Regulating Europe

Gail Moss highlights key legislative and regulatory developments for pensions across seven European countries

• A temporary tax on payouts above DKK362,800 (€48,660) which was enacted in 2010 will become effective from the 2011 tax year. The tax rate has been set at 6% for the years 2011 - 2014. From 2015 the rate will be annually reduced by one percentage point.

• The tax changes have been made under Foraarspakke 2.0, the Spring Package announced in 2009 to reduce the marginal taxation of wages and increase labour supply.

• The government is preparing to implement the Solvency II regulation but the legislative timetable is unknown.

• The law extending the emergency regulation to strengthen the solvency position of pension funds is now in force until the end of 2012.

• Legislation to introduce the first phase of solvency regulation is currently before Parliament and likely to be passed. The main change is to use a more accurate risk classification of bonds and loans in Finland's risk-based solvency regulation.

• The second phase rules should come into force once the temporary emergency regulations have expired. The third phase rules will come into force in 2014 at the earliest.

"In the Finnish statutory system, solvency regulation is based on national rules, so it remains to be seen how widely international Solvency II rules (or rules close to Solvency II) will be applied," says Reijo Vanne, head of research, Finnish Pension Alliance.

• There is no new legislation currently in progress, with little expected to happen this year.

• Additional tax regulations were passed last year to give clarity to the law governing pensions settlement on divorce. However, the courts have yet to rule on the appropriate limits, especially for large cash value pension promises.

• There is still debate about a risk-adjusted insolvency protection system, but no legislative procedure has been started. The premiums which pension funds pay to the German occupational pensions protection agency (Pensions-Sicherungs-Verein) were high for 2009 but returned back to normal for 2010. A risk-adjusted system could mean a scheme's external assets would be taken into account when calculating risk, thus reducing the premium.

• The Federal Administrative Court has confirmed that the insolvency insurance liability, as well as the contribution liability under company pension law for direct pension promises, remains applicable, even if a complementary insolvency insurance in form of a pledged reinsurance is in place. This means that the level of premium cannot be reduced without changing the law.

• The Federal Government is proposing that time-value accounts (Wertguthaben), which can be used to pay out salaries when an employee takes early retirement, should be used to pay salary when leave is taken to care for relatives or dependents (Pflegezeit). This would be the first mandatory use of a time-value account. However, a number of issues are still to be decided before any regulation is published.

• The last year have been a period of limbo for pensions legislation, following the general election last June. "There has been a lot of talking but no sign of a clear direction yet," comments Tim Burggraaf, principal, Mercer. "However, we will have to have one pretty soon." The coming year therefore promises to be one of flux.

• Supervision of pension funds is to be simplified following pressure from the regulators. Social affairs minister Henk Kamp has announced a new supervisory framework focusing either on a set of criteria, supported by the communications watchdog AFM, or on explicit rules, preferred by DNB.

• Kamp has also announced that the indexation label for pension funds will no longer be mandatory, until further decisions have been made about the label's future. One suggestion is to instigate a ‘quality label' for pension schemes.

• The new pension contract is still being negotiated by the social partners of employers and employees. It will bring major changes, including a new funding framework, as well as a new supervisory structure, known as FTK1 and FTK2. It is not clear what this will look like.

• The premium pension institution was launched on 1 January 2011 after three years of debate. The vehicle is expected to be a popular way of creating cross-border pension schemes.

• Plans for a true pan-European vehicle, API3, are still on the drawing-board because of uncertainty about the bigger picture. Tim Burggraaf comments: "I don't know if there will be a demand for this product. The Belgian OP seems more suitable for the job than the Dutch PPI, although a new FTK could change that."

• There will be legislation this year which stems from the rise in state retirement age to 66 by 2020 - agreed by the government in 2010 - and potential future rises. At present, members of occupational schemes generally think they will receive 70% of their income (state and occupational together). If this level is accurate, this may be ratcheted downwards automatically as life expectancy increases, both state pension and occupational pensions are likely to be linked to changes in life expectancy.

• The new insurance business act (Försäkringsrörelselagen) has been passed by the Swedish Parliament (Riksdag). The legislation takes effect from 1 April 2011, creating a new structure for friendly societies including tjänstepensionskassor, the Swedish equivalent of IORPs, as well as other older societies, mainly for funeral expense benefits. The changes will bring friendly societies into line with mutual insurance companies.

• The supervisory authority is preparing updating regulations to fit in with the new legislation, to be published at the start of May 2011.

• The ministry is seeking to comply with Solvency II, which will introduce a new risk-advanced calculation of solvency for insurance companies and occupational pension funds working within a life assurance framework.

