The European Council of Ministers adopted its so-called “common position” on the pensions directive on November 5 last year. The 43-page document is currently going through its second reading at the European Parliament. While parliament mulls over the document this winter, it is helpful to examine exactly what the Council of Ministers has put before them.
Firstly though, just to recap the current state of play in the parliament: re-elected parliamentary rapporteur for the directive, Austrian MEP Othmar Karas, gave his initial assessment of the common position to the parliament’s economic and monetary affairs committee (EMAC) on December 2. The proposals are likely to be discussed in full when the 42-person committee meets on January 20 and 21.
If the bill passes smoothly through the parliament, then the directive could become law in the EU by the summer this year. If there any hold-ups in the parliament, as seems likely due to the parliament’s insistence on the inclusion of social provision, then it will go into “conciliation”, the parliament’s term for extended negotiation with the Council of Ministers. If this happens, it could be delayed until the autumn, as both parties have to reach agreement before the directive can become law.
At this point it is worthwhile to review the EU’s stated aim, which is to create a pensions system that is secure for beneficiaries and efficient in terms of investments and cross-border transactions. A single pan-European pensions market is seen as providing significant savings for cross-border pension arrangements as well as opening up the European fund management market.
In a statement issued by the Council along with the common position, ministers laid out their view that adoption of the directive as it stands, following the Council’s amendments, would support these aims. “The Council believes that the directive, if adopted along the lines of the common position, would make a significant contribution to more secure and rewarding future pensions in Europe, while at the same time expanding and helping construct the single European market for financial services.”
But not all member states are in accord. At least one country voiced its disapproval at what it called a “compromise” over the prudent person principle, while another is maintaining that member states should be free to impose additional regulatory conditions on pension funds. The potential for problems lies in three key areas: investment rules, the so-called pensions passport and technical provisions. Lack of clarity and agreement in these areas indicates that the directive’s path through the European Parliament and back to the Council of Ministers will be less than smooth.
To drill a little deeper into the Council’s text: Article 18 of the new common position explicitly requires investment according to “prudent person” rules. It states: “Member states shall require institutions located in their territories to invest in accordance with the ‘prudent person’ rule”. One MEP said the parliament as a whole was “very persuaded” by this idea, suggesting that its passage would not be a difficult one.
However, the text from the Council is apparently contradictory on this point, appearing to concede to the value of the quantitative investment approach. This is certain to cause confusion in the parliament, split as it already is between supporters and opponents of proscriptive investment rules.
The Council text states in paragraph five: “Member states may, for the institutions located in their territories, lay down more detailed rules, including quantitative rules, provided they are prudentially justified to reflect the total range of pension schemes operated by these institutions.”
This confusion between the prudent person idea and the quantitative approach has already provoked discord. The Belgian government has already stated that it could not endorse the text of Article 18 as it stands, calling it a “compromise”.
In a statement buried in an appendix to the common position paper, the text reads: “Belgium states that it cannot endorse the text of the proposal for a directive as contained in the compromise, which the presidency has submitted to the council.
“Belgium considers that, owing to the shortcomings in quantitative rules, the security of operations in the context of cross-border membership cannot be guaranteed, and as a consequence Belgium cannot subscribe to the principle of mutual recognition that this involves.” It states that the cost of any failure would be borne by the member state in which the commitment is made.
Moreover, Belgium says it regrets that it has not been possible to extend the scope of the directive to include institutions for occupational retirement provision which operate pay-as-you-go or book-reserve schemes.
That notwithstanding, there is also less than full support for the proposals from the Netherlands. For its part, the Dutch government asserts that member states “should retain full responsibility for the organisation of pension systems, as well as for the decision on the role of each of the three pillars in individual member states”. It adds: “Each member state may make the conditions of operation of an institutional located in its territory subject to additional requirements, in order to realise a level playing field.”
This could be problematic when one of the key objectives of the directive is the creation of a so-called pensions passport allowing portability of pensions across borders within the EU. Article 20 of the common position refers to this. Its first paragraph states: “Member states shall allow undertakings located within their territories to sponsor institutions for occupational retirement provision authorised in other member states.”
How can the two positions be reconciled? As above, there is a lack of clarity. A new paragraph has been inserted in the directive text which reads: “In particular, an institution sponsored by an undertaking located in another member state shall also be subject, in respect of the corresponding members, to any information requirements imposed by the competent authorities of the host member state on institutions located in that member state.”
Another area of potential concern is that of technical provisions – the examination of a pension scheme’s liabilities. The EU says a prudent calculation of technical provisions is “an essential condition” for achieving a high level of protection for members and beneficiaries. Technical provisions are dealt with in Articles 15 and 16 of the Council text. The first paragraph of Article 15 declares: “The home member state shall ensure that institutions operating occupational pension schemes establish at all times in respect of the total range of their pension schemes an adequate amount of liabilities corresponding to the financial commitments which arise out of their portfolio of existing pension contracts.”
“The calculation of technical provisions shall take place every year,” states the third paragraph of Article 15. Yet elsewhere in the same paragraph we see: “However, the home member state may allow a calculation once every three years if the institution provides members and/or the competent authorities with a certification or a report of adjustments for the intervening years.”
Furthermore, paragraph five states: “The home member state may make the calculation of technical provisions subject to additional and more detailed requirements, with a view to ensuring that the interests of members and beneficiaries are adequately protected.”
Straightforward and clear it is not.
As Liberal MEP Chris Huhne says, these discrepancies “may be a constraint on cross-border activities”.
The Council of Ministers argues that this additional paragraph is an important element to “improve transparency and mutual confidence”. It states that the new text “undertakes to assess carefully and regularly, in close consultation with member states, whether the situation prevailing in member states leads to any forum-shopping, and to prudential standards which are not sufficiently prudent.”
In a directive that is already bogged down with apparent contradictions, has the Council of Ministers made things easier or harder for the European Parliament to reach a decision?
Here’s hoping, for the sake of pension provision across the European Union, that the legislators can eventually see a clear path through all this undergrowth.