The report by the European Federation for Retirement Provision (EFRP) ‘Rebuilding Pensions’ attracted little publicity when it was published two years ago. However, there are now signs that the European Commission (EC) is paying serious attention to its proposals. Last year, in his communication on the elimination of tax obstacles to the cross-border provision of occupational pensions European Commissioner, Frits Bolkestein, called on EU member states to investigate whether the proposals by the EFRP can be made ‘operational’. Now the Council of Ministers (which initially said ‘no’ to the EFRP proposals), the European Parliament and its Economic and Social Committee are being asked to look at the proposals again.
The EFRP report is expected to play a role in the development of an EU pensions directive. So this is perhaps a good time to reassess the report and to ask whether it really is on the right track.
The EFRP gave the EC a push in the right direction in 1996 with its report ‘A European Institution for Occupational Retirement Provision’, which urged the creation of an internal market of supplementary pensions. It said that the administration of the pension commitments of multinational companies with activities in several member states was fragmented and therefore unnecessarily costly. It made it clear that something must be done.
Terminology is part of the problem. It is not easy to find an unambiguous term that defines and describes the numerous legal entities that manage supplementary pensions in Europe. The EFRP report has provided a solution to this by coining an entirely new term – the European Institute for Occupational Retirement Provision or EIORP.
The EFRP report suggests a single licence supervisor and a minimum supervisory regime which is acceptable to all EU member states. This minimum regime has subsequently become the prerequisite and basis of the establishment of an EIORP within the EU, which would function as the central administration office for all the different national pension schemes of a single multinational company.
Member states that do not have legally based minimum supervisory regimes will not be able to set up EIORPs. This is because there is no infrastructure of supervision in those states where there are no second pillar pension schemes or where insurers dominate provision. They are also unlikely to introduce such an infrastructure until there is some compelling ‘national’ reason that forces them to set up institutions for supplementary pension schemes.
In the mean time, there is nothing to prevent the Netherlands, the UK and Ireland establishing EIORPs, although countries that do not have properly developed pension systems are likely to find such “unilateral preferential treatment” hard to accept.
The ‘attraction’ of an EIORP, according to the EFRP report, is that it encompasses all national pension schemes. EIORP regulations, however, will remain subject to national legislation. It is unavoidable that local fiscal, social and labour legislation will still have to be enforced. Furthermore, EIORP employees will be expected to keep abreast of national legislation, and any changes to it, from day to day – an almost impossible task. The same may be said of the EFRP’s intention to communicate in the language of the country whose pension schemes apply. However, if all national regulations are implemented, particularly the tax laws, this may encourage the acceptance of the EFRP proposals.
There is one exception, however, to this principle of subsidiarity. The EFRP does not want to rely entirely on local legislation with respect to pension plan governance. However, multinational governance appears to be limited to issues such as employee representation. National regulations are still likely to be paramount.
For the time being the EFRP proposals will be limited to multinational companies with subsidiaries in a number of EU member states. Industry-wide pension funds will be included later on.
The EFRP report says the EIORP model is not only the answer to pension funds, but also to ‘insurance product based vehicles’. The EFRP appears to be suggesting here that an insurer can be classified as an EIORP or some part of one. If so, this will bring the achievement of a level playing field a little closer.
The EFRP report also suggests that efficiencies can be achieved by the ‘co-mingling’ of assets and liabilities. However, there are drawbacks to this, particularly since assets and liabilities are eventually separated for the purposes of the relevant tax authorities. This administrative separation means that any economies of scale from ‘co-mingling’ are largely wasted. The merging of pension obligations can really only add added value within a defined contribution system. In the EU this is certainly not the case.
The EFRP recognises that implementation of its proposals will not be easy. However, it does not intend to wait for the conclusion of a protracted EU legislation process. It suggests trying out the EIORP in those countries where the proposals stand most chance of success – namely the UK, Ireland and the Netherlands. It concedes that such a pilot scheme would require the co-operation of the tax authorities and other regulators.
After this first step, Belgium and Denmark would also join in. It would be left to the remaining countries to decide when they wanted to join – perhaps when the pilot scheme became a European regulation. This suggestion smacks of arrogance and implies that the UK, Ireland and the Netherlands would be able to carry on with the EFRP proposal whether or not they had the backing of other EU member states or the EC.
One possibility is that the three ‘lead’ countries could conclude a bilateral treaty. There is a precedent for this. Various treaties preceded the European coordination rules governing legal systems and these provided much-needed experience of European cooperation. It was only later on – sometimes much later – that multilateral regulations caught up with them. This is by no means an unusual development.
So how does the EFRP report see the current climate for EIORPS – as favourable or unfavourable? A key area is that of investment regulation. How much freedom of investment do national pension systems have? Which member states have investment regulations that actively obstruct the establishment of an EIORP?
On the one hand there are countries – Belgium, Finland, Ireland, the Netherlands, Luxembourg and the UK – that have few investment restrictions other than prudent person principles, such as safe investment and diversification of risk. On the other hand there are countries – Denmark, France, Germany, and all southern European countries – that have many limits for the investments in various categories.
Yet efficiency gains are most likely to be made in the area of investment. This is why the door should be left open for the legal proceedings for the European Court of Justice, notably by testing investment restrictions and administrative impediments to the free movement of capital.
The EFRP proposals are aimed mainly at large multinationals and offer little comfort to small pension institutions. The Committee for Economic and Monetary Affairs of the European Parliament noted this in a report last November.
It said the proposal “would provide a solution for a very restricted group of workers in the EU. This would only lead to the elimination of administrative barriers and would not absolve the Commission and member states from the duty of tackling the substantive problems”.
However, the committee concluded that it was “a sensible first step, since it will make it possible to make a start in the short term, and because more and more firms are now doing business in various countries of Europe”.
Perhaps that is how the EFRP report should be viewed – a sensible first step that deserves to be followed up by more substantive action.
Rob ten Wold is director of the pension fund board consultancy AZL in Heerlen in the Netherlands