Roadmap for pan-European pensions
The European Directive concerning Institutions for Occupational Retirement Provision which was adopted by the European Council in May bears a certain resemblance to the Human Genome. Scientists inform us that the Human Genome consists of large amounts of obsolete genetic material interspersed with essential functioning genes. So it is with the directive. After seemingly millions of years of evolution in various European institutions, certain parts of the directive have become redundant. By way of an example, the advent of the euro has rendered references to currency matching largely obsolete. Nevertheless, if we equate genes with articles of the directive, just as with the Human Genome, there are a few key articles that perform a crucial role and it is these that deserve especially close scrutiny.
The directive and pan-European pensions
In terms of financial regulation, the first point to note about the directive is that it follows the ‘single-passport’ principle, so that a pan-European pension fund need only register in one EU member state even though sponsors may be based in several states and the members affiliated to the fund dispersed throughout these different states. The state in which a cross-border pension fund is registered is referred to as the ‘home member state’. It is the home member state that will be principally responsible for financial regulation. However, article 20 of the directive holds that it is the state in which a given sponsor is based (and where plan members work) which can insist on the pension plan conforming to the social and employment laws of that state – this state is referred to throughout the directive as the ‘host member state’. In the case of a typical pan-European pension fund or pan-European pension plan there will of course be several host member states.
Article 20 is the principal article of the directive governing pan-European pension funds and pan-European pension plans. This is the article that maintains that EU member states must permit sponsorship of pension funds located in their territory by sponsors located in other EU member states. Likewise, EU member states must permit sponsors based in their territories to sponsor pension funds or plans authorised in other EU member states. However, as already mentioned, host member states can dictate the social and labour laws affecting members of the pan-European pension fund or plan living in their territories. This has significant consequences for the structure of pan-European pensions (see below).
The main significance of article 20 is that it lays out the regulatory framework for large cross-border pensions in the EU. It describes the relevant regulatory powers of member states and it represents an honest attempt to facilitate the creation of cross-border pensions in Europe. A civil servant working for the European Commission informed me during the early stages of the directive’s development that the contents of article 20 represented the most important part of the draft directive as far as the commission was concerned. Virtually every other clause might be stripped away, but the directive would still serve its main purpose if the principles of article 20 were preserved. Quite simply, article 20 is the directive’s most important gene.
Progress on lifting tax barriers
The reader will no doubt be aware that while the directive might make pan-European pension structures theoretically possible, discrimination against cross-border pensions by fiscal authorities has traditionally rendered these structures impractical. However, the European Court of Justice (ECJ) has provided much recent support to the belief that tax barriers to cross-border pensions may soon be lifted by a critical mass of member states. In the recent Danner judgement, the court held that it was contrary to the EC Treaty for Finland to disallow deductibility of contributions from personal income tax when the contributions are made to foreign pension plans while permitting deductibility in relation to contributions made to Finnish pension plans. While in the Skandia case, the ECJ has just recently taken a similar stance in relation to tax discrimination against static employees in Sweden who have purchased Skandia pension products in Germany, Denmark and the UK.
Furthermore, the attitude of both the UK and Belgian tax authorities is currently being tested in applications to place employees in cross-border pension plans. Yet perhaps of most significance is the initiation of proceedings by the European Commission itself against six EU member states for alleged discriminatory tax practices against cross-border pension plans. These proceedings will presumably either lead to the member states in question ceasing discriminatory practices or else these cases proceeding to the ECJ.
Given the recent progress in breaking down tax barriers, it is not unrealistic to suppose that a critical mass of member states will have ceased discriminatory practices by the time that the directive comes into effect in 2005.
Pan-European pension structures
Now that the directive has been finalised, it is easier to predict the form of pan-European pension structures. It seems logical that either multinational employers or others might pool the assets of several national pension funds into one fund to create a pan-European Fund (Figure 1), or else they might in addition wish to place plan members in a single plan centred in one EU Member State, thus creating a pan-European pension Plan (Figure 2).
In a pan-European pension fund, all the assets of the fund are pooled in the EU member state in which the pension fund is authorised in order to achieve economies of scale and achieve considerable savings in costs. However, individuals remain members of the national pension plans in the countries in which they work. Obviously, there should not be a problem in conforming to the national employment laws referred to in article 20 of the directive, since all members will belong to separate authorised national pension plans.
With a pan-European pension plan, in addition to the cost savings achieved by pooling assets, additional cost savings are achieved by placing all plan members in a single plan governed by the law of the country in which the institution for occupational retirement provision is authorised. One should also note the considerable appeal to international benefit managers of multinational companies of the savings in management time associated with having a single plan for several European countries. However, in order to comply with article 20 of the directive, plan members will not only be subject to common plan rules, they will also be subject to different social and employment law related rules according to the country in which they are working such as for example differing retirement ages and rules on lump-sum benefits and annuities.
One of the most intriguing questions surrounding the directive is the issue of which countries sponsors might select as bases for their pan-European pension structures. One suspects that for sponsors without a natural preference for any one country, Luxembourg and Ireland will be top of their ‘shopping lists’. In 1999 Luxembourg introduced facilities for tax-friendly international pension plans with the future directive very much in mind, while Ireland has recently introduced legislation offering sponsors the opportunity to pool assets in a tax efficient manner.
While in theory a pan-European pension structure can be based in any EU member state, the financial regulation of pension funds in certain states is far from being ‘user-friendly’, and these states are unlikely to attract many customers. Furtheremore,offshore centres such as Jersey, Guernsey and the Isle of Man would appear to be out of the running in so far as they will not benefit from anti-discrimination rulings emanating from the ECJ.
The position of multinational companies historically associated with a certain state (where perhaps they were originally incorporated) is interesting. In selecting a base for a pan-European pension structure, will they opt for their historical homeland? One might be inclined to believe that patriotism and familiarity will win over more objective criteria. However, another school of thought holds that “familiarity breeds contempt” and that managers will attempt to base pan-European pension structures away from the historical homeland out of disgust for local national regulations as well as possibly local regulators!
Given the recent adoption of the Directive and the rapidly improving regulatory environment via the ECJ, it seems probable that the first few pan-European funds and plans will be set -up by pioneers in the near future and that thereafter pan-European structures will flourish and proliferate. In which case one can only assume that those euro sceptics in the pension industry who are fond of proclaiming that they will not see pan-European pensions in their lifetimes will be rushing for medical check-ups! They need not worry, both their own existence and that of pan-European pensions is reasonably secure.
Geoffrey Furlonger is an independent lawyer consultant based in Belgium. He acts as pensions director for Lombard International Assurance