Making pensions more mobile
When you talk about the “pensions directive” in the future, you may have to clarify which directive you mean, now that the European Commission has announced plans to table a new directive on pensions portability. The move comes on the heels of the now familiar Institutions for Occupational Retirement Provision – the pensions directive.
The Commission made the decision seeing that “the water between the social partners has proved to be too deep” – and that the directive that would take a “minimal harmonisation” approach. The Commission is preparing an impact assessment study of such a directive.
Withold Galinat, of German industrials group BASF, is the European Federation of Retirement Provision’s representative to the European Commission Pensions Forum. He says: “It is certainly desirable from an employers’ point of view to have cross-border mobility. However, I personally challenge the hypothesis that we have significant cross-border mobility of employment in the EU and that this cross-border mobility of employment will considerably increase in the future.”
He cites reasons of language, family-relationships and culture for EU citizens’ strong tendency to look for employment within a member state. “The only significant cross-border employment mobility is most probably within multinational groups whereby an employee is delegated to work temporarily in another member state for about three to eight years.” He says he has not yet seen any convincing statistics which “validly and reliably” address this topic.
Indeed, he says the whole issue of pension portability could be seen as a “Trojan Horse”. “Portability is not meaning only the transfer of accrued pension entitlements from one occupational pension scheme to another. No! Within the Trojan Horse we also find the terms and conditions under which occupational pension entitlements are becoming vested and indexed prior to payment, as a way of preservation of vested pension rights.
“As to portability per se, the EFRP welcomes all sensible measures which allow for the transfer of accrued pension assets from a pension scheme in a member state to another one a different member state.”
He points out that this requires two major things - the dismantling of tax hurdles and the freeing of employers from the liabilities under a pension promise by transferring a pension entitlement out of a member state. He says: “It must become possible to transfer pension assets across EU-borders without negatively affecting both the tax situation of the companies and the employee involved.”
“The EFRP recognises that it is vitally important to provide the mobile employee with information that allows him or her to make an informed choice about whether or not to transfer the accrued, vested pension assets.
“However, the EFRP wants to emphasise that providing such information is not for free. It bears a cost. This cost comes from additional administration.” He adds: “Isn’t it logical that all administration cost associated with portability should be borne by the mobile employee?”
And Galinat argues that there is a further issue about the amount of pension assets that represent the occupational pension entitlement accrued prior to an employee leaving a job. He terms this dilemma a “Gordian Knot”.
“The only solution which I see to disentangle this ‘Gordian Knot’ is to base portability on accrued assets rather than accrued entitlements. The amount transferred must be calculated on the calculation basis chosen by the employer or the trustees of the ‘transferring’ pension scheme while this amount is then translated into a pension entitlement on the calculation basis of the receiving scheme or employer.”
And he asks - who indeed has the right to determine whether or not pension assets are transferred from one occupational pension scheme to another? He points out that waiting and vesting periods vary considerably in the EU: “The range is from immediate vesting to no vesting at all. From an employer perspective, decreasing the waiting and/or vesting periods simply means additional costs.” He worries that, given the current economic situation, it may further hit EU competitiveness.
And he says that there is an issue over the indexation of pension entitlements of vested leavers. “In this context, it must be considered that indexation is almost not justifiable under flat rate and career average pension promises because then employees leaving an employer would be receiving higher benefits than those employees who continue to work for their employer and stay.”
He says this would “imply tremendous additional costs” because it is not the general practice - and that employers could be forced to re-calculate the distribution of the budgets for their occupational pensions, which would lead to a decrease of existing and new pension promises. “This cannot be what the European Commission tries to achieve by bringing indexation into the debate!”
The Comité Européen des Assurances, the federation of European insurers, says it welcomes the discussions about pension portability. It has suggested a “considered and prudent” approach which does not prejudice the commitments made in existing national schemes.
It says: “CEA considers consequently that it is premature to launch the second phase consultation of the social partners without understanding the impact of the new Community provisions on national schemes.” The CEA says it is necessary to have further technical studies. Although it shares the Commission’s idea that employees should be entitled to transfer their acquired rights and that the same actuarial rules should be applied to persons leaving or joining a pension scheme, the CEA opposes the transfer value being based on an agreement between the two schemes concerned. “Such a transfer value should be based on recommendations or guides drawn up by associations of experts, such as the national association of actuaries.”
The CEA says it is not certain that the issue of pension portability is a major barrier to employees’ mobility between EU member states.
The body says the EU’s actions must “supplement the regulatory and prudential framework” of the IORP directive with “appropriate accompanying measures of a social and fiscal nature”.
The Groupe Consultatif Actuariel Européen’s Philip Shier says the group “accepts that portability of pension rights is desirable to enable those who change employment during the course of their career to take their pensions with them”. The Groupe has set out principles applying to the calculation of transfer values. They are: the transfer value should be fair value for the benefits to which the member will be entitled on leaving scheme; the transfer value should allow for revaluation in deferment, indexation in payment, spouse’s contingent pensions if these are included in leaving service benefit; the transfer value should be based on vested benefits; the transfer value calculation should use standard mortality tables; the discount rate used in the calculation should reflect market rates of return.
“The use of these principles would help ensure that mobile employees who elect to transfer their benefits are treated equitably relative to those who leave their deferred entitlements in their previous employers’ schemes,” says Shier.
For its part, European employers body Unice, or the Union des Industries de la Communauté Européenne, says it supports removing the obstacles to cross-border labour mobility linked with supplementary pensions. “Any EU initiative should only deal with the cross-border portability of supplementary pensions and should not tackle the conditions for acquisition, preservation and transferability of supplementary pension rights at national level insofar as this would interfere with the organisation of supplementary pension arrangements in member states.”
As if one pension directive was not enough, let’s hope that the gestation of the new one is not as fraught as the first one.