The pension funds directive was a promise made by EU member states to European employees and employers that national borders for occupational pension provision will fall. If fulfilled, it should make such pension provision more cost-effective and secure.
Over time everyone will benefit. Smaller multinationals active in just a couple of member states with a limited workforce in each of them will benefit as well as larger corporations with significant presence in several member states. These will blaze the trail for pan-European pension provision more generally, generating experience that will be useful for smaller enterprises.
The future will be marked by uncertainty as to whether particular national arrangements are compatible with the pension funds directive. Pioneering multinationals will find that they inevitably become parties to these debates.
The directive opens up the possibility of having an international pension fund operating on the basis of a single pool of assets and liabilities. This promises significant efficiency benefits.
But a pan-European fund is not the same as a pan-European pension scheme: even if the directive is successful, continuing national differences in benefit design requirements mean that true pan-European pension schemes, ie, one scheme operated by a single fund catering for employees in all 25 member states, are unlikely in the near future.
This means that the benefits promised by this directive are only achievable if a sensible approach is taken on how to deal with national specificities on, for example, benefit design or information provision. The need for a pension fund to achieve multi-jurisdictional compliance is why the European Federation for Retirement Provision (EFRP) developed its concept of a national section in 2000: this concept remains valid. The real challenge is twofold:
l A multinational plan sponsor will have to be prepared to face host state regulation and some supervision on information for members in each host state. There will also be host state regulation and “ongoing supervision” concerning social and labour law. Determining which matters fall properly under the law of the pension fund’s home state and which under that of the host state will be a sensitive matter;
l The concept of a national section must be fleshed out without resorting to exaggerated requirements for separate, nationally ‘ring-fenced’ pension schemes. Regulatory overkill would mean zero progress, simply reinstating separate national pension funds under new terminology.
Before the advent of true pan-European schemes, we expect ‘cross-border clustering’, whereby pension schemes from groups of member states displaying sufficient similarity are identified for treatment together. So although pension funds structured into national sections will still be necessary, clusters of broadly similar pension products will still afford significant opportunity for rationalisation and economies of scale. The drive to simplify will most probably encourage the trend to defined contribution schemes.
More so than any other financial services directive before it, the pension funds directive is principle-based. It leaves much technical detail to member states. But silence on detail is not the same as a open licence to fill in perceived gaps.
The directive actually says more than it might initially appear to do to those more used to old-fashioned laws where the legislator tries to lay down rules for everything. Often several provisions deal with a particular issue and one needs to understand how these interact to realise what the directive demands or precludes. Particularly in the provision on cross-border procedures, apparent lacunae can be filled by relying on rules and principles set down elsewhere in the directive. The risk is that this new approach is mistaken for one that is full of gaps: gold-plating and counterproductive red tape would be the result.
This is one reason why the EFRP published its legal commentary on the directive, which appears to have been well-used by many national authorities. So even if the EFRP’s positions are not always shared, it should have reduced the length of debate and uncertainty about what the directive demands. The EFRP will update its commentary to help all parties.
The cross-border dimension of the principle-based approach means that member states must work together to achieve a common understanding on what the directive requires. National supervisors must learn to work together in a European spirit and trust each other’s work. They should also co-operate with their lawmakers to ensure regulatory frameworks facilitate cross-border operations.
Ensuring a coherent cross-border fit of national systems is where the pension funds directive interacts with another part of EU financial services policy. The recent and still ongoing ‘Lamfalussy revolution’ aims not only at ensuring fast-track legislative procedures but at maximising cross-border coherence. The new Lamfalussy committees are designed to achieve this.
Issues which the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) will have to address include:
l Creating a framework for swift and secure information exchange between national supervisors relying on a common format and working languages, with a one-stop-shop approach;
l On matters where the directive makes clear that it is a pension fund’s home state rules which apply, some conditions in the host state will still need to be taken into account by the pension fund. How technical provisions are to be calculated to reflect not just variant economic and demographic factors in the host state but also the actuarial implications of different retirement benefit commitments raise important questions;
l It is also unclear exactly how the full-funding requirement will be understood by each supervisor and how it will work in cross-border situations. Can a home state operation be under-funded provided that the aggregate of all non-domestic operations are fully funded?
Rather than wait for Brussels to do something, these are the sort of matters which member states could be resolving in CEIOPS to pre-empt them becoming problems.
But committees such as CEIOPS are double-edged tools; the biggest danger is of unwilling member states misusing them with a view to blunting the effectiveness of the directive. The recently proposed draft protocol on cross-border notification procedures displayed elements of this. CEIOPS must make its thinking on its common understanding of what the directive means publicly available, and also allow input by market participants. Because multinationals span borders they will find that they are in a good position to provide valuable input on the cross-border debate.
Fortunately, one area where a surprising level of progress is being made and which was depicted as real problem is tax. Backed by ground-breaking ECJ judgments, the Commission is displaying admirable vigour in rolling back tax barriers to pan-European pension providers and their members.
The interface between financial services regulation and social and labour law will raise some delicate questions but this frontier must not be allowed to become a final defence line behind which diehard pensions ‘nationalists’ throw up smokescreens to limit the cross-border effects of the directive. The issue determines the extent to which a pension fund can be subject to double supervision and a robust attitude will need to be taken towards member states who declare everything to be social law.
There is much to fight for. Whether the promise of the directive is fulfilled will in part be determined by those – most likely multinational plan sponsors - who take the first pioneering steps.

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