Regulation roundup: Europe’s changing pensions
IPE’s overview of the main regulatory and legislative developments affecting workplace pensions in key European countries
Nine months after the new European Parliament was elected there are few indications as to the direction of future reforms to financial services policy.
Though the headline news after the election was the rise of the fringe parties – particularly those on the right – EU rules requiring a political grouping to include a minimum of 25 MEPs from at least seven member states have ensured that power has remained in the centre.
Nevertheless, personalities still count, and a new duo heading the European Commission (EC) – President Jean-Claude Juncker, and first vice-president Frans Timmermans – plus an array of new Commissioners, signal major potential policy changes.
Particularly difficult to call will be the agenda of Jonathan Hill, the new Commissioner for financial stability, financial services and capital markets union, who is responsible for pensions, and the appointee of a British prime minister at a time of increasing euro-scepticism in the UK.
The EU regulatory pipeline
|Legislation/regulation activity||What it does||What it means||Timeframe|
|Institutions for Occupational Pensions Directive (IORP II)||Establishes rules for governance and member communication by occupational pension funds||Strengthens protection for scheme members through better governance and clearer information||A simplified draft of the original proposal was published in November 2014. Now awaiting debate in the European Parliament. Possible enactment in summer 2016|
|Holistic balance sheet||Sets out a solvency-based risk framework using six alternative models. Pension funds would value not only conventional assets and liabilities but also contribution increases and sponsor support.||Creates a tool for financial supervision||Consultation closed on 13 January 2015. Given almost universal opposition from the pensions industry, not clear if or when further steps will be taken|
|European Market Infrastructure Regulation (EMIR)||Introduces a central clearing system, margin and capital requirements and trade reporting for derivatives||Improves the stability of the EU over-the-counter (OTC) derivatives markets in particular, by improving transparency and reducing risks||In force from 16 August 2012. Pension funds are exempt until August 2017|
|Markets in Financial Instruments Directive II (MiFID II) and Markets in Financial Instruments Regulation (MiFIR)||Set out rules for transaction reporting and OTC derivatives trading||Enhance investor protection and provide transparency by setting up well-regulated trading platforms for securities||Now enacted. Takes effect in January 2017|
|European Fund for Strategic Investments (Juncker Plan)||Sets up a fund to invest at least €315bn in the real economy over the next three years. The focus will be on strategic investments (infrastructure, broadband, energy) and SMEs||Intended to kick-start the EU’s economy and create jobs||EC proposal published in January 2015. Enactment could be fast-tracked to enable first investments to be made from June 2015|
|Pensions Portability Directive||Improves acquisition and preservation of supplementary pension rights between occupational schemes in different member states||Aims to enhance worker mobility within the EU||Enacted in April 2014. Must be transposed into national law by 2018|
|Financial Transaction Tax||Imposes a levy of 0.1% on share transactions, and 0.01% on everything else, if at least one party is an EU resident or where the asset is issued in the EU.||Aims to ensure the financial sector makes a fair contribution to public finance. But likely to increase transaction costs for pension funds||Eleven member states have proposed the enhanced co-operation procedure to enact this, with others opposed. Immediate progress uncertain|
One certainty is that the focus will be on long-term investment and the promotion of growth. How this will be achieved is another matter.
The EC has already announced its European Fund for Strategic Investments – the Juncker Plan – to build a €315bn investment fund for infrastructure projects and small and mid-sized companies.
Meanwhile, a couple of regulatory perennials will form the Commission’s workload over the next few years.
A simplified version of last year’s much criticised IORP II proposal – a blueprint for governance and communications – has met with general approval. The Council working group has removed the prescriptive approach to issues such as the format of the annual pension benefits statement, and is likely to leave detailed rules on this to national regulators.
But still within the draft are proposed qualification requirements for pension fund trustees, which some member states may find too restrictive.
