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Retention of full funding requirement 'opposite to EC’s objective'

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  • Brussels, Belgium

The confirmed retention of the need for cross-border pension schemes to be fully funded runs contrary to the European Commission’s aims for retirement provision in the union, experts have said.

The Commission today published the newly revised IORP Directive, and while no change was made to cross-border funding, it represented a last-minute change of heart.

Initial drafts included the provision for pension schemes operating in two or more member states to be regulated by the same standards as single-border schemes, in essence creating a provision for unfunded cross-border activity.

Dave Roberts, senior consultant at Towers Watson, said the industry’s expectation was not wishful thinking, but rather believing a stance made by the Commission itself.

In November 2013, Klaus Wiedner, head of pensions and insurance at the directorate general internal market, said its plan included solving cross-border issues and creating a framework that allowed pension funds to grow.

“Retention of the fully funded requirement will not help attain that objective and would hamper IORPs’ willingness to engage in cross-border activities,” Roberts said. “And removal would make cross-border IORPs less expensive and less burdensome by aligning the rules to those for domestic IORPs.

“Respondents to a green paper previously mentioned the full funding requirement as a major obstacle to cross-border activity. It also would have been coherent with overall EU policy in the pensions area, the Europe 2020 strategy and the green paper on long-term investment.

“This option is not expected to generate costs. On the contrary, it is expected to generate significant gains. In particular, it will provide significant economic benefits to employees, employers and IORPs.”

However, responding to an IPE question regarding the last-minute decision by the Commission to maintain the status quo, Wiedner said the Commission foresaw potential obstables in cross-border provision if full funding requirements were dropped.

“We thought that, on balance, it was still better to keep that fully funded requirement because we obviously want cross-border trade, we want to make sure it is a sound cross-border provision of services,” he said.

The initional inclusion of relaxed funding requirements was widely welcomed by the European pensions industry.

Hans van Meerten of Clifford Chance in the Netherlands said that, despite the Directive being a positive step forward, the keeping of full funding requirements was disappointing.

“The lobby has tried very hard to keep the pillar one [solvency] requirements out of the Directive, and the result is that we are faced with one that promotes the further shift to individual DC,” he said.

Paul Bonser, head of the cross border consulting team at Aon Hewitt, said the move was effectively “discrimination”, as the Commission continued to treat cross-border pensions more harshly than others.

“It is effectively discrimination, which the Commission is trying so hard to erase in most other areas,” he said.

“Many within the pensions industry will question why this was reintroduced from the previous leaked version that was recently in circulation.

“This will undoubtedly continue to limit the ability of multinationals, headquartered in certain markets such as the UK, Netherlands, Germany and Ireland, to use their home country pension funds for cross-border activity.”

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