• A government committee is now drafting amendments to the insurance business act. One of its tasks is to analyse how the risk-based calculation of solvency will be implemented for undertakings covered by the act, including the Swedish IORPs. A traffic light system along the lines of the Solvency II proposals already exists. The report is due August 2011.

• Another government committee is investigating future rules for the demutualisation of life companies and the principles of handling bonus capital along with transfer rules for pensions. The aim is to ensure fair treatment for existing policyholders on demutualisation, especially the right to transfer pension savings.

• On 19 March 2010, Parliament approved second pillar reform, providing for increased oversight, governance and transparency. The laws are intended to strengthen the supervisory system through direct cantonal and regional supervisory authorities, and a clear delineation of the responsibilities and liabilities of parties such as trustees and actuaries. They also establish an overarching independent federal supervisory commission which can issue binding standards for local supervisory authorities. The changes are split into two stages. The stricter governance rules will come into force on 1 July 2011. The new supervisory structure and provisions for investment foundations will take effect from 1 January 2012.

• Last November, the Federal Council published a draft of detailed rules for implementation; the consultation will end on 28 February 2011. But the Swiss Pension Fund Association (ASIP) and other organisations have called for modifications to the proposals.

• Changes to the law on vesting in pension plans (FZG/LFLP) are in the legislative pipeline. Pension funds insuring the portion of salary above CHF125,280 (€95,216) (for 2011) may offer individual investment strategies to their members. But the current act says a pension fund has to guarantee at least the nominal amount of the member's contributions, which means those schemes bear the investment risk even if they do not pick the strategy. The amendment will abolish the guarantee for members who leave these schemes. The Federal Council is expected to provide a draft of revised provisions, which must then be approved by Parliament.

• The process to revise the Swiss Civil Code to achieve a fairer split of pension rights between divorcing couples continues. The change will mean non-working spouses will be awarded part of a disability or old age pension not only where their former partner is still working, but also where they have started receiving their pension. In spite of criticisms, the Federal Council intends to retain most of the provisions in its draft legislation, although the costs of new reporting requirements and the rules for calculating the split will be reviewed further. Explanatory notes for Parliament will be drafted by the Federal Office of Justice by the end of 2011. Enactment is unlikely before 2014.

• A bill to improve the funding level of public sector pension schemes to at least 80% over the next 40 years has been approved by both chambers of Parliament. It goes to a final vote later this year and could take effect as soon as 1 January 2012.

• The Federal Council must publish a report on occupational benefits by the end of 2011, indicating whether the constitutional principles relating to pensions are being met and whether further reform is needed.

• The government is planning reforms to the basic state pension. It is believed that the complex state second pension will be scrapped, the funds being added to the basic state pension. This should see a more generous state pension.

• The coalition agreement includes a commitment to ‘reinvigorate' occupational pensions. The National Association of Pension Funds has launched an independent commission to look into the future of workplace retirement schemes. John Hutton, the former Labour pensions minister leading the government's inquiry into public sector pensions, is to publish his final report soon, possibly by Budget Day, 23 March 2011. His interim report contained proposals for modernising public sector pensions.

• Auto-enrolment starts next year and will be implemented on a staged basis, applying to large employers first, and the smallest in 2016.Employers will be obliged to make workplace-based pensions available to all employees earning above £7,450 (€8,866), although employees have the right to opt out. The National Employment Savings Trust (NEST) will provide a default when employees cannot access a company-sponsored scheme. The Pensions Bill - which brings these changes into effect - is still subject to parliamentary scrutiny but should be approved by the summer, coming into force in October 2012.

• The previous government's proposed changes to tax relief, which will restrict tax relief on DC contributions for high earners, have been modified by the coalition. The level of the annual allowance for tax-free contributions will be reduced to £50,000 from £255,000. The change will be included in the 2011 Finance Bill.

• The coalition government is reveiwing the Employer Debt Regulations, which are now law. These were introduced to avoid saddling sponsor companies with a massive debt to the pension fund if the company is restructured. The regulations have proved unsuccessful, largely because of their complexity.

• Policy developments which are likely to become legislation include reform of the annuitisation rules obliging a DC plan member to purchase an annuity with their pension pot by the age of 75. The government is considering whether to allow scheme members to take a drawdown instead.

• The government will also allow some private sector schemes to switch indexation from an RPI to a CPI basis.

• The Pension Protection Fund has issued a new consultation paper on the risk-based levy for pension schemes. "We think this reform will go some way towards reflecting a better and more direct link between the risk which a scheme poses to the PPF, and the actual levy the scheme has to pay," says James Walsh, senior policy adviser, workplace pensions, NAPF.

• In January, The Pensions Regulator published its review of DC plan regulation. This review has been carried out in the light of the 2012 reforms which will see more people falling within the DC net. But any legislation is still a long way off.

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