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The EU Pensions Directive - considerations for transposition Back  
The EU Pensions Directive, which represents an attempt to harmonise cross-border provision and regulation of financial services in the pension sector, must in large part be transposed into Irish law by 23 September 2005. Tom Carney reports on developments to date, and says that transposition of the Directive is an ideal opportunity for consolidation of all pension legislation, old and new.
The first steps in EU pre-emptive regulation of national pension arrangements culminated in the publication, on 23 September 2003, of Directive 2003/41/EC (‘the Pensions Directive’). The Pensions Directive represents a tentative move by Europe’s legislators to harmonize cross-border provision and regulation of pension services. National priorities and domestic fiscal differences rendered tax harmonization for pensions through unanimity unattainable. Instead, the Pensions Directive, adopted pursuant to Articles 47(2), 55 and 95 of the EU Treaty, represents a political compromise to minimize, within parameters, national obstacles to the establishment and free movement of institutions for occupational retirement provision (‘iorps’) in Europe.
The Irish financial services sector needs to

The Pensions Directive, adopted for the benefit of an ageing population of European pensioners, will facilitate the free movement of iorps while respecting Member State autonomy over social protection and the taxation of pension schemes. It identifies as a primary objective the protection of pension scheme members and beneficiaries and requires (i) legal separation between sponsoring undertakings (employers) and institutions responsible for pension provision; (ii) monitoring of activities of these institutions by competent national authorities; and (iii) the provision of adequate information for the protection of present and future pensioners. While many of the legal obligations imposed on Ireland by the Pensions Directive are already housed in domestic legislation, others will pose challenges and opportunities for the Irish Government, Ireland’s regulators and the pensions industry.

1. The scope of the pensions directive
The Pensions Directive applies neither to first pillar pension arrangements (e.g. state funded pay-as-you-go schemes like exchequer funded contributory and non-contributory old age pensions) nor to third pillar pension provision (e.g. private pensions including RACs). Rather, it applies to a limited class of second pillar occupational pensions, iorps.

An iorp is described in Article 6(a) as:
‘an institution irrespective of its legal form, operating on a funded basis, established separately from any sponsoring undertaking or trade for the purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or a contract agreed individually or collectively between the employer(s) and the employee(s) or their respective representatives, or with self-employed persons, in compliance with the legislation of the home and host states and which carries out activities directly arising therefrom’.

Where an iorp lacks legal personality, the directive applies to ‘authorised entities responsible for managing [it] or acting on [its] behalf’.

Iorps covered by certain other EU directives fall outside the Pensions Directive. As do institutions where employees of a sponsoring undertaking have no legal rights to benefits, where the sponsoring undertaking (employer) can redeem the assets at any time and not necessarily meet its obligations for payment of retirement benefits. In cases where an employer company uses book reserve schemes to pay out retirement benefits to employees, the directive, likewise, does not apply. Nor do its provisions extend to those institutions which manage social security schemes covered by Regulation 1408/71/EEC and Regulation 574/72.

2. Possible application in Ireland
Irish iorps covered by the Pensions Directive will be required to restrict their activities to retirement benefit operations.

Occupational pension schemes: (defined benefit schemes and defined contribution schemes), as trust based vehicles, should fall within the scope of the directive. The Oireachtas, however, may restrict the directive’s scope. So-called ‘small schemes’ could be excluded under Article 5. The Oireachtas may also choose not to apply Articles 9 to 17 to larger iorps where pension provision is made under statute, pursuant to legislation, or is guaranteed by a public authority.

The directive will apply only to pension schemes operating on a funded basis. As trusts established under Irish law lack separate legal personality, the directive must be addressed to those persons responsible for managing them - scheme trustees.

PRSAs: If the Pensions Directive is to apply to PRSAs, its provisions will have to be directed to their managers - authorized PRSA providers. PRSA contracts, logically, lack separate legal personality and do not enjoy the capacity to sue or be sued in law. A PRSA is a legal contract between a contributor and an authorized PRSA provider in the form of an investment account used to save for retirement.

PRSA products may be sold inside or outside the work environment. Hence, the general application to PRSAs of the directive is problematic. ‘Group PRSAs’ specifically provided for in employees’ contracts of employment must be considered carefully. The portability of PRSAs from the work place to third pillar categorisation upon termination of employment gives rise to particular considerations. PRSA contracts concluded outside the scope of an employment activity are third pillar arrangements outside the directive.

IFSRA supervises PRSA providers. The Pensions Board authorizes and supervises PRSA products. PRSA providers are supervised under the Investment Services Directive (ISD) or the Third Life Directive. ISD PRSA products fall outside the scope of the Pensions Directive whereas PRSA life products may be brought within its scope by positive enactment of the Oireachtas. The Oireachtas, before making any decision on the application of the Pensions Directive to PRSA life products should measure the need to maintain a level playing field for life office and ISD PRSA products against the costs of compulsory ring-fencing. Likewise the opportunities for cross border trade within the framework of the Pensions Directive should be weighed.

3. The De Minimis rule
An iorp falling within the scope of the Pensions Directive may avoid substantive application of its provisions where the de minimis exception of Article 5 applies. The Oireachtas will have discretion whether or not to apply the directive (with the exception of Article 19) to small Irish iorps which operate schemes of less than 100 members. In exercising its discretion, the legislature is obliged by Article 2(2) to vest in small iorps the right to apply the directive on a voluntary basis. Voluntary application affords an iorp the possibility of engaging in cross-border activities.

