A Dutch view on IORP II
IORP II sometimes fails to reflect European case law, according to Hans Van Meerten
At a glance
• Removing Prudential requirements from IORP II means member states have less power as EIOPA has more discretion in its assessments.
• There may be flexibility in practice on how full funding is determined.
• IORP II arguably offers members more protection than the Dutch Pension Act.
• The revised directive sometimes fails to reflect the case law of the European Court of Justice (ECJ) in Luxembourg.
Europe’s population is ageing rapidly. Pension systems in most member states of the EU are opaque and unaffordable. Multinational corporations increasingly have pension funds that operate across borders and workers from the EU are working in other member states in greater numbers.
These developments help account for the updating of the EU’s 2003 Institutions for Occupational Retirement Provision (IORP) Directive. The European Commission wanted its draft proposal from 2014 to achieve two key goals: improve cross-border activity and better inform participants.
However, the IORP II Directive has attracted criticism in the Netherlands, especially from populist politicians. They see it as an attack by Brussels on the Dutch pension sector. For example, they wondered why German support funds (Unterstützungskassen) were outside the scope of a IORP II when the reasons were already given in 2003. They also asked why it was de facto only applicable to the Netherlands and the UK and why EU legislation was needed.
Such negativity does no justice to IORP II. It seems wise to further regulate activities that are becoming increasingly cross-border in scope. Pension funds managed by foreign firms are active in the Netherlands.
Although the scope for improving cross-border activity was considerably narrowed by the European Council, it represents progress on the transparency of pension arrangements. As the European Commission has rightly pointed out, many scheme members were not aware that their pension rights were not guaranteed. Nor do they realise that these rights may be reduced by IORPs, even those already accrued. The European Commission points to pension funds in the Netherlands as an example.
However, owing to heavy lobbying from the Dutch and UK pension sector, any obvious prudential requirements were removed from the Directive. At first sight, deleting the relevant delegated acts cannot stop the European Insurance and Occupational Pensions Authority (EIOPA) from making all kinds of assessments that exacerbate the large deficits in Dutch pension funds. These recommendations can have legal effect, as in other fields of EU law, such as state aid. Therefore, it would have been wiser to make sure that these delegated acts were properly regulated, instead of removed.
Paradoxically, this course gives member states less power than they would have had. Yet the Directive still stipulates that a member state must make clear the mechanisms protecting accrued entitlements and describe the benefit reduction mechanisms.
Cross-border funding in practice
Firstly, it was heard that the requirement to be “fully funded” was a great hindrance to cross-border activity. This stipulation has been clarified to some extent. Two situations can occur:
• upon a cross-border transfer of a scheme; and
• when an IORP already operates schemes on a cross border basis.
With regard to the increasing transfer of pension funds between the Netherlands to Belgian, the first situation is interesting.
In the new Directive, the Dutch and the Belgian supervisory authorities (DNB and FSMA) can block transfers. Arguably this was already the case in IORP I (see below).
DNB and FSMA shall, according to their local law judge if the assets to be transferred are sufficient and appropriate to cover the liabilities, technical provisions and other obligations or rights to be transferred.
At the same time, in case of a transfer of a scheme, the technical provisions of the receiving IORP must be fully funded “at the date of the transfer, where the transfer results in a cross-border activity”. When Belgium is the receiving IORP, Belgian law decides whether the IORP is fully funded. In my view, all pension schemes (including domestic) count for calculating the technical provisions.
This would mean that the Dutch transferred scheme might be underfunded but, for example through a recovery plan, it can show that it will meet liabilities. The transfer cannot be blocked in this case.
Grounds to prevent transfers
Secondly, a cross-border transfer is arranged under the Dutch Pension Act, that is articles 83 and 84. Article 83 refers to individual consent of the member (without blocking the transfer) and article 84 concerns a merger between two IORPs (with no consent of the member) whereby the transferring IORP is liquidated.
Article 83 contains general grounds for the DNB to block the transfer. The Dutch regulator must not “impose a prohibition” on the transfer. This discretionary power of DNB gives rise to all kind of questions.
The Directive gives three grounds where the DNB can stop a possible transfer. The DNB shall only assess that:
• the long term interests of the members and beneficiaries of the remaining part of the scheme are adequately protected;
• the individual entitlements are not reduced due to the transfer; and
• as we saw above, the assets corresponding to the pension scheme to be transferred are sufficient and appropriate to cover the liabilities.
This seems an improvement to the current Dutch situation. Not only is it clearer when to object to a transfer, it also leads to situations where these grounds can be invoked in case of a merger where article 84 applies. Arguably, the Directive therefore offers the participant more protection than under the Dutch Pension Act.
EIOPA and ‘foreign’ courts
Thirdly, in case of disagreement about the procedure or content of an action or inaction of the competent authority of the home member state of the transferring or receiving IORP, including the decision to authorise or refuse a cross-border transfer, EIOPA may carry out non-binding mediation upon request of the competent authorities or on its own initiative. We have seen above that this can lead to great powers for EIOPA.
Furthermore, where the authorisation of cross-border transfer is refused, the refusal, or a failure to act by the competent authority of the home member state of the receiving IORP, shall be subject to a right of appeal to the courts in the home member state of the receiving IORP.
For example, when a transfer is refused by the DNB the relevant Belgian court will examine whether that is justified. It is important to realise that any local court in a member state is in effect an EU court where the same EU (case) law standards apply.
That brings me to my conclusion. What strikes me is that the directive sometimes fails to reflect case law of the European Court of Justice (ECJ) in Luxembourg. IORPs are classified by the ECJ as full-fledged services providers ex article 56 TFEU (free movement of services). That means not only that the internal market provisions apply to IORPs, it also means that a member state cannot favour its ‘own’ IORP over foreign ones. In the Netherlands there exists mandatory participation within a Dutch Stichting (foundation), which covers 80% of the market. In my view, this is a clear discrimination on grounds of nationality and therefore forbidden under EU law. It cannot be justified simply by the social nature of the pension scheme.
Hans Van Meerten is professor EU Pension Law at Utrecht University and a adviser at Clifford Chance, Amsterdam