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No new funding requirements for EU pension schemes, but expert criticises cross-border "funding anomaly"

Out-Law News | 31 Mar 2014 | 9:45 am | 3 min. read

The proposed new legal framework which would govern occupational pension provision in the EU is a missed opportunity to remove inefficiencies from the current regime and improve outcomes for members, an expert has said.

Simon Tyler of Pinsent Masons, the law firm behind Out-Law.com, was commenting as the European Commission published its long-awaited proposals for revision of the Institutions for Occupational Retirement Provision (IORP) Directive. The Commission said that its revisions would ensure that pension scheme members were properly protected against risks while removing obstacles to cross-border provision of services, but Tyler said that the draft was "disappointing".

"The new directive has done nothing to remove the funding anomaly for cross-border schemes," he said. "A change would have allowed multinationals to rationalise the pension arrangements for all their staff - and you would have expected the European Commission to favour this sort of efficiency."

"Although pension scheme professionals recognise the need for professionalism, good governance and clear member communication, the imposition of new requirements is likely to add to the costs of running schemes, without necessarily improving anything for members. Additional requirements from the European Commission may cut across the good work the UK's Pensions Regulator and Department for Work and Pensions have already been doing to raise scheme standards," he said.

The original IORP Directive, which dates back to 2003, sets out basic requirements for occupational funds and their supervision, including a requirement for funds to invest their assets prudently and in the best interest of members and beneficiaries. The changes are based around the need for strengthened governance in light of the decline of defined benefit (DB) schemes, which guarantee the benefits paid out on retirement, in favour of defined contribution (DC) schemes, where the investment risk is borne by the pension scheme member. They are also designed to encourage more investment in "long-term economic activities", such as infrastructure.

The Commission's proposal has four objectives: to ensure the soundness of occupational pensions and better protect scheme members; to better inform scheme members; to remove obstacles to cross-border provision of services; and to encourage funds to invest long-term. It would introduce new governance and risk-management requirements, a requirement to use a depositary to safeguard members' assets and stronger powers for national supervisors; while schemes would also be required to produce a standardised Pension Benefit Statement to provide scheme members with information about their individual pension entitlements.

Although aspects of the proposals are designed to make it easier for occupational pension funds to operate a pension scheme across several member states, the Commission has not removed the existing requirement that cross-border schemes be fully-funded at all times. It has, however, proposed introducing a requirement for member states to remove any investment restrictions discoursing schemes from investing in "infrastructure, unrated loans etc., thus ensuring that investments, in particular with a long-term profile, should not be restricted if the restriction is not justified on prudential grounds."

As previously announced, the Commission does not plan to introduce new solvency rules for occupational funds at this stage. It had originally proposed the introduction of more stringent solvency requirements, to be compatible with those due to come into force for insurers under the Solvency II regime. However, this plan was dropped following lobbying by member states, including the UK, which would have been disproportionately affected by any new rules.

Internal Market and Services Commissioner said that the proposals could help the 125,000 occupational pension funds operating across the EU meet the challenges of "an aging population, and investing long-term to create growth".

"Occupational pension funds are at the junction of those two challenges," he said. "They have over €2.5 trillion of assets under management with a long-term horizon, and 75 million Europeans depend largely on them for their retirement pension. [This] legislative proposal will improve governance and transparency of such funds in Europe, improving financial stability as well as promoting cross-border activity, to further develop occupational pension funds as key long-term investors."

The proposal was published as part of a package of measures trailed by the European Commission as a means of supporting long-term financing solutions as a way of unlocking economic growth. They included measures designed to improve access to crowdfunding and other alternative finance mechanisms by small businesses, attract private finance to infrastructure and make better use of public funding. The measures will now proceed to the European Parliament and member states for discussion and refinement.