Last month, the European Commission referred Italy to the European Court of Justice for not transposing the Institutions for Occupation Retirement Provision (the IORP directive) into its national legislation.

IORP, the single passport principle for pan-European pensions, should have been implemented by all member states by 23 September 2005. Instead, the Commission has started proceedings against other member states, such as the Czech Republic, Hungary, and Poland, for failing to comply. "While recognising that member states' systems for occupational pensions differ widely, the directive provides harmonised rules for prudential supervision and capital requirements for these institutions," said the Commission.

Under the directive, a company can choose a European member state in which to base a pension fund, and the legal structure of the fund is then based in that "home" country, explains Mercer Human Resource Consulting. The regulations of that country will set down the financial elements of the fund, and in other issues such as corporate governance and prudential matters. The directive has also introduced minimum prudential standards for a cross-border pension funds, and legislates against discrimination of foreign service providers, allowing a fund to elect any service provider authorised to operate in a member state.

For many observers, the lack of implementation of the directive speaks volumes. "This whole idea is a wonderful pie in the sky and has been kicked forwards and backwards for many years. The critical point is that none of it will matter until tax issues are sorted out," explains Bernard Casey, a senior research fellow at the Pensions Institute of Cass Business School in London.

Others are more optimistic. "I would describe this more as a work in progress. As time goes by, we will see the opportunity for European cross-border arrangements develop, but of course there are some practical impediments and legal difficulties," says Simon Dudley, a senior consultant at Watson Wyatt.

Dudley points out that some inroads have been made, particularly with cross-border pooling. And many countries are trying to build frameworks that support pan-European pensions. Belgium adopted a framework in July this year that created a legal entity to embrace all pension funds, the Organisement de Financement de Pensions (OFP), for example. Whatever the location of the funds, whether domestic or cross border, they would be covered by one pensions entity, while Belgium itself moves onto an EET (exempt-exempt-taxed) basis. Holland has also set itself up as a hub for cross border provisions. In March, the finance ministry issued a decree which set out its commitment to promote the Netherlands as a preferred location for cross-border asset pooling. In particular, the decree endorsed a tax-transparent asset pooling vehicle for Holland, the Fund for Joint Account (FJA), in competition to CCF and FCP structures in place elsewhere.

And two years ago, Luxembourg abolished its 0.01% subscription tax for multi-national corporations who wished to establish cross-border pooling investment vehicles for their pension assets. "There are countries that are starting to create tax transparent vehicles, like Holland and Belgium. So financial centres are beginning to take notice. I suspect that this will lead over time to a more streamlined process for obtaining tax rulings," explains Julian Presber, managing director for State Street in Luxembourg.

Most industry participants agree that pooling is the first step towards achieving this, with multi-nationals eager to work out a viable solution. "Multi-nationals are really keen to understand their exposure to different forms of risk, and also achieve some governance over the independent plans that they have and contribute to. This is becoming even more important as the funded status of pension plans are on their balance sheets," explains Allen Overy, business development manager for pooling in Europe at Northern Trust.

Northern Trust provides custody and fund administration services to Univest, the pension asset pooling vehicle launched by Unilever last year. The fund was seeded with more than e2bn at launch, and Northern Trust also acts as management company to Univest, which, it says it believes to be the first fully tax-transparent, cross border pension pooling vehicle structured in the form of an FCP for a multinational company.

"We started as a consortium four or five years ago to investigate the viability and availability of a vehicle that could be used to pool multi-national assets," says Overy. After a lengthy process, the firm believes it has succeeded, saying that it worked closely with different tax authorities to confirm that they wouldn't penalise investors coming into a pooled fund from different countries, which was a massive undertaking.

Some industry participants are more optimistic than others about whether tax harmonisation can ever be achieved across Europe. Mercer Human Resource Consulting argues that multi-nationals are missing an obvious opportunity to save costs and reduce risks by operating separate pension schemes. The biggest barrier, that of the discriminatory tax treatment applied by EU member states to pension arrangements established in other states, are being broken down, with EU members agreeing not to discriminate on tax. EU member states which currently do not discriminate on tax are: Germany, Ireland, Luxembourg, The Netherlands, UK, Austria, Portugal, Finland, Spain, France, Poland and Hungary.


or its part, the European Federation for Retirement Provision (EFRP) has estimated that establishing cross-border operations brings tremendous economies of scale. Annual performance could be lifted by some 15 basis points, saved from improved investment costs (better manager selection, reduced number of managers, better control and monitoring), administration and compliance, and expatriate schemes. An additional 30 basis points could be saved by better investment returns and the ability to smooth out the ups and downs in solvency capital requirements by having one fund of assets and liabilities. The total overall savings of up to 45 basis points amounts to approximately €10bn annually. Even if only part of these savings were realised, the benefit for Europe's competitiveness would be significant, says the EFRP.

