When the European Federation for Retirement Provision (EFRP) unveiled the original version of its linguistically challenging EIORP concept back in July 2000, the pan-European pensions directive was still something of a blocked pipe dream.
The polemic strategy of Europe’s pension lobby group at the time reflects very much where we were then: suggesting, as it did, that pan-European pension funds could become a reality if national authorities would only start to co-operate on regulatory and tax lines.
With this in mind, the EIORP – a virtual vehicle that proposed mutual recognition of pension and taxation laws – was beefed up with the suggestion that regulators in the UK, Ireland and Netherlands would be able to demonstrate that such a system could work.
The provocative stance of the organisation was in no small degree a catalyst in shifting some of the psychological debris from the implementation path of the directive and prompting the EC’s strong-arm approach to taxation.
As Alan Pickering, chairman of the EFRP notes: “The first version of the EIORP was intended to say to employers with a cross border dimension to their pensions that things could be achieved in advance of a directive if there was a compelling case out in the public domain. It was very much written in the context of the UK, Ireland and Netherlands in the hope that the authorities would hold it up as a prototype.”
Within two years, the pan-European pensions directive, or IORP (Institutions for Occupational Retirement Provision) Directive, was on the table along with the EC tax communication, which paid the EFRP a clear compliment in more or less replicating the EIORP position.
By late 2002/early 2003, Pickering says the EFRP realised that it needed to do more work on the EIORP concept, in part because the thrust of the original document needed refining in the light of the actual content of the directive.
Says Pickering: “There were some gaps in the logic. We finished fine-tuning the document once we saw the final phraseology of the directive in September.”
The major advance for the EIORP concept under the directive is that member states are now bound to accept the prudential supervision of pension funds in other EU countries. This means that an EIORP need only report to one supervisor and comply with one set of prudential rules wherever it is located in the Union.
That the new model EIORP has the year 2005 tagged to it’s name, reflects the EFRP belief that it could become a reality once national governments have reached the 2005 implementation threshold for the Directive.
Says Pickering: “We’ve deliberately given this document a 2005 ‘strapline’ to calibrate it with the implementation process of the directive on the ground.
“We want to make sure that each member state when enacting the directive will have in their mind’s eye the EIORP concept.”
On the taxation side – considered by many the true test of the viability of any cross-border vehicle – the Commission’s Tax Communication and its subsequent infringement procedures in 2003 against member states (backed by the ECJ rulings on Danner and Skandia), have begun to elucidate what does and does not constitute unfair tax treatment on cross-border pensions.
The Federation believes that this has narrowed any potential opposition in member states to the EIORP concept.
Stepping back from the context of its introduction, what the EIORP actually does is provide a framework through which financial services providers or pension funds themselves can create pan-European pension fund products that are tax neutral – meaning that governments do not lose any revenue on cross-border pensions. The EIORP contains national sections for any member state in which it is active. These are treated exactly as if it were an IORP located in that country, with the relevant tax rules. Members join the national section of the EIORP in which their salaries are taxed and contribution tax relief is given accordingly. On the taxation of benefits (most member states operate on the EET principle where only benefits are taxed) this would work as if the benefit was being paid from an EIORP in that member state – regardless of where the member retires – using bilateral tax treaties where necessary.
EIORPs can also pay yield tax or withholding tax across borders if such taxes are levied in certain member states.
Pickering believes the document is as clear as it can be in showing how each member state can levy their fair share of tax on pension arrangements.
“Some might say that the document is far too detailed even in the apportionment of tax, arguing that the member state where the enterprise is established and where the retiree takes their pension funds should be the only interested parties. But we don’t think Europe has reached that stage yet. The decisions at recent ECOFIN meetings on corporate tax demonstrate this. With the EIORP, each member state gets their fair tax take.”
Pickering concedes, however, that the success of the EIORP will depend on give and take between regulators and tax authorities: “The thing would be killed off if people were to chase every cent of tax. So long as member states get the right number of millions in the tax area it doesn’t matter. I think the tax authorities will play ball with this, particularly as it is a tax neutral vehicle.”
The headline comes though with the EFRP calculations that for employers and employees the introduction of EIORPs could save as much as e10bn per annum in investment and administration costs.
Pickering points out that the figure of e10bn is based partly on savings that pension funds could get from reduced costs in hiring and monitoring investment managers, the argument being that of a single asset pool versus multiple jurisdiction funds.
“Not only will you hopefully get a lower ad valorem fee, but also when apportioning a plan sponsor’s risk budget you can have a Europe-wide rather than compartmentalised perspective. This means you can have a better balance between those assets that are in there because of their risk containment aspects and those that are in there for their growth potential.”
The second element of cost saving, says Pickering, comes through economies on administration. “This is something we have fleshed out since the first document. Every regulator should have a nominated administrator to whom they can look to see that the scheme is well run. We’re suggesting that this administrator could be in any country covered by the directive and its prudential rules. The fact that you only have to have one designated administrator who can the deal with each member state regulator has potential cost savings.”
So who will run these EIORP products and who will use them?
Certainly large multinationals with a number of different plans across Europe will be interested.
As Pickering notes: “Multinationals that we have spoken to say they have 80% of the possible cost savings in the bag already. But because of the amount of money at stake they say that the final 20% is worth going for, so long as there aren’t too may hurdles to be cleared. 20% of a big number is a big number in itself!”
The concept could also be interesting for smaller companies who may have mobile employees around Europe.
In some instances, it is possible that a plan sponsor will be large enough to operate an EIORP arrangement themselves. If the concept takes off though, it is likely that there will be a significant market for cross-border administrators, be they benefit consultants, law firms or accountants.
Having presented the EIORP 2005 report to European Commissioner Fritz Bolkestein at the beginning of December, Pickering says the EFRP will now be going to multinationals, national regulators and tax authorities to explain how the concept works and to garner support.
The initial response from Commissioner Bolkestein, says Pickering, was very positive. “He was particularly interested when we were able to demonstrate the savings of resources. We were at pains to stress our desire to make pension provision in Europe as cost effective as it can be so that European labour costs are not adversely impacted by unnecessarily high pension costs.”
And, says Pickering, the market response has been equally upbeat.
“Since the EIORP document went out our office in Brussels has had a number of phone calls from multinational companies who are keenly interested in this concept, which genuinely shows there is a market out there.”

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