The Pensions Portability Directive

The European Commission has succeeded in getting agreement to a Pensions Portability Directive (PPD) following an earlier, unsuccessful attempt in 2007. The directive on minimum requirements for enhancing worker mobility between member states by improving the acquisition and preservation of supplementary pension rights (the formal title for the PPD) was published in the Official Journal on 30 April 2014.

However, somewhat ironically, the PPD falls far short of the commission’s original aims by avoiding any rights and obligations that will apply to members of supplementary pension schemes linked to an employment relationship.

First, there are a number of exceptions to the application of the PPD. For example, it does not apply to pension schemes (or subsections of those schemes) that have been closed to new entrants or to individual pension arrangements other than those concluded through an employment relationship. Also, it will not affect any arrangements for insolvency guarantee or compensation arrangements that aim to protect workers’ pension rights in the event of the insolvency of a company or pension scheme. In this regard, the PPD would not, for example, apply to the UK’s Pension Protection Fund.

So what does the PPD actually achieve? Its focus is more on the acquisition and preservation of pension rights rather than the methods of allowing those rights to be transferred (hence the ‘portability’ misnomer!). So, for example, member states are required to ensure that, where there is a vesting period applied to supplementary pension schemes, that period does not exceed three years. Whilst this is unlikely to cause a stir in the UK (where pension benefits fully vest after two years’ qualifying service and members are entitled to transfer their benefits after only three months), it is unlikely to be welcomed in Germany where the usual vesting period is five years. Similarly, 21 is the new minimum vesting age; in Germany, the minimum age for vesting is currently 25.

A further source of consternation in some member states may be the requirement to ensure that an outgoing worker’s dormant pension rights or their values are treated in line with the value of the rights of active members. The PPD requires vested pension rights to be allowed to remain in the scheme in which they vested and then to be adjusted by, for example, interest or investment returns. Under German law, vested pension rights may not reflect any change in investment return or revaluation such that, over time, the relative value of those rights is eroded by inflation. From a UK perspective, revaluation has been part of the pensions landscape for many years so German legislators may have more to deal with on this front.

A common theme emerging from a number of European directives in recent times relates to the way in which pension schemes provide information to members. The PPD is no exception. It requires member states to ensure that active members are able to obtain, on request, information as to how termination of their employment would affect their pension rights. Schemes will need to be able to clearly provide information as to the value of vested rights and any conditions that govern the future treatment of deferred rights under a scheme. In light of the disclosure requirements in the UK, this should be business as usual. However it could throw up issues in jurisdictions where strict tests might be applied to, for example, the interpretation of “clearly”.

The PPD will need to be transposed into member states’ legislation by 21 May 2018 at the latest. This is unlikely to ruffle any feathers in the UK where the majority, if not all, of the PPD’s provisions are already included in English law. However, there are likely to be a number of member states who have more leg work to do in this respect – notably, Germany – and where the PPD is likely to result in a greater cost to employers than is currently the case.

Graham Wrightson is a pensions partner at Stephenson Harwood

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