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.

Taxation

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.

Consequences

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.

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.

 
In association with
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.