Dawn of a new era

Mark Duke and Gavin Watkins explain why the time has come for implementing pan-European pension plans

Even though EU regulations and the EU Pensions Directive have been in place for some time to facilitate the creation of pan-European pension plans, it is only recently that pan-European pension plans have begun looking like a very real possibility. Traditionally, tax barriers within nations looking to host pan-European plans have been a significant obstacle. Many of these barriers are now being removed. In fact some states, such as Ireland, Luxembourg and Belgium, see an opportunity in hosting pan-European vehicles and are deliberately making moves to facilitate this.

Another indication that the timing is now appropriate is that there is an increase in the number of funded pensions in Europe. Germany, for example, is now accumulating significant pension pots. Companies have already taken early steps; many multinationals already pool pension assets to take advantage of tax transparency and efficiencies.
Another reason that more organisations are looking at pan-European pensions is the potential to extend the plans to emerging markets.

Pan-European plans are an attractive alternative to creating and governing plans in emerging European states such as Poland and Hungary, for example, where the pensions infrastructure is immature and local pensions knowledge limited. In fact, organisations are now realising that the scope can go beyond Europe. Companies with presence in emerging markets outside of the EU might be able use pan-European pension infrastructure to provide better pensions facilities in those markets than the local systems.

The benefits
So what are the benefits of these pan-European plans? First, they can be efficient. Sharing the processes over several markets allows companies to enjoy significant efficiencies of scale. A key benefit for
a company’s management is the possibility of tighter governance and control – with all the pension arrangements “under one roof” it is far easier for financial directors to monitor and control from a central position than if each country is managed separately.

Pan-European funds also bring benefits for employees. The added efficiency will allow organisations to deliver better administration and communication to staff. Also, the greater purchasing power of the pooled pensions will allow greater asset choice and better fee deals, and will encourage asset managers to go to further lengths to customise the investment offering.

For countries with a history of defined benefit pensions there is also the potential to use a pan-European plan as a location for the DB legacy. This would allow organisations to write a fresh rulebook on how to address these legacies.
There is also some opportunity for regulatory arbitrage, although in the long run this will probably prove largely illusory. Although the law prevents organisations from using pan-European plans to sidestep local employment law, some countries (again Belgium is an example) are selling themselves as easier regulatory environments in which to run plans.

However, despite these extensive benefits to designing and implementing a pan-European pension plan, there are challenges facing any organisation looking to do so, and these challenges have so far put companies off taking the
first bold step. However, all these hurdles can in fact be overcome,
and the pan-European option is still very viable.

Challenge one – why be the first?
Despite the upsides, companies are reluctant to be the first to establish a pan-European plan. This is due to the significant costs and the associated risks. This is understandable. It is easy to see why organisations would rather wait for another company to make the first move, and observe how the risk and cost elements pan out. However, companies need to see the advantages to being the first adopter. The first company to create a pan-European pension infrastructure will be able to tailor the mechanics to their organisation, and make it a “perfect fit”.

Also the cost element can be addressed. There are organisations, including fund managers and consultants, who are looking to develop a pan-European pension plan structure that they can then sell to other sponsors. These institutions will be willing to split the costs of developing a pan-European plan, which will bring down the potentially intimidating costs.

There is also concern over the legal requirement for cross-border plans to be fully funded at all times, but this will inevitably be addressed as momentum grows and solutions to this issue develop.

Challenge two – obstruction from governments
With markets such as Belgium looking to host pan-European plans, some other countries may be unwilling to lose the fund management activity from their economy. So another challenge is the fear that these countries will attempt to obstruct the move of pension plans from under their jurisdiction.

However, this shouldn’t be too destructive a problem. The EU Pensions Directive is designed to facilitate pan-European plans, which will make it difficult for governments to be obstructive without good reason. The most effective way that companies can prevent Governments from interfering is to avoid giving them an excuse to do so. So they need to take steps to ensure the move from local to pan-European pension plans cannot be seen as damaging the interests of local employees.

Challenge three – employee concern
It is entirely understandable that employees may be concerned that a move from local pension administration to a pan-European plan, run from abroad, may have a negative impact on the pension benefits they receive.
It is important to address this, and communication is the key. Organisations looking to implement pan-European plans must make sure that they communicate to employees how the move will benefit them, and address any fears they have. By helping show the move is a win-win scenario for both employer and employees, organisations can avoid employee concern or unhappiness.

Pan-European pension plans – the way is paved
As local market impediments have eroded, the way is being paved for organisations to embrace the significant benefits of creating a pan-European pensions plan. Although there are challenges, these can be overcome and the organisation that moves first will be in a position to shape the structure of the scheme to fit them and their needs. The time really has come for pan-European pension plans.

Written by Mark Duke, principal and Gavin Watkins, senior consultant at Towers Perrin