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Bridging the gap

Written by David Adams
October 2011

David Adams explores whether the IORP Directive is increasing the take up of international pensions


Harmonisation is a strange word in a European context. Maybe whoever chose it to describe the process of dragging dozens of industries in the EU member states into uniform regulatory regimes had visions at the time of note-perfect choristers blending their voices to make beautiful music. Or maybe they just wanted a word to gloss over what was certain to become a crazy, lengthy mess.

As part of the European Commission's ongoing efforts to turn this mess into something more coherent, during July and August 2011, the pensions industries of the EU were asked by the European Insurance and Occupational Pension Authority (EIOPA) to comment on the Institutions for Occupational Retirement Provisions (IORP) Directive.

The original Directive came into force in 2005 and was designed to create an internal market for occupational pensions and to promote the use of cross-border pensions. This summer EIOPA was canvassing views on the Directive's scope, the definition of cross-border activity, labour law, governance requirements and various other matters. The comments they received will now be used to compile official feedback on the Directive EIOPA will deliver to the European Commission in December, to help it decide whether or not to try and change the Directive.

The EU has already made it easier, through previous Directives, for consumers to access state pensions from another country. But occupational schemes are much harder to manage across borders, partly because they are subject to differing national tax and work-related legislation and partly because of the cultural ideas that have driven the development of pensions in the different member states.

Nonetheless, the IORP Directive did enable some important changes, insists Aon Hewitt head of research for Europe and EU affairs Leonardo Sforza. "For the first time it gives
the possibility for a company to choose the location for setting up
its pension fund," he explains. "The second change is the possibility
to create a European market for service providers. If you give greater competition among service providers we will create the conditions for having more employers [providing financial support to] pension schemes and getting better results through more efficient management of funds."

Progress has been slow. Today there are thought to be 85 cross-border arrangements, 11 of which were only established during the past year. Sforza blames a lack of understanding of the Directive. "It's taken time to be digested by national supervisory authorities and employers," he says.

International law firm K&L Gates partner and head of pensions Danny Tsang recalls a scramble among employers, when the Directive came into force in 2005, to ensure they would not be forced into a commitment to a three year funding plan. But, six years on, he feels that in practice its impact has not been particularly significant.

There are other inhibiting factors too, in particular solvency rules. Insurance companies, responsible for varying portions of pension provision in various member states, are subject to Solvency II, the 2009 Directive governing capital adequacy rules for EU insurance companies. Some of these insurers argue that pension schemes should also be subject to the same regulation. This would be pretty bad news for the DB schemes that are still widespread in the UK and Ireland.

"As far as DB is concerned, we're justified in continuing to be afraid that considerable damage could be done by a new Directive, because they continue to assert that the basis of it should be Solvency II," says Aries Pension and Insurance Systems director Ian Neale. "If you significantly ramp up the funding requirements of pension schemes
it does speak of a fundamental misunderstanding of the way UK
DB schemes are funded." Other observers believe it would be difficult for the EU to impose any such change, as it would run counter to the subsidiarity principle.

Further debate was sparked by EIOPA's draft response to the EC's request for advice on the Directive; the document upon which it sought comment during the summer. EIOPA had proposed four main possible courses of action regarding the scope of the Directive: to leave it unchanged, even though this would leave some pension schemes or institutions with the same characteristics as IORP outside its scope; to broaden the definition of an occupational pension scheme (enabling the inclusion of some schemes running in central and eastern Europe which were originally created under legal obligations instead of agreements between employers and employees); to permit optional application of the Directive to schemes currently outside its scope; or extending the scope to cover all providers of occupational pension schemes operating "at their own risk". A slightly different version of the latter would extend the scope to cover personal pension schemes.

The European Federation for Retirement Provision (EFRP) disapproved of the EC reviewing the Directive in the first place. "The Commission's aim to tackle the 'unlevel playing field' for IORP 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 declared in its official response. "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."

Still, the EFRP announced that it could support option two, broadening the definition of an occupational scheme; or an altered version of the fourth option, in which the words "at their own risk" would be replaced with "not guaranteed by the state". Its statement went on to blame the low level of cross-border IORP activity on low demand and tax-related problems, but added that, in its view, growth in cross-border pension provision since the Directive came into force actually represented significant progress.

Aon Hewitt principal in the international team Rene van Leggelo thinks redrafting the Directive would send the wrong message to employers considering using cross-border arrangements. "Multinationals would say 'Look, it's not mature and they're still working on the legal framework'," he says. "I would say that the Directive is fine: it's mainly a question of communication and of multinationals starting to understand the opportunity."
His colleague Leonardo Sforza agrees. "If the reorganisation of the Directive will improve the business environment for establishing cross-border pensions, we welcome that," he says. "[But] by revising the current regulatory framework we may have a negative impact in terms of predictability of cost and increase of cost. And by changing frequently the framework you undermine its credibility."

Ian Neale thinks the EC and EIOPA are both still asking the wrong questions. "It would be much more helpful to focus on the considerable variations across the member states on tax and labour laws," he says. "It's really important to resist a new Directive until there is a much better understanding of the differences in pension schemes between member states. And it's very important that whatever comes out of a new Directive doesn't add to the overall cost burden."

As for making any progress towards the original aims of the Directive, Danny Tsang still believes the real obstacle to the more widespread use of cross-border pensions remains the variation between tax regimes and social security systems across Europe. "There's a difference between the ideals that the founding fathers of Europe had in the 1950s and what in reality is the case," he says. "It's taken us 55 years to get this far. There are too many differences in the areas that matter for pensions to switch to a pan-European pensions arrangement. It may happen eventually, but there's a lot of work involved." We'll all find out in 2012 what the Commission plans to do next to tackle that workload.

Written by David Adams



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