From direction to implementation

As the EFRP approaches its 2003 annual conference delegates might expect an air of congratulation at the work achieved on the pan-European pensions directive, while wondering where the organisation’s work goes from here.
The buzzword going forward though will be “implementation”.
Just what will be the impact on member states in applying the IORP Directive (Institutions for Occupational Retirement Provision) to local pensions law and how is this likely to be achieved?
At this stage, an assessment of how member states’ regulators will react to the directive can only provide rough and tentative results.
The legal impact of the directive in each member state should be relatively easy to assess by comparing the existing legislative frameworks and that envisaged under the directive. However, this can be misleading. A more realistic assessment would be to take into account more qualitative aspects, identifying those changes that imply a basic shift in principles rather than mere changes in detail.
First, it is highly unlikely that any member state will already comply 100% with the directive because the cross-border procedures will require at least some kind of changes in respect of procedural and institutional matters.
No country yet seems to fulfil the basic full set of information requirements for the operation of IORPs.
More specifically, two countries, Spain and Portugal, will almost certainly have to remove restrictive rules on IORP use of cross-border investment managers and custodians in order to bring their laws into line with the directive.
Portuguese legislation, while complying with the main thrust of the directive, has a particular problem in that it is focused on regulation of the fund managers/ insurance companies and not on the pension fund itself, thus requiring significant alteration. Such change is unlikely to please local banks, fund managers and insurance companies seeking to keep Portuguese employee funds inside Portugal and controlled by Portuguese managers for as long as possible.
Another fundamental aspect of the directive will be the gradual removal of qualitative investment rules towards the prudent person investment principle. Only two countries, Denmark and Austria, do not comply currently with the prudent person principle.
That is not to say, however, that countries such as Denmark will have more ground to make up in implementing the directive.
Although it is too early to draw up a compliance league table, informal assessments of local legislation indicate that Denmark may actually be leading the compliance field with domestic legislation that fits around two-thirds of the mandatory requirements for IORPs.
Hasse Nilsson, chairman of Danish consultant Alcifor Advisory Services, recently noted that he saw little to trouble the market.
“The major impact will be in other member states,” he said. “The pension system here is very developed and so I think the directive will have a bigger impact on some of the countries that are less developed.”
At the other end of the scale, neighbouring Sweden seems to comply with only about a fifth of the directive’s stipulations.
Expected changes in the Swedish pensions market under EU law include new rules on investments and reimbursement, although these are unlikely to have a major impact.
Supervision for all IORPs also looks set to transfer to the jurisdiction of the Swedish Financial Supervisory Authority.
Jan Waage of consultant Wassum in Stockholm, recently commented that there was still uncertainty as to the impact the directive would have in Sweden.
“I think there may be some governance questions and there may be some pension education issues rather than any asset allocation changes, but it is difficult to say,” he said.
At the same time a European Court of Justice (ECJ) decision rejecting Sweden’s treatment
of pension taxation in the so-called Skandia case, is, albeit inadvertently, seen as a move that could help to open Europe’s pension market.
A further aspect of the directive concerns the possibility of member states extending or limiting the scope of the directive beyond the mandatory requirements.
The option under the directive for countries to create a separate regime for small IORPs seems unlikely to raise much interest, except perhaps in Finland, Sweden and the UK.
However, observers believe that all member states concerned are likely to want to make use of the option to extend national rules to include life insurance companies as IORPs under the directive.
In France the entire impact of the directive could depend on whether or not the government does this or not, as a large part of France’s pension system is presently excluded from the directive. Few though expect creation of true pension funds in France at this point as the government has expressed its objective as being to strengthen
the financial position of current compulsory plans and encourage employee savings through incentives to existing savings schemes.

Germany is another market where most employee pension rights remain untouched by the directive. The majority of German retirement assets (60%) are allocated to book reserve arrangements, which are not separated from the sponsoring company and are excluded from the scope of the directive.
The same is true for support funds (7% of retirement assets) as they do not grant the employees a legally enforceable right on benefits. Nonetheless, up to three of Germany’s five funding vehicles could be affected by the directive; pension funds, Pensionskassen and possibly direct insurance if the state chooses to apply the directive to this vehicle. In the directive’s paragraphs on investment there are several hints about the necessity of ALM studies.
This may imply a higher importance being put on ALM studies with regards to investment than laid down in German law. Nonetheless, the practical relevance of the directive looks likely to be limited.
The story looks similar in Belgium and Luxembourg where the three main objectives written into the directive – prudential supervision to protect members and beneficiaries, investment rules intended to facilitate cost-effective investment and rules enabling cross-border management of occupational schemes – are already covered to a large degree.
In both countries, however, it
is deemed that a review of the regulatory authorities (and the possible extension of their powers) alongside a review of disclosure and information requirements for pension funds will be an indispensable development.
Moving beyond the micro issues though, the overall economic impact of the directive is harder to assess. From a purely domestic perspective, if a national legal framework is already in place that complies with the new rules then the impact will be minor.
Similarly, for member states with few pension funds or other providers falling within the scope of the directive, it may appear that the economic impact will be minimal. However, the real effect depends on the extent to which current arrangements can be adjusted to be brought under national rules implementing the directive or the relative ease with which new IORPs can be set up
to compete with those existing institutional arrangements falling outside of the directive.
The cross-border dimension of the directive also implies some changes for member state rules, although these will need to be considered in conjunction with neighbouring policy areas – particularly those of taxation and social policy.
To this end the endeavours of the European Commission (EC) in tackling discriminatory tax treatment of non-domestic occupational pension providers – perhaps taking it as far as the ECJ – will be watched closely in the coming months.
The EC’s 2001 tax communication also outlined how social policy powers – almost entirely in the hands of individual member states, must be exercised in compliance with EU treaties. This will be relevant to the parts of the IORP directive that refer to the need for IORPs to comply with any host state’s social and labour law requirements above and beyond the prudential rules set out in the directive.
The foundations for the directive may well be in place – in itself no mean feat – but the EFRP’s work looks as if it will now be shifting from the EU centre in Brussels
back out to the member states to explore just how the structure of pan-European pensions starts to take shape.

Have your say

You must sign in to make a comment


Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2511

    Asset class: Commodities.
    Asset region: Global.
    Size: $10m.
    Closing date: 2019-02-25.

  • DS-2512

    Closing date: 2019-03-08.

Begin Your Search Here