The fledgling directive will now be debated in the European Parliament, leading to possible enactment in summer 2016. It is uncertain whether Parliament’s amendments will lead in the same direction as the Council’s.
Having been shelved by the Commission in 2013, the issue of solvency reform has now been taken up by EIOPA, which published its own proposals last autumn, including models for a holistic balance sheet (HBS). Consultation closed in January.
Opposition from the European pension fund community remains vociferous, and there are indications that the Commission may not decide to proceed after all.
The past year has been a quiet for Danish pensions legislation, especially on the tax front.
The only significant development has been the extension of the window for the tax rebate on capital transfers to the new regime for lump-sum pensions, by one year. Pension savers now have until 31 December 2015.
The rebate stems from the switch to a TTE basis (taxed contributions, taxed investment income and capital gains of the pension institution, and exempt benefits) for lump-sum pension schemes, from the previous ETT system.
When the system changed on 1 January 2013, savers with existing pension accounts under the old regime could choose to have them treated under the new rules, as long as they paid upfront the tax originally due on payout at pension age. This would have meant a 40% charge.
However, in order to encourage the switch, savers were offered a lower tax rate – 37.3%, the lowest rate for earned income – if they made the switch during 2013. This was later extended to 2014 and has now been further extended, to 31 December 2015.
Meanwhile, Solvency II is all but incorporated into Danish national law. A number of different pieces of solvency legislation have taken effect over the past year, notably capital requirements for life insurers (including pension providers) and the use of internal models. There were also new policyholder protection rules covering the calculation of capital assets, accounting standards and governance.
These measures have been timed to ensure the pensions industry has the chance to identify any teething problems before the directive’s implementation date of 1 January 2016.
The third and final phase of the solvency regulation reform – extending the solvency requirement to take all types of risk in investment activities into account – is nearly complete.
The Ministry of Social Affairs and Health submitted the final draft legislation to Parliament last year, with enactment expected early this March.
The former solvency rules were largely based on asset classes, designed for allocations using fewer types of financial instrument. To the relief of many investment professionals, the new model does not replicate Solvency II, although, it is risk based.
Once enacted there will be a two-year phasing-in period up to 1 January 2017, which should enable pension insurance providers to accommodate changes in asset allocation.
After a long and drawn out consultation, the social partners – government, employers and employees – have agreed a major reform, that applies to all statutory pensions.
This is designed to strengthen the sustainability and stability of the public pensions system and includes gradually raising the minimum statutory pension age from 63 to 65, changing the part-time pension to an actuarially defined partial and early old age pension, and changing the accrual method for individual pension rights.
Detailed legislative work should achieve enactment this autumn, with the new rules taking effect in 2017.
Finland faces a national election in April 2015, but the current opposition – seen by many as likely to win the election – also supports the nature of the reforms.
A new law was passed last year allowing pension insurers to own housing companies that take out debt from external sources.
Previously, housing companies owned by pension funds could only borrow from the pension fund; now, they will be able to borrow money elsewhere, for instance, from banks. This makes investing in housing companies more attractive for pension funds.
The new three-year/18-year temporary option means that pension insurers wishing to invest in this way have a period of three years, to the end of 2017, to set up subsidiary housing companies. They can then hold the debt owed to external parties for no longer than 18 years, or until the end of 2032.
A further change affecting pension insurance companies was enacted last autumn, when legislators amended the regulation on their administration. The main provision is that board members and management of pension insurance companies must make a public declaration of their personal investment portfolios and trading.
Meanwhile, Finland has implemented the alternative investment fund managers (AIFM) directive. The change to national law took effect from 15 May 2014 – rather later than the EC’s target date of 22 July 2013.
The Ministry of Social Affairs and Health continues to prepare changes to competition rules for pension funds. However, the work has been delayed because of differing views among social partners and pension funds themselves.
The first draft law to incorporate the EU Mobility Directive into German law is expected this spring. In particular, the lower vesting requirements – three years, reduced from five years
– a minimum age for participation of 21 rather than 25 and the requirement to index vested claims are new to the German pensions environment.
