The EU pension directive that brought the prudent person principle for second-pillar pension funds and which seeks to pave the way for pan-European retirement provision, will go back to the drawing board for amendments from spring next year.
Issues that will have to be tackled include the fact that member states have interpreted articles differently - in particular the question of a stricter solvency regime for institutions for occupational retirement provision (IORP) and clarification of terminology like ‘fully funded'.
This includes the basic question of which pension schemes make up which pillar in a member state, Jaap Maassen, chairman of the European Federation of Retirement Provision (EFRP) points out.
"There are a number of member states, mainly among the latest EU joiners, that say we do not have pensions in the second pillar, ‘we only have pensions in the first pillar'. They have a mix between state-provided and company or industry-wide pensions put together in the first pillar," Maassen explains. Finland is a key example here.
"As a result some member states say the EU pensions directive does not apply at all to their pension systems. This means that the basic ideas of the IORP, liberalisation of pension fund investments, protection of beneficiaries and the provision for pan-European pension vehicles are not applied."
But even in member states that have implemented the directive, certain articles offer a range of possible interpretations. Indeed, one of the priorities the Committee of European Insurance and Pension Supervisors (CEIOPS) has set itself for this year is to look at the different implementations.
Maassen, whose organisation is currently asking its members for their thoughts on amendments to the IORP directive, is "particularly concerned" about an article allowing member states to impose stricter regulations on investments than those included in the directive as long as they are prudentially justified. "This seems to be an open invitation to impose more rules," he says.
But five years after the directive was passed by the Council of Ministers, the key issues that have surfaced in its practical application are not just the question of solvency regulations but also whether or not pan-European retirement provision can work.
"The IORP directive has already reached its limits," says Thomas Steffen, chair of CEIOPS and director at German supervisor BaFIN.,
Instead of overhauling the IORP directive Steffen suggested at a recent conference that "the valuable core ideas of Solvency II to pension funds" could be applied, albeit with amendments.
Pension funds perceive this proposal as a major threat to their existence and to the stability of financial markets.
When the issue was first brought up in 2005 Dutch pension fund ABP calculated that it would have to sell off 30% of its equity holdings or €60bn worth of stocks in order to decrease its risk to a Solvency II level, says Maassen, who is director at ABP: "All other funds would have to do so as well and this would mean a collapse in the equity market."
Massen added that the EFRP "will be proposing alternative solvency regulations at the end of this year". Major concerns are that the current Solvency II regime does not account for differences between insurance companies and pension funds, such as the role of the sponsor or the longer investment horizon.
Even more heated discussions can be expected on the issue of pan-European pensions as recent statements show.
In April, Dirk Witteveen, executive director of De Nederlansche Bank, said Belgium was trying to "sell a car without having the technical specifications yet".
In May the German association of occupational retirement provision aba wanted to "kill" the portability directive, which has recently once again been postponed indefinitely, for causing extra costs for companies. In June, Richard Ellison, former chairman of the UK's National Association of Pension Funds (NAPF), accused CEIOPS of "plotting the destruction of pan-European pension schemes".
Apart from solvency regulations, the tax issue is one of the most difficult to resolve. This also shows in the lengthy procedures the European Commission and the European Court of Justice had to open against member states like Denmark and Sweden in the case of taxing pension contributions to foreign retirement providers.
Indeed, Ellison is convinced that any provision for pan-European retirement provision will be useless unless the tax issue is resolved. He also points out that the IORP is currently silent on the tax issue.
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