By Ilonka Oudenampsen
Pension and investment associations across Europe have expressed different views on what they see as the future of cross-border pension provision, as the European Investment and Occupational Pension Association (EIOPA) closed its consultation on the IORP Directive yesterday.
EIOPA launched the consultation in a response to the European Commission’s request to advise them on the future of the Institutions for Occupational Retirement Provision (IORP) Directive. EIOPA is expected to advise the EC by mid-December and has asked the industry for its opinion on the future of the directive.
In its draft response, EIOPA laid out four options. The first option would be to leave the directive unchanged, although this would result in a number of pension schemes/institutions with essentially the same characteristics as IORPs falling outside the scope of the directive.
The second option is to clarify what should be considered an occupational pension scheme. By widening certain definitions, some occupational schemes which are currently not covered by the directive would be included. For instance, the current contract excludes schemes in the new member states, as they provide retirement benefits based on a legal obligation, rather than an agreement between employers and employees.
The third option is to permit the optional application of the directive to those pension schemes currently falling outside its scope; while a fourth option would be to extend the scope of the IORP Directive to all providers of occupational pension schemes operating at their own risk. A fifth option is a variation of option four, but it would also include personal pension schemes.
In a common response to the consultation, the Association of the Luxembourg Fund Industry (ALFI) and the Association of the Luxembourg Pension Funds (ALPF) said they prefer option four.
Their response read: “We adhere to and support the proposal that the new EU member states should be able to benefit from the advantages offered by the IORP Directive. Therefore, it appears absolutely necessary to us that the current scope of the directive be adapted to include these new member states’ occupational retirement schemes that fulfil the same purpose and reply to the same need as in the existing member states but which currently fall outside the scope of the directive.”
On the subject of tax discrimination between the host and the home member state, ALFI and ALPF said that a solution could be a provision which countries can include in their bilateral treaties to provide reliefs for pension contributions taxed twice. The associations also said that it might be useful to consider procedures in the directive to settle such problems, and, if necessary, EIOPA could act as a superior authority and seek a solution.
Furthermore, ALFI and ALPF are proposing “to impose on the pan-European funds the obligation to comply with ‘core’ social provisions with regard to occupational pensions, such as, for instance, the social principles which are applicable when an employee is posted in an EEA State.
“This would not aim at limiting the rights of pension scheme members, which would remain governed by ad hoc social provisions; however, the management of those pension funds would be simplified via this minimum harmonisation of the social provisions at European level.”
The European Federation for Retirement Provision (EFRP) criticised the European Commission for reviewing the IORP Directive. “The commission’s aim to tackle the ‘unlevel playing field’ for IORPs and create a fully harmonised ‘playing field’ is, at this stage, premature, extremely difficult to achieve and an unconvincing justification for the IORP review. It fails to take into account the very diverse national systems of occupational pension provision as well as the different degrees of reliance on such occupational schemes.”
However, the EFRP said it preferred option two, which it called a straightforward and workable proposal, but said it could also support option four by substituting ‘at their own risk’ because this wording may create confusion. The federation therefore proposed an option six, which would replace ‘at their own risk’ with ‘not guaranteed by the state’.
The EFRP also said that the lack of cross-border activity of IORPs is due to very little demand and tax hurdles, and that an increase of cross-border pension provision of 8%, as reported by EIOPA in July 2011, is good progress. This view was supported by the British National Association of Pension Funds (NAPF), who see no need for a new IORP Directive.
Like the EFRP, the NAPF also feels that Solvency II is not suitable for pension schemes, although the European Commission has asked in its call for advice how sections of the Solvency II directive could be adapted for pensions. According to James Walsh, senior policy advisor at the NAPF, pensions differ from insurance in many ways and harmonising the systems of all member states is almost impossible, as well as undesirable and costly.
“It’s not sensible to try to impose a single harmonised system on all member states when all have a different pension system. One of the flaws in that argument is that you end up changing pension regulation for every pension scheme, in order to benefit a very small slice of the pension market. That doesn’t seem sensible either.”
The NAPF therefore favours option one and believes changes to the directive are not necessary. Walsh said that the UK already has a good functioning pension system in place, with the employer covenant, The Pensions Regulator and the Pension Protection Fund, and that adding another layer to that would just unnecessarily complicate matters.
However, the NAPF recognises the problems with the Central and Eastern European member states. In its response, it proposed two steps: “First, EIOPA or the EC should draw up a clear classification of the different types of pension scheme across the EU. This would provide a stronger foundation for future policy-making.
“Second, in order to address one of the key challenges for the Eastern European schemes, their national regulators should adopt and apply a high-level framework of governance standards. This would strengthen the independence of these schemes and would improve operation and oversight.”
The German Bundesverband Investment und Asset Management (BVI) said it had too little time to advise EIOPA on which option is preferable, although they strongly advised against option five. However, in its response BVI said that it appears helpful to clarify what is to be considered as an occupational pension scheme on a European basis.
“We also agree with EIOPA to stick to pension schemes that are managed by private financial institutions. A further enlargement of the directive to all providers of occupational pension schemes operating at their own risk would not give enough attention to individual national regulations that have worked well in the past,” BVI said.
The German association also pointed out that the proposal should also extend the optional application of the directive to other regulated financial institutions. “To the extent that there are financial institutions other than life assurance companies that offer occupational pension services, it is important to extend the optional application of the directive to these institutions to ensure that the directive does not lead to distortions of competition.
"The prevention of asset managers and other institutions such as banks from competing with pension funds and life-assurance companies on equal terms has led indeed to pension markets being dominated by a limited number of providers belonging to the latter categories.”