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Saturday, 20th April 2024 |
| Pan-European Pensions- the fourth dimension |
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| The recent transposition of the pan-European pensions directive, offers ‘tremendous opportunities’ both for Europe and for Ireland, with estimates from the European Federation for Retirement Provision suggesting that the Directive could lead to improved returns of some €10 billion. However, there are a number of hurdles to be overcome before a true pan-European pension can be created, writes John Feely, as the Directive does not deal with tax, employment law or social security issues. |
In September 2005 Ireland transposed the EU’s Directive on Institutions for Occupational Retirement Provision. This directive lays down minimum standards governing the operation and supervision of pension plans throughout the EU. Crucially, it provides for mutual recognition of regulatory frameworks in the different EU Member States, thus providing a basis for the establishment of pan European (cross border) pension plans.
The Irish government has already transposed the directive and, given that some other Member States failed to do so by the deadline, puts Ireland in a good position. The transposition introduced some new compliance requirements for Irish pension funds including new trustee regulations, new investment rules and a requirement to prepare a Statement of Investment Policy Principles. The directive also impacts on some existing arrangements which were previously covered by bilateral arrangements between Ireland and the UK but which are now subject to the directive’s cross border requirements.
Why is the development of pan-European pensions important?
For some time (decades, in fact) multinational companies have been frustrated by the lack of coordination of pension regimes in Europe and the inefficiencies that result. A multinational company operating in 25 different EU member States may have employees covered by different arrangements in each country. In some countries where occupational pension systems aren’t well developed companies may not even have an arrangement in place for their employees. This can cause problems when they want to encourage greater employee mobility.
Even where arrangements have been set up they are all different - different regulatory regimes, multiple service providers, multiple governance arrangements, and inconsistencies between employee benefits policies.
The establishment of pan-European pension plans has the potential to provide significant benefits to multinational companies including:
• Risk reduction – operating and managing a single pension plan, with a single governance structure and control environment, operating within a single regulatory framework under the auspices of a single pension regulator
• Cost savings – consolidating investment and administration arrangements and benefiting from economies of scale and purchasing power and elimination of inefficiencies
• Consistency – delivering consistent benefits and services to employees, providing an opportunity to promote a single corporate policy and culture
Speaking at a recent Irish Association of Pension Funds seminar, Internal Market Commissioner Charlie McCreevy stated, ‘The directive will give multinationals the option to operate all pension schemes in one institution: the pan-European pension fund. The European Federation for Retirement Provision estimates that the total effect on a yearly basis of improved return, as a result of more investment freedom and combined scheme operations, could be close to €10 billion.’
Do pan European plans work equally well for all types of pension plan?
Despite best efforts during the development of the pensions directive certain requirements will make it more difficult for some types of plan than others. In Ireland we essentially have three types of pension arrangement:
• Defined benefit (DB), where an employee’s benefit is determined by a formula based on their salary at or near retirement and the number of years they have worked for their employer
• Defined contribution (DC), where employees and their employer contribute to a pension investment fund and the employee’s benefit is based on the value of the fund
• Personal Retirement Savings Accounts (PRSAs), which are individual pension investment funds
Pan-European pensions add another dimension. In reality, however, obligations to maintain solvency within defined benefit plans will make it difficult to operate these on a cross border or pan European basis. Similarly the individual nature of PRSAs does not lend itself to their use as a pan-European vehicle.
On the other hand, defined contribution plans are ideal. DC plans are relatively simple to operate as they essentially mirror an investment or savings plan. Money is invested by or on behalf of the employee in a range of investment funds. The assets grow within the funds and a benefit is paid based on the value of the investments when the member retires.
The transposition of the directive opens up the potential for multinational companies to establish pan European DC plans.
Are there barriers to the development of pan European plans?
The pensions directive is a financial services initiative designed to improve the efficiency and effectiveness of the management of pension funds in Europe in the context of the single market. It does not deal with tax, employment law or social security issues. This means that a pan-European pension fund, wherever established, will still have to satisfy and comply with the tax, employment and social security requirements in the individual Member States. So, for example, if Irish pensions law requires that employees are entitled to retain their pension benefits once they have completed two years as a member of a pension plan, then this requirement must be satisfied irrespective of whether the plan is a local Irish one or a pan-European plan established in some other Member State.
This probably sounds worse than it is. In fact it’s no worse than the existing situation where individual plans are established in each country and each of these plans has to satisfy the local rules. Again, to quote Charlie McCreevy: ‘I will therefore not accept that Member States abuse the requirements for pension funds to comply with host Member State social and labour law in order to protect their pension market. Again, the potential benefits are just too big.’
Similarly, barriers to providing tax relief on cross border pension plans are being broken down, with the threat of infringement proceedings from the European Commission encouraging local governments to announce that similar tax reliefs will be provided for cross border plans and local plans. The Irish government has already taken this step, along with Germany, Luxembourg, the Netherlands, Austria, Portugal and Finland with Belgium, Spain, France and the UK soon to follow suit.
A more serious question is whether a pan-European plan could actually be worse off than a series of local plans. There is one area where this could be the case relating to withholding tax on dividends. A pan-European pension plan may not be able to avail of the double taxation treaties that would be applicable to local plans. For example UK pension funds benefit from a double taxation treaty with the US which means that 0 per cent withholding tax is applied on US dividends remitted to UK pension funds. It is not clear that this treaty rate would apply if UK employees are included in a cross border pension plan established in another Member State.
What about asset pooling and shared services?
The difficulties associated with the establishment of a truly pan European pension plan have led some multinational companies to consider setting up pooled vehicles to at least benefit from economies of scale in investment management, custody and related areas. Ireland is well placed, having introduced a tax transparent vehicle – the Common Contractual Fund – to facilitate multinational companies who want to locate these asset pools in Ireland. Shared services are less common although Ireland is again well placed with its strong pension services industry supported by a number of global professional services firms.
In conclusion
Watch this space – I expect to see significant developments in pan European pensions in the coming year. I’ll leave the last words to Seamus Brennan, Minister for Social and Family Affairs who recently stated, ‘The directive offers tremendous opportunities for Ireland and we must ensure that we are in a position to take advantage of these.’ |
John Feely is a principal in Mercer HR Consulting with responsibility for leading the development of Mercer Retirement Solutions
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| Article appeared in the February 2006 issue.
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