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back to index backGLOBALtalk November,  2015

Proposed Revisions to the EU Pension Directive in Progress

Employer Action Code: Monitor

The EU Commission is working toward issuing a revision of its 2003 Occupational Pension Funds Directive (also known as the IORP* Directive), which laid down basic governance requirements for occupational pension funds. According to the Commission, there are some 125,000 such funds operating across the EU, with assets of €2.5 trillion on behalf of around 75 million members. The Commission's stated objectives in issuing a revision are to:

- Ensure the soundness of occupational pensions, and better protect pension plan members and beneficiaries

- Better inform pension plan members and beneficiaries

- Remove obstacles for cross-border provision of services so that occupational pension funds and employers can fully reap the benefits of the single market

- Encourage occupational pension funds to invest long term in growth-, environment- and employment-enhancing economic activities

Key Details

The EU Commission released its proposals for a revised directive in March 2014 (see our May 2014 Global News Brief), and in July 2015, the rapporteur for the European Parliament published a draft report setting out amendments to those proposals (as well as to earlier amendments suggested by the EU Council of Ministers). The July amendments remove or relax certain of the proposals that were considered by commentators to be overly intrusive and prescriptive. Although further amendments are expected, it seems likely that this more principle-based approach will carry through to the final revised directive. Assuming a reasonably straightforward passage through trialogue (i.e., the discussions between the Parliament, the Council of Ministers and the Commission), the directive may be finalized in spring 2016.

EU member states would then need to transpose the requirements of the revised directive into their local legislation within 18 months of the directive coming into force; this could be around December 2017.

The main adverse (or possibly adverse) provisions of the amended proposals are:

- Nonconsensual employee transfers will be outlawed, which will frustrate much merger and acquisition activity, and the consolidation of IORPs.

- All pension funds will have to be fully funded at their establishment, which possibly may apply to activities such as plan mergers or splits. For cross-border arrangements, this could represent an obstacle to establishment, but for plans in place, the proposed funding regime (aligned with domestic rules) would be more flexible than is currently the case.

- Pension funds providing defined contribution benefits will have an additional expense, as they will be required to appoint a depositary.

- Local supervisor approval would be required for a) those responsible for pension funds (e.g., trustees and management committees) to be considered fit and proper and b) a key function of the pension fund to be met by a resource that provides the same or a similar function for the plan sponsor.

- Pension funds will be required to notify pensioners/beneficiaries in advance of changes in benefits.

- It is unclear whether those responsible for running a pension fund could be based outside the country in which the fund is based.

Of the positive changes, the most welcome are:

- The Council of Ministers' earlier suggestion that a host country's regulators should have a veto on a cross-border transfer is removed

- The clear message to the European Insurance and Occupational Pensions Authority to stop developing the holistic balance sheet for pension funds or issuing any other financial recommendations or guidelines to pension funds

- Further simplified pension benefit statement requirements

Employer Implications

Some of the proposals could have adverse cost implications for pension funds, which could ultimately be picked up by sponsoring employers.

The European Parliament is always keen to learn the views of employers of EU citizens, particularly where jobs and growth are concerned. Employers may want to consider sharing their views of the proposals with members of the European Parliament, either directly or via relevant trade bodies such as BUSINESSEUROPE.

In any event, employers will need to understand how the directive develops and assess what, if any, changes it will bring to their pension plans in the European Economic Area.

Source: Towers Watson

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