UK: Pan-European Pensions

Last Updated: 31 March 1999
Pan-European Pensions

By Tom Collinge, Pensions lawyer, Hammond Suddards

Current Developments

Occupational pensions are not just complicated, they are problematic. Ten years ago the Commission tried to bring supplementary pensions within the framework of European law. This effort came to little. Today the prospects for a Single Market for supplementary pensions are better than for many years, yet many difficulties remain to be addressed.

In March we should see a Commission Communication containing proposals to bring pan-European pensions a step closer. This will build upon the ideas within the 1997 Green Paper (COM 97 283) and the subsequent debate. The legislation proposed will help consolidate the limited advances delivered by last summer's Directive on the supplementary pension rights of migrant workers (98/49/EC).

Nevertheless, the Communication may disappoint those who are impatient to see a wide-ranging draft Directive secure a common European legal basis for cross-border membership of pension schemes at a stroke. The signs are that the Commission has preferred to advance gradually and will address the issue of cross-border membership later.

The proposals will probably concentrate on a limited but critical set of objectives. The focus will be upon investment rather than membership, but should bring great advantages in its wake. The heart of the Directive, when it emerges, will be to allow supplementary pension funds to invest freely anywhere in the Union using the services of approved managers established in any Member State. Even so, it is likely to produce a high level of controversy.

Prudential Rules

It is expected that a regime familiar to the Netherlands, the United Kingdom and Ireland will become a new European standard. A limit on self investment is likely to be set at 5%, together with an acceptance of the "prudent man" rule on investments generally. A Minimum Funding Requirement, perhaps of 90%, is also predicted. While some Member States, such as the Netherlands will set their own minima higher, this will provide a workable minimum standard for the European Union.

The prospects of pension investment on "prudent man" principles across Europe are the most controversial element of this possible framework. It is well known that the Germans are very uneasy at this suggestion. They are not alone among Member States in preferring to impose explicit quantitative restrictions on the investment freedom of supplementary pensions.

Nevertheless, Mario Monti has expressed the view that the future use of "rigid and uniform investment rules of a quantitative nature" would be "counterproductive". Despite this, and although the birth of the euro has partially neutralised quantitative currency matching restrictions, there will be vigorous debate over the "prudent man" investment concept.

While the defenders of quantitative restrictions will argue that they bring security and also that managers subject to these regimes rarely exploit fully the maxima, the Commission seems prepared to take the contrary line. The sophisticated mechanisms of asset/liability modelling are available to moderate risk. Furthermore, there is a growing acceptance that supplementary pensions work effectively and reduce the exposure of national governments to soaring State Pension costs when greater diversification in investment is available.

This militates against quantitative restrictions.

It is tempting to believe that the "prudent man" concept will simply be adopted as the new European model, but a more realistic analysis suggests otherwise. The level of opposition likely to be encountered will be stiff and compromise appears to be the most probable outcome. There is certainly scope for continuing to allow countries to set quantitative restrictions as long as these limits are set at sufficiently high levels to ensure that funds do not suffer for a lack of diversification. Europe has become increasingly used to legislation with opt-outs, derogations and other forms of variable geometry; an approach that allows Member States to choose between the "prudent man" model and a liberalised form of quantitative control would not be unlikely.

At this stage, it appears that the Commission will win praise from pensions and investment practitioners for choosing a path of moderate regulation. Equally, it may be criticised by some Member States for adopting a light touch. This would be unfortunate as Europe needs to move forward quickly to improve the supplementary pensions environment. The demographic projections for the new century underline the need for pre-funded pensions to be available at reasonable cost to Europe's citizens and their employers lest we all end up bearing the costs via the higher taxes that will be needed to support State pensions.

Perhaps anticipating that some national governments will press for greater harmonisation between the regimes for supplementary pensions and social security as the price of their acquiescence to the new proposals, the Commission is also proposing new rules in this field. Regulation 1408/71 co-ordinating national social security systems is to be updated and simplified to extend its application and cover early retirement.

Other Issues

The level of involvement of members in the running of their pension scheme will be a matter for individual countries to decide. While the Commission may favour involvement, especially in defined contribution schemes where the members assume the investment risk, this is not something it can impose. Similarly, there is support in Brussels for the use of insurance cover to protect schemes against fraud or, to an extent, bankruptcy in the sponsoring company. This Communication is likely to do no more than recommend its use.


If the Commission has chosen to keep things relatively simple at present, there are other areas in its sights. Among these will be the vexed topic of taxation. In the UK and elsewhere, the pattern for the incidence of taxation is exemption on contributions and funds with single point taxation on the emerging income (the "EET" system). Once again, Germany is ranked among those preferring a different pattern. The involvement of the EU in any aspect of direct taxation is bound to be controversial so it seems sensible that this contested issue is divorced from other pension-related proposals.

Nevertheless, the Directive (98/49/EC) on migrant workers passed last summer has brought one limited form of cross-border pension scheme membership closer. It would be appropriate for any attempts to achieve mutual recognition of pensions tax systems to begin with the community of expatriate workers who will be seeking to remit pensions contributions back to a home country scheme. With a following wind, a further draft proposal for a Directive on tax relief for expatriate pension contributions might be seen towards the end of this year, including input from DGXXI.


The drive to bring supplementary pensions within a Single Market framework is taken very seriously in Brussels. While resistance from some states is certain, practical initiatives will command broad support within the European Parliament. European trade unions are also keen to see progress. Responding to the Green Paper, the unions were clear that cross-border pension scheme membership and reduced vesting periods were important components in delivering real substance to the Treaty freedom of movement for workers.

Focusing attention on the factors that inhibit pension funds from operating across Europe looks to be the right place to start what must be a step by step process. Much of Europe finds the idea of relying on equities to fund pensions deeply worrying. Even in countries such as Italy that are currently introducing pension funds, there is unlikely to be a huge rush to change existing arrangements. Nevertheless, liberalising the investment environment will bring opportunities both for asset managers and international employers.

Further amending Directives on UCITS may bring to the market effective investment vehicles which match different national regulatory environments within sub-fund structures of umbrella funds and extend the range of permissible investments. This would allow for compromises arising from the "prudent man" versus quantitative limit debate while giving international employers a means of managing down the investment costs of their pension provisions. The results could be the first stage in the development of true pan-European pension products and contribute to the momentum for further liberalisation.

We may have to wait a while before all the pieces fall into place. Topics such as the cross border treatment of transfer payments will have to be dealt with further down the line, despite their importance to free movement. The European Parliament has expressed an interest in restricting the use of surplus to benefit improvements and equalisation. This too is material for a later debate. Liberalising pension investment would be a major first step and, as the French say, it's the first step which counts.

For further information please contact Jane Marshall, e-mail: Click Contact Link , 7 Devonshire Square, Cutlers Gardens, London EC2M 4YH, UK, Tel: + 44 171 655 1000

This article was first published in the March 1999 of Pension Age

The information and opinions contained in this article are provided by Hammond Suddards. They should not be applied to any particular set of facts without appropriate legal or other professional advice.

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