The Federation's own EIORP model has been further clarified by the IORP directive, it says in a report. Most importantly, it states, no tax harmonisation is required, with the EFRP claiming its solution will ensure a member state retains both effective fiscal control and its tax revenue. The national section for a member state in which the EIORP is active is to be treated exactly as if it were an IORP located in that state. Tax neutrality is achieved by ensuring that the national section applies the tax rules of its corresponding member state. So members would join the national section of the member state in which their salaries are taxed.

Still, it concedes that there is a long way to go. "At the moment, it's difficult to know what is happening on the ground. The fact is that the directive is not yet implemented in every member state, and there are disparities in that implementation," says Chris Verhaegen, secretary general of the EFRP. "It is hard to get national legislators and national supervisors accustomed to the idea of cross border pension provision. We are very hopeful that sooner or later this will fall into place and will fit, but for the moment, the implementation is more of a paper exercise," she adds.

Critics say that both the EFRP, and Mercer, are being too optimistic in their outlook. "Consultants get excited about anything new that can generate fees, and so they try to find a problem for which there might be a solution," argues Trevor Llanwarne, chief actuary for pensions at PricewaterhouseCoopers. The reality, he suggests, is that it will be 3-5 years before multi-nationals create anything close to a pan-European provision. "The big issues are that anything that's defined benefit has to meet more stringent funding requirements. The UK does not have stringent funding requirements, for example, but many European countries have. So I don't think that anyone will do it on a pan-European basis. They'll start cross-border."

Mercer accepts that it is not a straight forward task. Yvonne Sonsino, European partner, points out that while some multi-nationals have started to make inroads, there is a long way to go. "It is not simple, there is no agreement as to what the social and labour and compliance rules will be in all these countries, and there's still a big degree of uncertainty out there. But we are moving closer and to a position where a pan-European plan is becoming a distinct reality," she insists.

Sonsino believes that 2007 will see the first implementation of a pan-European proposition. In fact, Mercer is developing its own structure to pitch to clients, but declines to provide details on what it will entail or when it will be ready. "Some clients are scared stiff, and some are still very sceptical. Other clients that are looking for new DC plans in European countries have nothing to lose. They need to set up a new plan so it may as well be a pan-European plan. For them, the prospect is very exciting," she says.


ut PWC's Llanwarne points out that opening up a pan-European proposition may not make sense for defined contribution (DC) schemes. "There's not a crying need on DC to have something. If a company is paying 10% contributions in the UK and maybe 3% in a continental country where they have bigger social security, you're going to have to have different contribution rates in different countries to reflect that social security." He also points out that cross-border propositions could take away the effect of market conditions. "Traditionally, when multi-nationals first step food in various countries, they might have a sales operation of three people. At that level, you might well wish to have some commonality linked closely with home. But as soon as the business grows, almost invariably you start devolving power down away from a global arrangement with each country having its own autonomy, because that way it can react to market conditions," he suggests. As a result, by centralising things costs go up, rather than down, because you do not reflect market conditions, Llanwarne argues.

Others point out that the IORP directive is too open to interpretation. Article 16, for example, states that the minimum level of pension scheme solvency must be 100% at all times. While the UK believes that its scheme specific requirement meets the directive, the Netherlands has set up a minimum ratio of 105%. The problem is a broad one across all pension related issues. Social and labour laws are distinct to each country, with no consensus on languages used, for example. And, suggests one consultant, too much emphasis has been put on investments and not enough on benefits. "I think the real issue is the structures of benefit provision in all the different countries and harmonising them is almost impossible. It's difficult to see how it would be put in place, particularly in a defined benefit environment," he says.

Cass's Casey points out that different EET structures do not help matters either. With the different combinations of exemption and tax, governments will argue over how revenues work. "Nothing has been sorted about this. The inroads that have been made have all been about setting up a system which looks at the governance of a scheme, rather than the convergence of tax issues."

Cost participants see developments on a cross-border, rather than pan-European basis, and footholds have already been made in this direction. Pensplan, the pension services provider of the semi-autonomous Trentino Alto Adige region in northern Italy, is set to offer a cross-border fund in Germany, for example. "Having set up a system that is working in our region, we can reach economies of scale that are successful in Germany as well," explains Michael Atzwanger, managing director of Pensplan in Italy.

Because Italy has not yet implemented the directive however, things are on hold. "We have already submitted the documentation to the Italian authorities, and once Italy has implemented the directive we will apply for authorisation. This will happen in a month or two," he says.

Atzwanger accepts that there needs to be harmonisation on both tax, and annuities, but points out that it is possible to avoid the bigger tax harmonisation issue and still go cross-border. For Pensplan, language is not a concern either. "There is a small Germany community in the northern part of Italy so we have both languages, German and Italian, which helps."

Going forward, observers say there is still much to be done. But over the long term, most are agreed that developments will continue. "Somebody will start this off and get approval. If a company has a particular need to achieve this, they will invest time and energy into things. And that could well start things up," suggests Watson Wyatt's Dudley. At present though, he doesn't see it happening. "It's achievable, but there is a cost and one has to look at what the benefit would be. At the moment, there is more cost than benefit," he says.