Much has been written and spoken about the EU Directive, which must be implemented in EU national laws by 23 September 2005. Some see it as having insignificant impact and others believe that it will be a catalyst for major change for pensions throughout the EU.
Implementation of the directive by member states has been described as “slow and piecemeal” and reflects the difficulties of interpreting a framework directive which emerged as a compromise after many years of discussion.
The Committee of European Insurance and Pensions Supervisors (CEIOPS) and its Working Group on Occupational Pensions (WGOP) are supervising implementation. The European Commission (EC) also provided support in the form of a clarification meeting in October 2004.

The directive sets a framework for the prudential supervision of institutions for retirement provision (IORPs). In effect, it sets out a minimum level of supervision which must be applied in all member states. Member states are free to go further than this if they so decide. Whilst this seems straightforward, many issues arise from the variety of pension structures which apply in the different member states and the equally varied supervision regimes applying to these.
The minimum supervision level for IORPs focuses on management, disclosure requirements, technical provisions and funding, and investment. The main areas where member states have a discretion on the approach they adopt is whether the directive is applied to the pensions business of insurance companies covered by the life directives and whether schemes with less than 100 members are excluded in relation to specific provisions. The directive also gives member states an “opt out” clause which allows them to apply limited quantitative investment restrictions and to decide whether there is any requirement for additional national investment provisions to be required for national employees in an IORP which is located in another member state.
The other dimension of the directive is that it enables institutions for retirement provision to operate on a pan-European basis and effectively sets a framework for pan-European pension schemes in future.
It is likely that existing funds will have to comply with changes in compliance requirements. These changes will be in the area of detail, rather than principle.
Cross-border pension arrangements will require interaction between supervisors of different member states. The aim of the directive is that one supervisor would take responsibility, although the IORPs would be subject to some supervisory requirements of the host member state and some of the home state. A protocol is being developed between supervisory authorities to facilitate the necessary cooperation and exchanges of information and to work towards an environment of smooth and effective regulation and supervision.
A plan sponsor located in one country may consider relocation of its plan to another member state. Whilst this is possible for single plan sponsors, it is more likely that multi-national plan sponsors will make changes. Many have already been pooling investments and they may now also consider pooling services or indeed merging their multiple pension plans in one plan and one location.
Plan sponsors’ changing needs are likely to focus the attention of the pensions industry on new opportunities. Consolidation of investment services, including asset management, fund administration and custody is already out there and seems likely to be developed. Consolidation of pension services in the actuarial, legal, benefit consulting, benefit administration, accounting and compliance areas also seem likely. In any event there will be increased EU-wide competition and consequent pressure on industry charges.
There is also likely to be competition between member states since there are clear benefits in being the location of choice for new or relocating pension arrangements. Influences on this are likely to include the tax arrangements in the member state, the pension tradition and the services available. Recognised availability of tried and tested pension skills and resources would clearly be an advantage. It is also likely that the regulatory and compliance regime may be an influence, and that a regime which is perceived to be of good reputation and with a good balance of cost and protection is likely to be attractive. The ability to accommodate other countries outside the EU may also be an issue.
Ireland and Luxembourg are two member states which have shown interest in attracting business. Ireland is currently implementing the directive through its Social Welfare and Pensions Bill which was published on 11 February and is expected to be passed into law in March. This legislation aims to implement the essentials of the directive and is not currently adding any further new supervisory requirements for Irish pension arrangements over and above the requirements of the directive. The bill maintains the trust-based pension framework for the purposes of its definition of IORPs, but the Irish authorities have made it clear that they are open to discussions with
any IORPs interested in locating in
Ireland and wishing to use some other legal structure.
The recent Finance Bill in Ireland contains complementary provisions which extend the right to tax deductions for pension contributions to any pension arrangements established in another EU member state. These tax changes will bring Ireland into line with the EC’s requirements to eliminate tax discrimination favouring nationally-based pension schemes. Whilst there may be some time to go before true pan-European pension schemes emerge, these measures should put Ireland in a strong position to compete as the market develops.
The Irish Common Contractual Fund (CCF) was introduced a year ago to allow pension assets to be pooled in a tax transparent structure. Further changes are proposed in the recent Finance Bill to allow for a non-UCITS version of the original CCF and to extend the range of qualifying investors to include all forms of institutional investment.
Ireland’s positioning in the market for pan-European pension opportunities is being monitored by a Pan-European Pensions Task Force. This was established last year to examine opportunities for Ireland in international pensions areas and with particular regard to EU developments, and shows the Irish Government’s commitment to developing Ireland as an attractive location for pan-European pensions.
The shape of pan-European pension funds is still unclear. The European Federation for Retirement Provision put forward a model for this which it called EIORP 2005 and this certainly forms a good basis for consideration of what might be done. Tax issues will remain a major consideration for employers considering cross-border pension activities and these include both the tax status of contributions and also the investment tax treatment. This is a very complex area which still requires considerable work before the many issues are clarified.
The directive requirement that cross-border pension arrangements must have full funding at all time is likely to make cross-border defined benefit arrangements impractical other than the potential for asset pooling. The defined contribution area seems more likely to be the one where there is strong potential for pan-European arrangements.
A number of plan sponsors, and in particular multinationals, are looking at the potential of the directive and have set up project groups and employed advisers to look at potential opportunities arising from the directive. The next phase will be to move from the discussion stage with some party or parties actually going ahead. As ever, what is needed is a first player to go into the field and see what might work.

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