European employers, need the proposed directive on pension funds to be able to fully exploit synergies in the management of occupational pensions, thereby allowing a more cost effective provision of benefits and, as a result, enhancing the competitive position of European companies.
The instinctive response to this would be that synergy exploitation applies also to other internationally operating companies and therefore why would the directive then give European employers an edge over their non-European counterparts. Yet, the response to this is that yes, the non-European employers will be able to exploit pension synergies too. But the amount of such synergies will be higher for European employers, as it is in their home market where European employers, at least currently, have relatively more pension liabilities and assets to manage than non-European employers.
Obviously, the proposal for the directive as it is drafted allows only for a limited exploitation of the synergies a pan-European pension fund could potentially achieve, because the tax dimension is left out. Were taxes included, not only could synergies in the investment side be better addressed, but also cross border movements of employees could be managed in a much simpler way.
As a consequence of this view, we as European employers shall not give up in our attempts to get this directive in place. Furthermore, we believe that this current proposal for a directive is not enough. We need the tax framework around it to make it a real hit.
To avoid giving too subjective a view of an employer on the forthcoming directive, a survey was recently carried out among international companies.
The survey consisted of a brief questionnaire with statements following from the proposed directive. They addressed only a very limited number of what was considered to be the core issues in order to encourage participation. The questionnaire was sent to both a group of German companies and a group of UK/Dutch companies. The answers are provided separately for both groups of companies.
As is known, the institutions for occupational retirement provision (IORP) describes entities that have just one purpose: to finance the retirement benefit promise which the employer made to the employee.
To the extent the proposal for the directive on the activities of IORPs is intended to address the employer-employee relationship, it is designed to strike the best possible balance between security of the employees benefit entitlements on the one hand and the affordability of providing occupational benefits for the employer on the other hand. Employers are not so sure whether this is the case. While the German sample mildly agrees with this statement, the UK/Dutch sample mildly disagrees.
A tricky issue is that of defined contribution schemes. In its original version, the proposal for the directive could be relatively easily read as including both defined benefit and defined contribution schemes. Somewhat to the contrary, the amended, “after European Parliament” version – after a fierce battle in respect of whether or not IORPs by definition must cover biometrical risks or at least provide a guarantee on contributions paid – could be interpreted that defined contribution schemes are no longer covered. For employers this would be very difficult, as we would like to have a choice between defined benefit and defined contribution schemes. And looking across the North Atlantic: our North American counterparts have this choice. The big ones among them even tend to provide both types. It would be unacceptable, if European employers did not have the choice.
The proposal for the directive now stipulates in Article 9 that employees must have a ‘collective’ option between a retirement promise with or without biometrical risk. The collective exercising of the option to be arranged on the basis of the jurisdiction in the member states. In Germany, one would expect, this would normally be a collective agreement between works council and employer. It would be necessary in connection with those options to give full transparency and administration. Here, in my view, the European legislation goes a bit too far. It is making issues too complicated for a fast moving business environment.
It is my view that defined contribution schemes would be covered by the pension funds directive because the typical defined contribution promise includes rules according to which the monies accumulated in the employees’ ‘DC account’ must be used to buy a pension and because Article 11d) addresses schemes “where the member bears the investment risk”.
The results of the survey show that employers in both samples would welcome inclusion of defined contribution schemes in the directive proposal.
Article 18 of the proposal suggests a qualitative approach to investment. However, member states are given some discretion on the precise investment rules which they require from pension funds located in their territories at least for a transition period of five years. The original wording of the Commission allowed for more intervention of the supervisory authorities of the member states. If the recent change in the relevant wording really means that the member states have less of an option to impose quantitative requirements and limits, then this change must be welcomed.
The results of the survey demonstrate that employers clearly favour a qualitative approach in the investment area over quantitative limits and requirements. Not surprisingly, the UK /Dutch sample strongly agrees yet the German sample only agrees. The response of the UK/Dutch sample is evidence of how important they consider the so-called “prudent person principle”.
Article 19 of the proposal for the directive allows IORPs to choose freely among any custodian or investment manager duly approved in any of the EU member states. Both the German and the UK/Dutch sample indicate that they strongly agree with this new possibility. This view is probably founded on the opinion that a broader EU base will allow selection among a broader base of expertise and talent, enhance competition, find better managers for special mandates and bundle mandates much more easily in order to achieve higher rebates.
This view was tested in the question: Choosing custodians and investment managers freely within the EU will allow the cutting of costs and improve investment returns. The UK/Dutch sample strongly agreed and the German sample, mildly so.
Article 20 of the directive would allow for one IORP to provide cross-border pension services in all European member states. When it comes to the question whether or not employers are interested in those cross-border activities, both German and UK/Dutch employers have a relatively strong interest that this should be possible. It can be assumed that the reason for this strong interest is the view that it then would be possible to realise synergies via economies of scale.
Another issue addressed is whether employers feel that the current proposal for a directive on IORPs will encourage them to provide pension services in all EU member states on the basis of a single IORP with a single license and thus just with home country supervision. Both sample groups neither agree nor disagree with this statement. Perhaps they assume that the directive has still a long and hard way to go before cross-country services can be provided and that the various local social and labour law requirements, information requirements to employees, language barriers and the like, make the possibility of cross border activities troublesome.
On the matter of opening the pension fund directive for insurance companies: This is now stipulated in Article 2. A contemporary commented that the proposal was hijacked by insurance companies. It is argued that insurance companies must be included in order to provide a level playing field. I am not convinced that a level playing field can be established by the current proposal. Financing a pension promise via direct insurance or via a pension fund are not the same thing. If they are different, you probably need to treat them differently in order to open up a level playing field.
Yet, pension funds are strong enough to cope with the fact that insurance companies will have a choice of being covered by the life directive or the pension directive, which is a choice funds do not have. They shouldn’t fear being among the losers of the pan-European pension development.
It is fundamental to stress again, that European employers must not give up in the objective of getting a pan-European pension fund in place. We cannot wait another 10 years.
Withold Galinat is employee benefits co-ordinator at BASF in Ludwigshafen, Germany. This is based on a presentation to the European Federation for Retirement Provision conference, last autumn

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