Plain speaking

Pensions simplification has been a preoccupation across Europe ever since Sir Leon Brittan, as the European Community’s Commissioner for Financial Affairs in the 1990s, campaigned to provide funds with portability and investment choice freedom.

Some 20 years on however, the pensions industry is still waiting for the emergence of a savings regime that can work in everyone’s best interests.

Brittan’s laudable offensive never gained enough support, and, much like his political career, disappeared into a black hole filled with accusations of vested interests and back door deals.

Instead, member states were handed the first IORP Directive, a set of standards that Robin Ellison, a partner at Pinsent Masons and Professor of Pensions Law and Economics, Cass Business School, describes as the complete opposite of Brittan’s original intention.

“The directive we have now is a controlling and not a liberalising one,” he says.

It’s hardly been surprising, therefore, to see some of the EU’s members take matters into their own hands.

In Denmark, for instance, a commission has been studying the country’s pension system to find solutions for complex rules and high taxation of pensions. In Ireland, calls have been made to radically alter the defined contribution (DC) landscape. Mercer head of DC Niall O’Callaghan has been vocal in suggesting three main alterations to policy: phasing out the pensions levy by the end of 2014; the creation of one DC system; and the imposition of a UK-like auto-enrolment savings framework.

The EU’s authorities have also responded to the challenge of course, with the European Commission’s revision of the IORP Directive and EIOPA’s chairman, Gabriel Bernardino, suggesting at a recent conference in Bratislava that the construction of a single European pension product was a distinct possibility.

In addition, EU workers moving between member states will have their occupational pension rights guaranteed after the European Parliament passed a draft law on the matter in April.

Not so simple

But despite high levels of activity, concerns remain over the route to simplification.

“I am all for pension simplifi-cation,” says law firm King & Wood Mallesons SJ Berwin partner Wyn Derbyshire. “But every time they try to simplify things it just gets worse and worse, and that is just on the domestic level. On the European level, that’s even harder to do, with 28 countries trying to do the same thing with different levels of sophistication in pension regimes.

“It magnifies the problems many times over.”

Despite the magnitude of the task, James Walsh, who heads up EU policy for the UK’s National Association of Pension Funds, believes that there are some areas that the new directive could have addressed to help large funds in particular, but chose not to.

“What we expected them to do was to remove the fully funded cross-border schemes requirement,” he says. “That would have eased the regulatory regime, and potentially created new schemes.”

Towers Watson senior consultant Mark Dowsey also identifies this omission as a missed chance.

“Many multi-nationals have legacy DB schemes. And even if they’re closed to accrual or new members, economies of scale dictate that employers would look, where possible, to consolidate existing arrangements.”

He points out that extending provision for companies is made less attractive if they still have a half a dozen DB schemes dotted around Europe.

But the fully funded question is only one part of the new directive, which, as far as Walsh is concerned, is far too detailed and prescriptive to be described as a step towards simplification.

“The new directive will increase the number of instructions from about 20 to 80. That gives you some sort of sense of the increased level of detail and content that we’ve got,” he says.

“We would like to see much more high level principles put forward, and allowing flexibility so that they can be applied to how national pension systems operate.”

Adaptability of this sort would be most welcome across various parts of the continent, not least in Germany. Commentators there have expressed strong concerns about some of the extra requirements for scheme governance, not least the one that will stop company benefit directors from being able to oversee the day-to-day running of a scheme, which is a common occurrence in the country.


According to some analysts, the failure to give individual nations room to interpret elements of the directive stems from a mulish misunderstanding of the diversity of pension arrangements across Europe.

“There is a fundamental specific problem with different legal bases for workplace pension schemes across the EU. In many countries the contract-based DC system is the only one available,” explains Buck Consultants head of pensions policy Kevin LeGrand.

“That leads to a large bloc of influence that fails to properly recognise or understand the employer-driven model that is prevalent in countries such as the UK, the Netherlands and Eire.”

Consequently, he views pensions simplification across the EU as being still some way off.


Despite the negativity shown towards the directive from some Northern member states, there are aspects of IORP II that should be applauded, says Dowsey.

He believes the insistence on the establishment of uniform scheme member benefit statements, whilst being roundly criticised in many quarters for being too prescriptive, could in fact help with cost cutting for multi-national companies and improving communication with savers.

The removal of investment restrictions is also a positive move, says Dowsey. It is expected that the directive will encourage pension funds to invest in long-term assets that are beneficial to real and sustainable economic growth.

It is also further good news for multi-nationals. “At the moment, you have to look at different investment rules for different country compartments within your cross border scheme,” he says. “This cuts through that and says that the only restrictions you can impose are those at a high level.”

Getting everyone on board

The commission is in dire need of the sort of support shown by Dowsey, if its work is to have any lasting effect, says Robeco head of European pensions Jacqueline Lommen.

“What would be helpful now is if member states and individuals, instead of objecting to what comes out of the EU, look at it more closely and thereby avoid triggering misconceptions about EU initiatives and their true objectives,” she says.

“I like to think of European pensions integration as a tanker.

And instead of trying to stop that tanker or being in a small fishing boat, it’s better to get onto the tanker and try and help steer it gently in the right direction together with everyone else.”

Lommen, who was involved in the drafting of the first IORP Directive, argues that the commission and EIOPA have not been given enough credit in trying to both protect individual members’ accrued pension rights and accommodating the needs of multinational employers and mobile employees.

Tackling the widespread disapproval shown at the retention of fully funded cross border plans is one example of the union’s leaders’ willingness to listen and learn. She says that the EU is focusing on how it can accommodate the sort of schemes that traditionally do not rely on solvency buffers, such as those in the UK and Ireland.

“In the future they will also recognise sponsor covenants and the UK pension protection fund as a route to being fully funded,” she says. “The EU is actually trying to help building a more holistic funding system for DB schemes, rather than being counter productive.”

Preserving competition

Ellison, however, believes that Lommen’s tanker analogy could benefit from being split up into various speed boats, in particular when it comes to regulatory standardisation.

He claims that EIOPA is wrong to try and stifle competition between regulators in the name of simplification.

“What has happened over the last 15 years is that different jurisdictions have tried to make themselves sexy so that people can register there.

“Five years ago the Belgian Prime Minister ran a series of seminars in London encouraging companies to register their schemes in Belgium.

“And why not? In principle, there’s no reason why authorities should not fight for business.”

“I’m in favour of regulatory competition - you get better regulation as a result.”

Marek Handzel is a freelance journalist

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