Recent Pensions Board figures underline that at least 1,233 of a total 1,693 defined benefit pension schemes would escape application of the Pensions Directive if the Article 5 exception were applied to Irish schemes. Similarly, only 170 of a total 110,972 Irish defined contribution schemes would be covered by the directive if the Oireachtas were to exclude small schemes.

Politically, it might appear anomalous that the benefits of a directive, adopted by the EU for the protection of present and future pension scheme members/beneficiaries, should not extend to some 219,632 current pension scheme members by decree of our national legislators.

4. Substantive provisions
Article 16(1) imposes an ‘EU funding standard’ for second pillar pensions in Ireland. Each Irish iorp not excluded from the directive whether or not it engages in cross border activities must, at all times, have sufficient and appropriate assets to cover the technical provisions in respect of the total range of pension schemes operated by it.
The Irish financial services sector needs to

Article 16(2) provides for a limited exception to Article 16(1). Ireland may allow an Irish iorp for ‘a limited period of time’ to fail to meet the EU funding standard. While the definition of ‘a limited period of time’ is not provided in the directive, under EU interpretation rules, any exception to the specific requirements of Article 16(1) must be interpreted strictly.

To ensure effective compliance with EU law, as the State body charged with transposing Article 16, the Oireachtas should consider:

Upon entry into force of the Pensions Directive, will the requirements of the first and second paragraphs of Article 16 engender directly effective legal rights in pension scheme members and beneficiaries upon which they can rely before Irish courts?;

Does the EU doctrine of ‘effet utile’ require that the term ‘limited period in time’ (as an exception to the general legal right vested in Article 16(1)), be interpreted to oblige the Oireachtas to provide for a clear temporal delimitation in its transposing statute?

Should the State fail to implement Article 16(1) effectively, either through parliamentary transposition or Executive action, would Ireland be exposed to State liability under EU law?

Where an underfunded defined benefit pension scheme and/or its sponsoring undertaking collapse in the future and its members/beneficiaries (in vulnerable age groups) suffer loss, would a court of the European Community, on appeal or on reference, having regard to the clear, precise and unconditional wording of Article 16(1) view a deviation from full funding of ten years or more as ‘a limited period of time’ within the meaning of Article 16(2)?

Other substantive requirements regarding technical provisions, statements of investment policy principles, information provision, national regulatory functions and investment rules and management/custody are set out in the directive.

5. Framework for cross-border iorp activity
The free movement provisions of the Pensions Directive essentially turn on the legal rights of:
• Sponsoring undertakings (employers) in one Member State to make cross-border financial contributions to pension arrangements of an iorp established in another Member State
• Iorps established in one Member State to accept cross-border sponsorship from an undertaking (employer) of another Member State

The Oireachtas when transposing the Pensions Directive, must be conscious of the opportunities available for cultivating in Ireland an international funds centre for the cross-border provision of pension services. International financial centres like Luxembourg and London will no doubt seek to maximize the opportunities afforded by the Pensions Directive. An essential element for consideration by Ireland is the tax status of authorized Irish iorps in a context of reverse fiscal discrimination.

Before an Irish entity can accept cross-border sponsorship within the parameters of the Pensions Directive, it must be authorized under Irish law as an iorp by the national competent authority, presumably the Pensions Board. An Irish authorized iorp may only engage in cross-border activities (i.e. accept cross border contributions) where:

• It notifies the Irish competent authority of its intention to accept contributions from a sponsoring undertaking of another Member State
• It complies with all the provisions of the Pensions Directive
Overall, the Directive provides for cross border co-operation between national regulatory authorities within a framework which ensures that national pension regulatory rules are respected by the iorp and the social and labour law requirements applicable to the sponsoring employer are complied with.
In particular, under Article 18(7), an Irish iorp (in respect of those of its assets which relate to cross-border activities on behalf of a non-Irish sponsoring employer) may be required:
• Not invest more than 30 per cent of these assets in shares etc not admitted to trading on a regulated market
• Invest at least 70 per cent of these assets in share etc admitted to trading on a regulated market
• Invest no more than 5 per cent of these assets in shares and other securities etc issued by the same undertaking and no more than 10 per cent in shares etc issued by the same group of undertakings
• Not invest more than 30 per cent of these assets in assets denominated in currencies other than those in which the liabilities are expressed

7. Concluding remarks
The Pensions Directive was negotiated at EU level between 2001and 2003 as collapsing stock markets wiped euro-billions of the value off Irish pension assets, leaving many occupational pension schemes seriously under-funded and requiring greater flexibility from the pension regulator. The Pensions Board recently sought views from interested parties on the proposed implementation of the Pensions Directive in advance of 23 September 2005. The regulator’s input to the State’s transposition process will coincide with its consultative review of the funding standard for defined benefit pension schemes. While the directive’s transposition might have been an opportunity to consolidate Irish pension legislation, the preferred implementation route is stated to be by statutory amendment, introduced through the Social Welfare Bill, 2005.

The Oireachtas, when transposing the Pensions Directive must ensure the supremacy of European law and the protection of Articles 40.3 and 43 of Bunreacht na hEireann afforded by judicial extension to the pension property rights of members/beneficiaries of occupational pension schemes. To do other wise may expose the State to liability.

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