Legislation on other areas, in particular indexation and defined contribution schemes, is also under discussion, so far without a timetable for enactment.
The coalition parties still have to agree on detailed rules aimed at making the state retirement age more flexible, although there is general agreement that this is necessary.
Among the ideas are greater options for individuals to draw a partial pension while continuing to work and more flexibility to continue working beyond normal retirement age.
A number of court judgements have been made influencing pensions law. The Federal Labour Court has clarified that changes in the statutory normal retirement age can be a legitimate reason for employers to make changes to a company pension plan.
Another of the rulings is that strict funding requirements for so-called pensioner companies do not apply after an asset deal has triggered a transfer of undertakings and active members transfer to the new company, leaving existing pensioners with the ‘old’ company.
This situation means the ‘old’ company becomes a so-called pensioner company. A previous court ruling stated that in this case extra funding is required for the pensioner company; the most recent ruling states extra funding is not required.
The same court has stated that plan assets, if ring-fenced in a contractual trust arrangement (CTA), must not be taken into consideration when a company refuses to increase pensions because of financial distress.
A ruling from the Federal Court for Social Law has caused anxiety among in-house lawyers. The court ruled that the privilege of exemption from social insurance is restricted to lawyers at dedicated law firms. So unless certain grandfathering rules apply, companies are now forced to register their in-house lawyers for statutory social insurance from 1 January 2015. Social insurance benefits are much lower than those paid out by pension funds specifically for lawyers.
Late last year the Dutch government pushed through the enactment of the new financial assessment framework (FTK), bringing about the biggest change for the pension system in several years.
Changes include shifting pension funds to an amended nominal pensions contract, using a yearly (instead of three-month) average as the ultimate forward rate, with increased financial buffers and stricter requirements for pension board members. The law came into force on 1 January 2015, with pension funds given until July to effect the changes.
Having achieved what seemed like the impossible, the government now faces an equally daunting challenge – setting up a blueprint for the long-term future of the Dutch pension system.
Last autumn, Jetta Klijnsma, secretary of state for social affairs, promoted a national debate on pensions, with a dedicated website and events throughout the country. Comments were solicited from institutions and individual members of the public.
The focus included intergenerational solidarity, freedom of choice, collectivity and responsibility for risk sharing. The high level of interest has left the ministry with the task of drawing the various strands together to propose a coherent framework.
The Social and Economic Council (SER), which advises the Dutch government on social and economic policy, has said that unions need not continue to play such an important role in the pensions system in the future. This is significant because board membership is generally equally split between employers and unions.
The Financial Markets Authority (AFM) has suggested that employees be allowed to put money into a mortgage rather than a pension. The main regulator, De Nederlandsche Bank (DNB), has said that high earners should receive lower tax concessions.
A preferred solution could be DC plans with collective risk-sharing. An intractable question is mandatory participation in industry-wide funds.
“If the unions are not involved in pension delivery, we could end up with company employees leaving it to management to decide what to do with their money,” says Tim Burggraaf, partner and DC practice leader at Mercer in the Netherlands. “Industry-wide schemes may then stop being compulsory.”
The government must now publish draft proposals based on the feedback from the national debate and it seems likely that a document will be published this summer. There could be further consultation in early autumn following the six-week summer recess and new laws are highly unlikely to be enacted before 2016, which means the debate will form part of the run-up to September 2016’s parliamentary elections. The role of unions in pension funds is likely to be an election issue.
A new pensions vehicle – the general pension fund (APF) – has still to be launched. The APF will be a pooling vehicle similar to industry-wide schemes but with ringfencing of assets.
APFs will be able to operate at relatively low cost because of their huge size. However, because of their low cost, they are seen as a serious threat to business by some industry-wide funds. No formal proposals have been issued by the government.
