Pension rules catch up with changing work patterns
Patterns of work in Europe are changing, with flexible and part-time employment becoming far more widespread. In the UK, it is estimated that about a quarter of the workforce is now employed on a part-time basis, and only a third of new jobs created in the last few years were full-time posts.
Many part-time employees do not belong to occupational pension schemes. Social reasons may be behind this, with some part-time workers being single mothers who simply cannot afford company pension contributions. But at least the legal framework is now being put in place across Europe to ensure part-timers at least have the right to participate in an employer's scheme.
Legal changes aimed at improving rights for part-time workers have already gained much ground in Europe, and now a European Council directive on the issue is set to enshrine those rights in local law. The directive (Council Directive 97/81/EC), concerns the framework agreement on part-time working hammered out between European social partners at the end of 1997 - the social partners being the ETUC (trade unions), UNICE (private sector employers) and CEEP (public sector employers). The agreement aims to eliminate discrimination against part-time workers and to improve the quality of part-time work. Though not spelt out explicitly in the directive, the right to be included in an occupational pension scheme is likely to be part of this, being an important element of employment conditions. The directive was amended by Council Directive 98/23/EC in April last year to extend it to the UK.
States have until January 20, 2000 to incorporate the directive into national law, while the UK's deadline is April 7, 2000. However, transposing the directive into local state legislation is no simple matter, as scope for interpretation is wide. The directive states that it binds member states as to the result to be achieved, but leaves national authorities the choice of form and methods. And while the underlying framework agreement states that, in respect of employment conditions, part-time workers should not be treated in a less favourable manner than comparable full-time workers just because they work part-time, it qualifies this by adding, unless different treatment is justified on objective grounds". Under the agreement, member states can also, wholly or partly, exclude part-time workers who work on a casual basis. But any such exclusions would have to be reviewed periodically to see if they remain valid. "The starting point was the social partners' agreement of the principle that part-time workers had to be treated on a pro-rata basis with their full-time colleagues," says Alan Broxson, director of Irish Pensions Trust in Dublin. "The problem left to the states is implementation." The directive does not specify what is really meant by a part-time worker or even what pro-rata means, and it also raises a whole gamut of other issues.
So it is quite likely that the eventual legislation will differ from country to country, says Broxson. "Even though it has to be implemented into Irish law by the end of the year, we haven't got a clue yet as to what the nature of the local legislation will be." In its report on the framework agreement in 1997, consultants Mercer's European Union practice Brussels said that one effect of the agreement might be to increase the uncertainty over thresholds for inclusion of part-timers (that is, how many hours a week they must work to join the scheme) as well as to increase the diversity of practice across the union. Apart from the fact that casual part-time workers can be excluded, with no definition of 'casual' offered, the agreement also says member states can make access to particular conditions of employment subject to a period of service, time worked or earnings qualifications. Mercer points out that member states could allow companies to make access to pension plans subject to waiting periods, and minimum threshold hours worked per week. But even if this was the case in domestic implementation of the directive, part-time employees affected might still have a claim against employers for exclusion from the pension plan under the European Court of Justice jurisprudence relating to indirect sex discrimination. "Therefore, whatever happens, it is probably still advisable for companies to maintain a liberal policy with respectto inclusion of part-time employees in pension schemes," Mercer advises in its report. Christine Verhaegen of the Brussels based European Federation for Retirement Provision says at the moment laws on part-time employees and their rights differ enormously from member state to member state. "In some countries it is almost neglected from a legislative point of view," she says. But despite the lack of domestic legislation in some countries, companies have already largely adapted their pension scheme rules to comply with the European Court of Justice rulings. Rulings in the ECJ, notably Barber in 1990 and Vroege in 1994 reinforced the rights of part-time workers to be treated equally. The principle behind these cases, and the driving force behind the directive, is that of stamping out discrimination on the grounds of sex, since part-timers are mostly women. In Ireland, the directive has coincided with efforts made to find out why second pillar pensions coverage has not been as broad as it could be. The reason, says Broxson, as in the UK, is the proliferation of atypical employment - including part-time working.
The directive should go some way toward solving this problem. At least, that is the theory.Bill Birmingham of the UK's National Association of Pension Funds in London is sceptical that the legal changes resulting from the directive will make any real difference to pension coverage. Although any worker is likely to join a non-contributory occupational pension scheme given the opportunity, because there is nothing to lose, contributory schemes are a different matter. He suggests three reasons why part-time employees are unlikely to join. Some part-time workers are single parents who cannot afford the pension contributions. "At the end of the month they've got nothing left at all," says Birmingham.
Second, many part-timers may have a husband or partner who has a workplace pension which is expected to provide for both partners in retirement. Also, part-time employees tend to be women, and tend to have gaps in their entitlement to a state pension. If they had built up some entitlement to occupational pension benefits, then they would lose out on social assistance by the same amount. "The aggregate would be no higher," he says.
The issue of just how occupational pension benefits dovetail with the state benefits in retirement is a major one for Ireland in implementing the directive effectively. Most Irish occupational pension schemes, particularly defined benefit schemes, take account of the basic state pension. If an employee is only working one or two days a week, this means the company pension may be nothing. And if the state pension was taken into account twice for one worker with two part-time jobs, this would obviously be unfair, says Broxson. When the directive is incorporated into UK law, there would be no sudden changes in membership levels of pension schemes, says Birmingham, because UK schemes have been slowly reducing their part-time exclusions over the past few years. "European case law already requires one to put part-time workers in a pension scheme," says Geoffrey Furlonger of Mercer in Brussels. "So the European part-time workers directive reinforces that," he adds. Even if the directive fails to break new legal ground, at least it will give new publicity to the fact that part-time workers have equal rights, says Furlonger. So in many continental European states, legislation arising from the directive will be of purely academic interest to the pensions industry. Part-time employees already have the right to inclusion in private pension schemes. Rob Ten Wolde of Dutch company pensions association CPF in the Hague says he believes the principles of the directive are already incorporated in Dutch law. "In 1994, we already made pension funds legally obliged to facilitate pension build-up for part-time workers in relation to their income or the hours they work," he says. The latest directive is no more than a formality for pension schemes in the Netherlands, he says. In Denmark, too, the directive will not change things for pensions. The terms of an employee's inclusion in an occupational pension scheme are a matter for negotiation between the employers' association and the trade union, either on an individual or collective basis, says Aase Kogsboell, head of law at the Danish Insurance Association. "Part-time workers are included already ... it is not a change for Denmark," she says. Jos Verlinden, board member of the Belgian Pension Fund Association, says Belgian law already obliges pension schemes to allow part-timers to be included. A law on pensions was passed in 1996, named the Colla law after the government minister behind it. As a result of the legislation, there has been a small increase in the number of members of occupational pension schemes, he says. Previously, for most pension schemes there had been a threshold of 20 hours a week work, and any one working less than this would not be entitled to join the scheme, says Verlinden."