EUROPE – The European Union’s directive on pan-European occupational pensions comes into force in one year’s time.
Directive 2003/41/EC “on the activities and supervision of institutions for occupational retirement provision” was published in the EU’s Official Journal on September 23 2003. Member states then had two years to implement the directive – now they have just one.
Leonardo Sforza, director research Europe at Hewitt Associates, said that three countries were at the forefront of implementing the directive: the UK, Ireland and Luxembourg.
But Francis Fernandes, head of actuarial at ABN Amro, said: "With only 365 days to go, UK companies are still waiting to see the detail on two of the key requirements – the prescribed assumptions for calculating technical provisions and the maximum period over which any resulting pension deficits can be removed.
“With most finance directors and corporate treasurers deciding on their budgets for the year ahead, they need to be aware of the potential cash calls as soon as possible - for some, the hike in contributions may simply be too much to absorb.”
Sforza said that the European Commission should be more proactive in helping member states with the implementation of the directive.
"If the Commission also has a position of wait and see, then it is clear that several member states will not meet the September 2005 deadline"
Fernandes said the Statutory Funding Objective set out in the UK’s Pensions Bill was likely to see more matching of liabilities – which will increase the demand for long-dated and index-linked government bonds, and long-dated corporate bonds.
“This demand is likely to outstrip supply, which itself could exacerbate the problems in liability matching,” Fernandes said.
Keith Jecks, ABN Amro’s global head of pension fund coverage said UK firms were “pre-occupied” with Pension Protection Fund levies - rather than an increase in contribution rates required to cover the directive’s technical provisions.
“At one extreme, you might interpret ‘technical provisions’ as reserving for pension promises based on risk-free returns - which would increase deficits well beyond those we have seen under the accounting standard FRS 17.”
The Netherlands seems further down the line on the detail of how it will apply technical provisions than the UK,” Fernandes added.
“However, when it comes to the pensions accounting numbers soon to appear under IAS19, there may be some raised eyebrows from readers of Dutch accounts - at least, FRS17 in the UK has already brought the deficit issue out into the open.”
Another element of the European directive to watch is the impact on future pan-European schemes, said Fernandes.
“If the various member states are operating under slightly different interpretations of ‘technical provisions’ - with one country being much less prudent than another - this could lead to difficulties unless there is some ring-fencing of each member state's assets and liabilities within the cross-border pension scheme.”