Legislation to enact Solvency II for life insurance companies is expected to be enacted by the Riksdag on 1 July. However, the debate on implementation still continues, especially regarding Sweden’s pension companies, which take the form of life insurance companies.
Life insurance companies also run a large number of DC pension funds, which can be either traditional life, or unit-linked, contracts. Both are common.
A government committee has recently proposed allowing companies to split pension and life insurance business (including private pensions) into two different companies. The insurance business would then comply with Solvency II, and the pension business with any future IORP II regulations.
Reactions have been mixed. The Swedish Financial Supervisory Authority Finansinspektionen (FI) is largely opposed to the idea, arguing that the concept of ‘same risks, same rules’ should apply. No decision has been taken as to the suggested framework.
Meanwhile, occupational pension funds – which are set up as friendly societies rather than pension companies or associations – must change their legal status, either to a life insurance association, or an occupational pensions association. Friendly societies were abolished by a 2011 law and these entities have until the end of 2017 to comply.
Tax relief on private pension premiums will be drastically reduced during 2015. The maximum deduction from annual salary had been SEK12,000 (€1,264) per annum but this is now SEK1,800.
A proposal has been presented to the Riksdag to abolish tax relief altogether in 2016, and is expected to get approval. The government says that because of worker mobility within the EU, and also the possibility of Swedish nationals retiring to southern Europe where tax rates could be lower, future tax revenues are uncertain. It also argues that tax relief mainly benefits high earners and those over 50.
However, this plan has been controversial among the public and has sparked discussions about alternative ways of encouraging private savings to improve retirement income.
Meanwhile, the government is keen to improve the transparency of information for individual transfers of DC plans and private pension savings between life companies. Work in this area is being led by trade organisations, under the supervision of FI.
The main topic is the sweeping reform of both first and second pillar pension provision, planned to take effect in 2020 (Altersvorsorge 2020). A parliamentary bill was published last November and a committee of the upper house of Parliament is currently preparing the proposal for debate.
The intention is to raise the normal retirement age for women from 64 to 65, the same as for men. First pillar reforms include changes to survivor benefits and an increase in VAT rates of up to 1.5 percentage points to secure benefits.
The key reform for the second pillar is the planned reduction in the guaranteed conversion rate for occupational schemes (used to convert the member’s cash account balance to a pension) from 6.8% to 6.0%. Contributions from both employers and employees would be raised so that final pension payments would remain the same.
The bill is set for a stormy passage. Although there is consensus that reform is necessary, the proposed VAT hike, the increase in retirement age for women and the jump in labour costs related to additional contributions are proving controversial. The law is likely to face a referendum, most likely after federal elections in October 2015.
Changes in the rules on pension fund investments became effective as of July 2014. These are intended to improve transparency and increase diversification of risk in pension fund portfolios and include a new list of ‘standard’ debt investments, with other investments classified as ‘alternatives’. A broader definition of alternatives means Pensionskassen are to push up against the 15% allocation threshold. Other changes relate to leverage, securities lending and repo transactions.
A number of other legislative initiatives remain stalled or are proceeding slowly. Among these are changes to the law on vesting in pension plans (FZG/LFLP). The proposals transfer the burden of investment risk to plan members by waiving certain guarantees if the member individually chooses the investment strategy (permitted for schemes insuring salary above CHF126,900 [€121,150] per annum). At present, members are assured a minimum level of benefits even if they opt for a risky strategy that delivers poor returns.
These changes would allow sponsors to introduce pension schemes that qualify as DC under IAS19 and move pension liabilities off their balance sheets.
An updated draft bill was presented to Parliament in February 2015 and any resulting law is unlikely to take effect before 2017.
A new corporate governance framework obliges Pensionskassen to vote at shareholder meetings and disclose their voting decisions. These rules are subject to an ordinance that now needs to be codified into federal law. The preliminary draft of the statute, open for public consultation until 15 March 2015, is not fundamentally different from the current provisions, although a significant change is the obligation to vote on all resolutions, not only those related to elections and compensation. This will require extra resources and pension funds may opt for mutual funds rather than direct equities, as the fund manager is then responsible for voting. The rules are unlikely to take effect before 2019.
