The long and winding road

Lynn Strongin Dodds looks at how far we have come on the journey towards pan-European utopia

The road to pan European pensions has certainly been a long and winding one but progress is gradually and that is the operative word, being made. There are still several hurdles, though, to overcome and the logistics remain tricky to navigate. This is why many market participants believe that cross border rather than pan European schemes will be the order of the day for the foreseeable future.

Tim Reay a principal at Hewitt Associates notes, “Companies are conducting analysis but I do not think they will opt for a single European pension plan that covers 27 different countries as it is too complicated. Instead, I think we will see more cross border plans or groupings of countries with similar regulatory styles such as the UK and Ireland, the Netherlands and Belgium or blocs such as Southern Europe and Eastern Europe.”

There was an expectation that the floodgates would open after Unilever injected €2.3bn into a fully tax transparent cross-border pensions using the Luxembourg-based Fonds Commun de Placement (FCP) in 2006. IBM and Nestlé were also quick off the mark with their Dublin-based Common Contractual Fund (CCF) vehicles while Intel is the most recent high profile company to go down this route with a cross border plan based in Dublin that covers Ireland, UK, Hungary and Poland.

Activity had been gathering pace after the Institution for Occupational Retirement Provision (IORP) directive finally came into force in June 2007 after first being published four years before. Typically, these plans, which require fully funding, cover defined contribution (DC), where it is much easier to ensure that assets equal liabilities.

The latest report published by Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) shows that as of June 2008, there were roughly 70 cross-border schemes, a 46% jump from the figures reported for January 2007. Total cross-border activity also increased to nine home states from five during the 18 months period. The UK and Ireland accounted for the bulk – 20-35 while Austria, Belgium, Germany, Luxembourg, Portugal, Finland and Liechtenstein have between 1-5 cases.

Not surprisingly, though, the collapse of Lehman Brothers last September and the ensuing financial crisis diverted multinationals’ attention away to more pressing matters. As Jim Connor, director of Navigant Consulting Europe, puts it, “There is an appetite for pan European pensions but at the moment given the current climate, many companies are focusing more on survival tactics. They have put the development of these schemes in the too hard to do box. His colleague, Kenn Taylor, also a director, adds, “I expect to see over the next two to three years, providers coming to the market with products that they have developed for their own client base. The insurance companies, for example, are well placed because they have a large footprint in the asset management business and a very large client base. Once the first plans are set up, the momentum should begin.”

Chris Mayo, senior international consultant at Watson Wyatt notes, “There is a great deal of talk but the reality is true pan European pensions are still difficult to achieve. Given that providers are not yet coming forward with off-the-shelf solutions, companies would have to put a significant amount of time and money into developing their own structures and to date chief financial officers have been reluctant to sanction this.

One of the major problems is that every country is at a different starting point and it is not therefore just like in the US of rolling out a 401 K plan in every state . The directive has to be adapted in each country but I do not want to diminish companies’ interest or aspirations to improve their efficiencies. I believe they are waiting for providers to develop the solutions.”

Their views are also echoed in last year’s Mercer’s survey on pan European pensions. The investment consultancy found that the participants it canvassed- 80 multinationals headquartered in the US or Europe - expressed disappointment at the limited variety of providers in the market that could help them implement a pan European pension plan. Of the 25 providers it surveyed, only six claimed to have packages offering investment, administration, communications and plan management. Of those six, half used Belgium’s Organisation for Pensions (OFP) as one of the vehicles although the existing vehicles were found not to be suitable for all schemes.

Not everyone, though, believes that companies will turn to independent providers. As one market observer put it, “MNCs are nervous in today’s environment about handing over their assets and many sponsors still have a bad taste in their mouth from the problems and poor returns on their investments from the insurance industry. I think we will see companies working together with custodians, active asset managers and actuaries to develop their own solutions.” Other participants believe that investment consultants will play a role as perhaps a project manager.

Mark Price, an associate in Mercer's international retirement business at Mercer, believes there are likely to be a number of different companies involved in the provision of a pan European pension. It could evolve along the same lines as the as the offshore/ international pension plans whereby providers in the market split services for these plans that provide retirement benefits to employees working in multiple countries. “Depending on the company the services involved in such an arrangement can either be fully outsourced to one of the bundled providers or to a number of companies.”

Whichever route a multinational takes, all agree that the biggest challenges remain the tax, social and labour laws, according to Aaron Overy, Aaron Overy, asset pooling business development manager, at Northern Trust." The trustees or managers of a pan-European pension scheme must ensure it is operates in accordance with the social and labour law requirements of the various EU member states that it covers. Also, the plan needs to comply with the different tax regimes in the various sections that it is covering.

Kerry White, first vice president for global product management at BNY Mellon Asset Servicing points to four main issues surrounding the supervision of cross border schemes that need to be tackled. “Member states have definitional differences that require clarification on cross-border activity, subordinated loans, ring-fencing and investment regulations / guidelines. However, CEIOPS are trying to address these issues and put reforms forward.”

This past April, CEIOPS published a consultation paper which aims to establish the rules and regulations under which pensions supervisors of IORPs should operate. It will outline what they have to reveal to either home or local regulators when an apparent problem arises concerning an element of a cross-border pension plan’s regulation, as well as a timeframe. It hopes to resolve the ‘incompatible’ laws problem by delineating how supervisors should communicate any concerns to their counterpart regulators and what IORPs need to do to meet rules or fill any gaps in meeting local supervision laws.

Despite these hurdles, Gavin Watkins, a principal at Towers Perrin, which worked with Intel to develop its cross border scheme, does not believe they are insurmountable. “I think many of the challenges have been overstated. A large part of the effort is interpreting the different tax, social and labour laws but once you have done it, you will have the experience to call upon. And, once the decision to establish a cross-border plan has been made, it can be set up quickly. A simple plan could be operational within six months".

David Roberts, senior consultant at Towers Perrin also believes that the benefits from establishing a pan European pension plan outweigh the difficulties. For defined contribution plans, the principle is improved governance, but the saving in internal management time - which means cost - shouldn't be underestimated. The financial crisis and the lack of governance oversight has focused companies on the importance of having a central view of their benefit designs, investment policies, practices and operations.

"The companies with whom we are talking to understand the governance advantage of a plan and this is what drives them. However, companies will not establish one large plan with ten country sections on day one; they will start out with perhaps three to four countries and then gradually add others.”

WRITTEN BY LYNN STRONGIN DODDS,
A FREELANCE JOURNALIST