Analysis: The burden on cross-border pension schemes to be fully funded at all times could be lifted as the Institutions for Occupational Retirement Provision II directive moves nearer its final version.
After countless changes to the wording, more paper is moving through the mills at Brussels. On Monday, the European Parliament Committee on Economic and Monetary Affairs is voting on further amendments to the IORP directive.
A new version of the directive, IORP II, will eventually (2018 at the earliest) replace the 2003 version. The proposed amendments include the question of whether cross-border pension schemes should no longer be fully funded on a technical provisions basis at all times, as is currently the case, but only when they are first set up.
There are only 88 cross-border schemes in Europe, mainly between Northern Ireland and the Republic of Ireland, precisely because of the burdensome funding requirements. But this could change as state pensions are pared back and the emphasis on workplace pensions increases.
The current draft directive states: “Cross-border IORPs… are limited today. But the increasing pressure on the occupational pensions sector is likely to grow significantly in view of increasingly limited public pensions systems, and cross-border IORPs have the potential to represent an increasing share in occupational pension provision.”
Mergers and new sections unaffected
Some of our members have said to me, ‘Yes, in an ideal world we would like to lead a single pension scheme for all our European operations but it’s just not possible at the moment’
James Walsh, PLSA
The possible change to funding rules – which would allow schemes to temporarily go into deficit and operate a recovery plan – would matter mainly to the UK and Ireland, said Maria Rodia, partner at law firm CMS.
She welcomed the fact the full-funding requirement at creation would not apply when pension funds change the way they are organised.
“[The suggested amendment] wouldn’t vitally catch schemes when they merge or when they set up new sections of pension schemes,” she said.
“For the UK that’s very important, this is what we do, it wouldn’t therefore impact on usual scheme activity.”
However, because of the need to be fully funded at establishment, employers might still be put off from setting up cross-border schemes, she said.
Not a cure-all
The Pensions and Lifetime Savings Association would welcome a move to make cross-border scheme funding less strict.
Its EU and international policy lead James Walsh said this could strengthen the European single market, while admitting that some hurdles would remain.
The council’s stand is the full funding requirement should stay
Corianne van de Ligt, European Council
“You would still have problems like different tax regimes in each member state… There’d still be obstacles to overcome, but this would be something that Europe could do to strengthen the single market as far as employment and pensions are concerned,” he said.
Walsh added there was a demand for cross-border schemes: “Some of our members, pensions managers of large FTSE 100 companies, have said to me, ‘Yes, in an ideal world we would like to lead a single pension scheme for all our European operations but it’s just not possible at the moment’.”
Full funding should stay
The amendment, however, could still be scuppered: after the Econ Committee vote, the draft report will be discussed in trilogue negotiations between the Parliament, European Council and European Commission representatives.
According to Corianne van de Ligt, policy adviser at European pension fund association Pensions Europe, the European Council has already indicated it wants to keep the requirement for full funding at all times within the directive.
“The council’s stand is the full funding requirement should stay,” she said.
Tim Smith, senior associate at law firm Eversheds, said even if it is agreed that it is not explicit, the requirement for full funding could still be implied by the current wording of the compromise document, as it asks that the interest of members and beneficiaries is “fully protected”.
Smith said this wording was a concern and “could undermine what they’re trying to do here”.
The directive is subject to a vote in the European Parliament following the Econ Committee, but could be fast-tracked to the trilogue stage as the Dutch presidency, ending in June, is keen to finalise it.