The national regulatory pipeline
|What it does||What it means||Timeframe|
|Finland||Amendment of permanent parts of Solvency Act, phase three||Extends the solvency requirement to take all types of risk in investment activities into account, using a risk based model||Deals with all the risks recognised in Solvency II in a national framework||Bill is progressing through parliament with enactment expected by summer 2015. Takes effect in 2016|
|Pension Reform 2017||Raises minimum statutory pension age gradually from 63 to 65; changes the part-time pension to an actuarially defined partial and early old age pension; changes the accrual method for individual pension rights||Aims to strengthen the sustainability and stability of both public and private pension systems||Parliamentary bill to be published and enacted during 2015. To take effect in 2017|
|Germany||Implementation of EU Mobility Directive into German law||Reduces vesting period to three years; sets minimum age at 21. Mandatory indexation for vested claims||Aims to ensure uniform treatment of employees in. domestic and cross-border pension schemes||Government to publish draft proposals in spring 2015. No timetable for enactment although the deadline in the directive is 2018|
|Changes to make state retirement age more flexible||Possible options include allowing individuals to draw a state pension while still working; more flexibility to work beyond normal retirement age||Gives individuals more scope to enhance income beyond retirement age; strengthens sustainability of pensions system||Grand coalition agrees in principle but still discussing details. No timetable for enactment|
|Netherlands||Introduces the general pension fund (APF), a DB–type pooling vehicle similar to an industry-wide scheme but maintaining ringfencing of assets||Provides a low-cost DB alternative to industry-wide schemes||No formal government proposals as yet|
|National debate on long-term future of pensions||A range of ideas have been put forward, including ending compulsion, introducing individual accounts, greater investment freedom and a reduced role for unions||Aims to provide sustainability by strengthening freedom of choice and a fair system of risk-sharing||Consultation ended 1 December 2014. Draft proposals likely before summer 2015. Legislation unlikely before elections in September 2016|
|Sweden||Implementation of Solvency II||Enacts EU solvency legislation for insurers||Currently being debated by parliament. Enactment expected on 1 July|
|Ditto||Potentially, to split pension and life insurance business into two different companies. The pension business would then comply with future IORP II regulations.||Part of legislation to implement Solvency II||Recent proposal by government committee, with mixed reaction. Not clear if this will be adopted. A four-year waiting period (until end-2019) may be possible for companies to choose between a split, or to comply with Solvency II for occupational pensions|
|Ditto||Abolishes tax relief on pension contributions altogether, from current maximum of 1,800SEK per annum||Helps stabilise future tax revenues for Swedish government||Proposal presented to parliament and is expected to be enacted. Current plan is to take effect from 1 January 2016|
|Switzerland||Pensions 2020 (pension reform)||Comprehensive reform of first and second pillar pension systems. Both pillars: Harmonisation of normal retirement age to 65 for men and women. First pillar: Changes to survivor benefits; increase of VAT by up to 1.5%. Second pillar: Lower conversion rate and increased contributions||Aims to ensure the financial sustainability of the system while guaranteeing the current level of benefits||Draft bill published November 2014, to be presented to parliament this year. Planned to take effect from 2020|
|Amendment of the law on investing in pension plans (FZG/LFLP)||Waives certain pension fund guarantees if the plan member individually chooses the investment strategy (1e-plans)||Transfers the burden of investment risk to the plan members so pension funds and their sponsors can remove liabilities from their balance sheets||Public consultation on the preliminary draft bill ended in 2013. Updated draft is expected soon. Unlikely to take effect before 2017|
|Splitting of pension benefits in case of a divorce (revision of the Civil Code)||Revises the provisions of the Swiss Civil Code relating to splitting of vested pension benefits for divorcing couples||Improves the position of the non-working spouse.||Draft bill published in May 2013, currently being debated in parliament. Unlikely to take effect before 2017|
