Portability begins at home
The lack of pension rights portability has been a long-running problem in Europe. Any switch from one pension scheme to another in a single country is likely to result in reduced pension rights. Moving across borders creates additional problems. Transfers may be complicated or even impossible, and benefits may be taxed differently or even twice.
The free movement of people is one of the fundamental goals of the European Union (EU), and this goal will be more difficult to achieve if people are penalised for moving by reduced pension entitlements.
The EU has made some moves to correct this. The EU directive on safeguarding the supplementary pension rights of people moving within the EU, guarantees the right to equal treatment between those who change jobs within a country and those who move across borders.
Yet it does not remove the obstacles to mobility represented by the conditions for acquiring, preserving and transferring pension rights – in other words, pension rights portability. The EU is therefore consulting on a possible directive on pension rights portability.
Drafting such a directive will be fraught with difficulties. For a start, it will tread on national toes. an EU pensions portability directive, critics say, will interfere with the way member states organise their second pillar pensions.
Others suggest that EU member states rather the EU itself should provide a lead. Jaap Maassen, the new president of the European Federation for Retirement Provision (EFRP) concurs with his predecessor, Alan Pickering, that the issue of portability should be resolved at national level before it is resolved at an EU level.
There is force in this argument. For the portability directive to succeed, some of the national obstacles to pensions rights portability, such as vesting periods, will have to be removed or smoothed over. The vesting period is the period during which an employee is required to contribute to an occupational pension scheme before obtaining pension rights. Only a few occupational pension schemes currently offer employees a right to a pension immediately after joining. The average vesting period is five to 10 years.
This is far too long, critics say. The Pensions Forum, an EC consultative committee of representatives of EU governments, social partners, pension funds and their beneficiaries, has proposed that vesting should occur no later than one year after starting employment.
However, European employers’ representative bodies have opposed this, arguing that reducing vesting periods would add to employers’ costs and could discourage them from providing supplementary pensions to their employees.
Is this a real threat? We found that there is by no means a consensus on the issue of pensions rights portability. Although the pension fund managers and administrators who responded to our survey are generally supportive of pensions rights portability, there is some disagreement about how this will be achieved. There is also little expectation that it will happen in the foreseeable future.
The EC thinks that community legislation, in the form of an EU directive, is the best way forward. A directive would set common principles to ensure the portability of pension rights with the EU. This has widespread support from European organisations representing employees.
Our respondents are similarly supportive. A substantial majority (84%) agree with the principle of a portability directive. However, whether it would work in practice is another matter. Opinion is evenly divided on whether Europe’s occupational pension schemes are too diverse and complex for a single Europe-wide portability directive to work. Clearly any directive would have to be flexible enough to take account of the different types of occupational schemes in Europe.
Similarly there are mixed feelings about whether the issue of portability of pension rights should be dealt with at an EU level before it is resolved at a national level. A slight majority (54%) agree with the EFRP that member states should show the EU how portability can work, rather than the other way round.
DB plans are by definition less portable than contributory pensions, and one possible consequence of a pension portability directive will be to put pressure on employers to introduce defined contribution (DC) arrangements in their occupational pension plans.
A clear majority (66%) agree that a directive could tip the balance towards DC schemes. However, there is a strong feeling that this will merely reinforce an existing trend. The manager of an Italian pensions fund points out that employers hardly need encouragement from
a pensions portability directive
to switch from DB to the DC “They’re going that way anyway.”
A UK manager agrees: “The pressure is there for other reasons.”
And what of European countries where membership of an occupational pension scheme is mandatory? Should pensions portability be a reciprocal right in these states? A large majority of our respondents (83%) think they should. However, there are some qualifications. One UK pensions fund manager points out that portability should be mandatory only for employees’ contributions.
One objection to a pensions portability requirement is that it makes pension provision too expensive for employers. Most of our respondents (66%) do not see this as a problem. The manager of a UK pension scheme points out that “portability should apply to the value of accrued benefits and should not generate additional benefits per se”.
Another objection is that the regulation of pensions portability is primarily an EU issue. The leading employers organisations in Europe, including the Union of Industrial and Employers’ Confederations of Europe (UNICE), say that an EC initiative on the portability of supplementary pensions should confine itself to cross-border transfers. This proposal gets little support from our respondents. Only one in three (33%) see portability as primarily a cross-boundary issue.
There is less agreement about whether a directive on the portability of pension rights would interfere with occupational pensions at a national level. A slight majority (52%) agree. This is a problem that could be resolved by sensitive drafting, some respondents suggest.
One UK pension fund managers observes that “the EU directive should be worded to enhance rather than hinder pensions”.
Similarly there is some optimism about the prospect for occupational pensions in the wake of a portability directive. Most pension fund managers (84%) do not think a pensions rights portability directive will discourage employers from offering a supplementary pension to their employees.
Much will depend on the stance of employers. Will they retain the right to impose their own minimum ages, waiting and vesting periods, or will they be content to allow the limits to be set by the EU? Here employers get support from pension funds managers.
A majority of our respondents (65%) agree that employers are entitled to impose their own age conditions, waiting and vesting periods.
However, there are some dissenting voices. The manager at a Nordic pension fund points out: “Pension is deferred compensation. If anyone is promised a set of benefits other than salary it seems wrong that such a benefit is not vested the same day. There is no need for a vesting period but perhaps employers should not promise benefits they are not able to deliver.”
The vesting period is a particular irritant. Yet the Pension Forum’s suggestion that it be reduced to a maximum of a year gets only limited support (44%). Perhaps one UK pension fund manager speaks for many when he says that “vesting periods should not be excessive”.
The prospect of a pensions portability directive seems distant to our respondents. Only one in four (25%) expects pension rights to become fully portable in the EU within the next five years.“The differences between the EU countries are too big to solve this problem,” says the manager of a Dutch fund. And a UK pension fund manager notes wryly that “we have been waiting for nearly 15 years to get portability. I doubt the EU will get its act together in the next five years.”
The recent implementation of the IORP directive ought to provide some hope. Yet the IORP is concerned with occupational pensions from the point of pension providers rather than pension beneficiaries.
Put another way, while the IORP Directive promotes the freedom of financial services providers to offer their services across Europe, the portability directive promotes the freedom of ordinary people to offer their labour across Europe.