Pensions in the EU
The EU can be a confusing place for those on the outside looking in. Companies headquartered elsewhere in the world may assume that what works in one member state will equally apply in another, and that the single market always facilitates businesses that want to work cross border. Neither of these assumptions is necessarily correct when considering pensions policy (see Market Knowledge).
A remark usually attributed to US Secretary of State Henry Kissinger – “If I want to call Europe who do I call?” – illustrates the problem. The EU is not one place. It currently comprises 28 member states, all with distinct cultures and different ways of doing things. Some countries have been nation states for over a thousand years; others were born out of 19th century upheavals or 20th century wars and political realignment. European institutions such as the Commission, the Council and the Parliament are structurally complex. A vast amount of information is available about EU activities, but it is often not easy to understand.
The UK, Netherlands and Ireland have the largest funded occupational schemes
What does this mean where pensions are concerned? Member states have different patterns of pension provision. Some depend heavily on state systems (the so-called 1st Pillar) and have underdeveloped systems of employer-sponsored (2nd Pillar) and personal pension provision (3rd Pillar). Some focus on a collective industry approach. Some countries have traditionally organised pensions on a defined benefit basis, others on a defined contribution basis. Some countries have developed systems in response to particular historical circumstances. In Germany, for example, when investment was needed after the Second World War, book reserve schemes (where benefits were not funded but recorded on the company’s balance sheet) became widespread. In Sweden, insured pension provision is the norm. The UK, Netherlands and Ireland have the largest funded occupational schemes, and for that reason EU pensions legislation has the capacity for a disproportionate effect on business in those countries.
A Directive on Institutions for Occupational Retirement Provision (IORP) was enacted in 2001. One of its drivers was the recognition that international business operating across the EU might be able to make pension provision more efficient by establishing cross-border schemes. Pooling assets and liabilities seemed a natural extension of the prevalent UK trend of merging pension schemes acquired as a result of a corporate transaction or business rationalisation.
Accordingly, the IORP Directive tried to frame a system where a scheme approved by the authorities in a particular member state would be accepted elsewhere in the EU without the need for additional approvals. The so-called ‘single passport’ was a principle that had been adopted in other areas of EU legislation, and there was no reason to think that the principle could not also work in the field of workplace pensions.
A modified insurance solvency regime would be likely to mean material increases in employer contributions
The business origins of the Directive did not survive the complex EU legislative process. Cross-border defined benefit schemes were effectively ruled out by a requirement that they be ‘fully funded at all times’. Member states erected hurdles to the single passport system.
The IORP Directive is currently being revised. There have been attempts to use it to introduce a modified insurance solvency regime that would be likely to mean material increases in employer contributions. These provisions have been dropped, but still remain a long-term ambition of some. The risk of stricter funding standards cannot be ruled out, although it is likely that any change would be introduced through lengthy transitional provisions (see Strategy).
Changes in governance and disclosure can be expected in the revised Directive (see Governance Audit).
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