Pan-European Funds: DC across borders
Running a single pan-European pension scheme is an attractive idea for employers with staff in more than one country. At present, employers are faced with offering separate pension arrangements in each country. This can mean that an employer has to operate multiple schemes under different regulations and employment law. Governance costs are high, with specialist staff and advisers required in each jurisdiction. Now, the emergence of pan-European default funds for defined contribution (DC) schemes, could lead to a significant simplifications.
Legislators have been keen for some time to create a level-playing field for schemes across the EU. In 2003, the EU introduced the Institutions for Occupational Retirement Provision (IORP) Directive, which initiated moves towards the creation of a pan-European pension market. The Directive was intended to be “the first step on the way to an internal market for occupational retirement provision organised on a European scale”. However, a decade later, progress has been painfully slow, with no set date for the introduction of the updated IORP II Directive.
The problem the EU has faced in encouraging pan-European schemes has been that pension legislation, scheme structures, taxation and benefits administration differ from country to country. The current IORP Directive also insists that pan-Europe schemes are fully funded, which presents difficulties for sponsors carrying unfunded defined benefit (DB) liabilities on their balance sheets. The upshot has been a slow takeup of fully fledged pan-European schemes. Many employers have stuck with the administrative cost and duplication of running schemes across jurisdictions rather than face the challenge of developing a single scheme.
Many employers would prefer a better solution. Running multiple schemes not only adds cost and operational burdens, it also acts as a barrier to the movement of staff between European locations. For example, a hypothetical European manufacturing company that wants to relocate research staff between its operations in Munich, Oxford and Geneva. In each jurisdiction the pension arrangements are different, with different contribution levels, administration systems and benefits. This means that staff of equivalent seniority and experience, working alongside each other, could have completely different pension benefit packages. This can foster a reluctance to relocate to jurisdictions with inferior arrangements.
While the creation of fully IORP-compliant schemes remains challenging, alternatives are becoming available to employers with multiple European DC schemes. One solution is the idea of creating a single pooled default fund, or a selection of funds, which can be accessed through each of the employers’ schemes. Each fund would have a single asset allocation model and single changing structure. These core funds could be accessed by employees in whichever jurisdiction they are based.
For the employer, the pan-European fund structure offers the potential of reducing administration costs. While each scheme would need to adhere to the regulatory requirements of its home country, its investments would be the same as the sponsor’s other schemes across Europe.
This offers the employer the potential to rationalise pension administration, potentially even running a single ‘pension hub’ from one country. Staff based in the ‘pension hub’ would be responsible for the management of all of the employer’s European schemes, working with investment and benefit consultants. Compliance with local regulation could be handled by specialists in the ‘pension hub’, managed in-country by the employer, or outsourced.
“The problem the EU has faced in encouraging the adoption of pan-European schemes has been that pension legislation, scheme structures, taxation and benefits administration differ from country to country”
For employees, the pan-European fund model, means that they will benefit from the same fund structure, asset allocation and changing structure wherever they are located. This removes one barrier to relocating staff.
Pension investment consultants are well equipped to design pan-European investment strategies for multi-scheme employers. The difficulty they have previously faced has been the delivery of an effective implementation structure that works across numerous jurisdictions. The emergence of institutional investment platforms, structured as life companies, means that they can now design a single fund, or range of funds, which can be made available to members by the administrators of the scheme in each country.
When using an institutional platform, the investment consultant sets the asset allocation model for the pan-European default fund. This is delivered on the platform by using individual funds from external asset managers, or by blending a range of funds from different managers. This default fund is then made available to members through their individual schemes. If their employment takes them from one country to another with the same employer they can switch scheme but continue to benefit from the same fund structure and charging model.
Using a platform structured as a life company is important because it offers administrative and cost advantages. The life structure also offers high levels of corporate governance and regulatory oversight, backed up by significant levels of regulatory capital.
Because the life company is a single entity, the assets of multiple schemes can be pooled. This means that the life company – rather than the pension schemes – is the client of the fund manager. Any changes made to the funds are a single transaction between the life company and the manager, rather than multiple transactions made by underlying schemes. This means that the consultant can switch managers, rebalance funds or adopt a tactical asset allocation strategy without involving multiple transactions. The life structure enables the consultant to access funds where the minimum investment level would previously have been an issue.
The life structure can also reduce out-of-market risk. By holding assets on an institutional platform, switches between funds can be made on a same-day basis, eliminating out-of-market exposures. Some platforms offer significant advantages when transitioning assets from one manager to another. Rather than selling and then replacing, incurring two sets of dealing costs, funds can be transitioned in specie – reducing the costs and eliminating out-of-market risks.
Pan-European default funds can greatly simplify the management and administration of DC pensions for employers with multiple schemes across different European countries. They can reduce cost, simplify administration and enable a single pan-European investment strategy to be adopted. Pan-European default funds can be delivered cost-effectively by consultants working in partnership with life company investment platforms. While the EU continues to progress its plans to create an internal market for occupational retirement provision, the emergence of pan-European DC default funds gives employers a solution that works today.
Chris Trebilcock is managing director of Mobius Life