|Amendment of the law on occupational retirement pension plans (BVG/LPP)||Authorities must inform pension funds about plan members who neglect their obligations to provide child or spouse support. Pension funds will have a duty to report capital payments to such members in advance to the relevant authority||Allows retirement benefits to be withheld in case of failure to provide child or spouse support||Public consultation on the preliminary draft bill ended in February 2013. Revised draft presented to Parliament in February. Unlikely to take effect before 2017|
|Revision of corporate law (Aktienrecht/droit de la SA)||Besides a general modernisation of corporate law, aims to codify the existing rules against excessive compensation in listed corporations||The ordinance against excessive compensation in listed corporations (VegüV/ORAb) will be replaced by new regulations. Pension funds will remain obliged to vote in the annual shareholders’ meeting and disclose how they have voted||Public consultation on the preliminary draft bill ends on 15 March 2015. An updated draft will then be prepared for parliamentary approval. Unlikely to take effect before 2019|
|UK||Occupational Pension Schemes (Charges and Governance) Regulations 2015||Requires more information on scheme charges to be given to members by schemes themselves, and information on transaction charges by investment managers. Sets up minimum standards for scheme governance||Aims to improve value for money for scheme members by reducing high charges and strengthening governance||Draft regulations were to be published and enacted in early 2015. In force from April 2015, a few provisions from April 2016|
|Pension Schemes Bill 2014-15||Introduces possibility for greater risk-sharing between employers and employees. Also allows flexibility for members in accessing benefits and provides for them to access professional advice||Makes DB schemes more sustainable, while alleviating some of the risk for DC scheme||Due to be enacted in early February 2015, taking effect from April 2015|
The past few years have seen huge swathes of UK pensions regulation, with the most recent changes still to take effect. From April, compulsory annuitisation is removed from all sizes of DC pension accounts, allowing scheme members aged over 55 to make cash withdrawals, with 25% tax-free and the rest to be taxed at the member’s marginal rate. Members of DB schemes also have the possibility of transferring part or all of their savings to a money purchase arrangement so they can access their funds flexibly.
Also from April, the 75bps cap on charges for default investment funds for auto-enrolment into DC schemes takes effect, as do new rules on governance and transparency.
Detailed regulations on charges and governance were due to be published as IPE went to press, following a consultation last year. Pension schemes will have to give detailed information to members on scheme charges and also transaction charges by investment managers.
All this activity has been happening in the shadow of the UK general election, which will take place on 7 May. Richard Wilson, senior policy adviser for DC at the National Association of Pension Funds notes that the timetable for implementation before the general election is very tight.
Meanwhile, the Pension Schemes Bill 2014-15, the culmination of the coalition’s plans to reinvigorate occupational pensions, was due to be enacted in early February.
This is intended to introduce greater risk-sharing and innovation by creating defined ambition (DA, or shared risk) schemes. It also includes provision for members to access independent financial guidance on methods of decumulation.
Although DC scheme members are likely to be most in need of advice, the NAPF sees potential pressure on DB schemes to allow members to withdraw money before they retire. Any pension scheme member wishing to transfer their accrued DB rights to a money purchase arrangement will be required to take appropriate advice before transfer.
Alongside recent legislation, a series of reviews is taking place to assess how well the retail market is working, whether drawdown is proving successful, and whether consumer information is sufficient.
The NAPF says these reviews should be carried out by a new retirement savings commission, to be set up by the next government, and is calling on the government to establish an independent retirement savings commission to oversee pensions policy, with savers as the focus.
Wilson points out that pension funds need time to implement changes and says annuity products are still the right choice for many retirees.
All bets are off as to what will happen after May, especially as the result of the general election is expected to be the most unpredictable in decades.
Research by Gail Moss