border schemes.
  • Member states can impose additional restrictions to any plans located in their territories, but only within limits. Plans are allowed to invest up to 70% of their assets in shares and bonds traded on regulated markets, and up to 30% in foreign currencies and investing in risk capital markets.
  • Where there is cross-border activity the host member state could require a particular set of investment restrictions to apply - essentially these are similar to the above rules on traded shares and bonds and foreign currencies, together with a 5% limit on investments in one undertaking.

What does this mean - issues

  • The requirement for assets to be "predominantly invested on regulated markets" does not currently exist for UK schemes; it is hoped that "look through" provisions will be included in the legislation to prevent the introduction of new restrictions on open ended investment companies (OEICs), unit trusts and similar types of investment vehicles. We are monitoring the government’s response to this.
  • A cross-border pension scheme may be subject to different investment rules depending on where the plan, and the participating employers, are located. It could be possible to ring fence these different sections to meet the different rules for different host member states. The Directive leaves it to the home member state to determine how ring fencing would be achieved and whether it is necessary. However, ring fencing may dilute the advantages of a cross-border scheme.
  • If the scheme is a new scheme or a defined contribution scheme there is the possibility of pooling assets across borders. This would allow a more aggressive overall investment strategy. For existing defined benefit schemes this is much more difficult as trustees would be unlikely to agree to share surpluses or merge with schemes which are in deficit.

What the Directive does not say

The Directive does not cover tax at all. The current tax barriers are one of the main obstacles to establishing cross-border schemes.

  • Tax treatment has still not been harmonised across Europe. Pension scheme contributions are often only granted tax relief when they are made to a pension scheme in the same country but not when the contributions are made to a scheme in another country from that in which the tax relief is claimed.
  • The European Commission is currently taking infringement proceedings against a number of member states (including the UK) and has referred Denmark and Spain to the ECJ for failing to provide the same tax treatment to schemes based in other member states as they provide within their own country. The Commission has also been supported by the ECJ in its decisions in the Danner and Skandia cases. A number of member states have already told the Commission that they will amend their tax legislation and it is likely that in 2005 there will be significant progress towards tax harmonisation.

Tax Changes introduced by the Finance Act

The Finance Act 2004 includes details of the government’s pensions tax simplification. Changes are due to take place with effect from 6 April 2006.

  • Eligibility: the Act has relaxed the eligibility requirements for registered schemes (schemes which register for the new simplified tax regime). Employers can include non-UK employees in UK registered schemes and overseas schemes can apply to become UK registered schemes.
  • Transfers: these can be made freely between registered schemes and "recognised overseas schemes" - these include schemes established in the EU, or in other countries provided certain requirements are met (for example generally the scheme must be recognised for tax purposes in the country where it is established). These changes may mean it is possible for employers to merge their UK and overseas pension arrangements.

Employers will need to consider carefully whether it is appropriate to include non-UK employees in UK registered schemes (or to register non-UK schemes in the UK). In particular, it will be necessary to consider the tax or regulatory requirements in the country where the employee is working.

Correspondingly approved schemes – at present overseas employees who remain in their overseas scheme whilst seconded to work in the UK may claim ‘corresponding approval’. The Act removes this and replaces it with ‘migrant member relief’. Subject to certain conditions, this can apply to a wider description of schemes than was possible before and is intended to offer greater flexibility. It should also enable more secondees to the UK to remain in membership of their overseas scheme. Alternatively, individuals would be able to claim relief under the terms of a double taxation treaty,

Conclusion

The UK government still needs to address the anomalies in the draft legislation to ensure cross-border schemes are a practical alternative for multinational employers. Most of the elements to establish a cross-border scheme are now in place or, at least, once the Directive is fully implemented throughout the EU, they will be. The main obstacle still remains doing this tax-efficiently. However, it does appear that the Commission is committed to the removal of these tax obstacles within the EU.

This article is intended merely to highlight issues and not to be comprehensive, nor to provide legal advice. Should you have any questions on issues reported here or on other areas of law, please contact one of your regular contacts at Linklaters.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.