Failed Pensions Directive?

The Pensions Directive has failed and should be replaced by a new version as quickly as possible, according to a panel discussion reported by IPE last week. The reasoning is that at this point, there are only five new cross border pension schemes in operation.

While I agree that the market response to the new opportunities offered by the Pensions Directive has been slow to date, talk of a "new" pensions directive is counter-productive in my view. The retirement industry has an unusually long time horizon, it is therefore not prone to hasty moves, especially not in the presence of regulatory uncertainty. As the CEIOPS Initial review of key aspects of the implementation of the IORP directive showed in April, there are important aspects that require legislative attention, thus the transposition of the pioneering project that is the Pensions Directive, while formally finished, is not complete. 

The Pensions Directive can be improved, but improvements should be approached in a gradual manner, as it is highly unlikely that IORP II could bring pan-European harmonisation of retirement systems. Hence impediments to cross-border schemes, such as taxation issues, need to be removed one by one. The attractiveness of cross-border schemes should be increased by expanding the scope of the Directive's applicability. Surprisingly, this is not part of CEIOPS' conclusions, but as described earlier, an important segment of several Central & Eastern European countries' mandatory occupational retirement schemes lies outside of the Directive's scope. This unfortunate omission is due to the fact that these countries did have no part in the preparation of the Directive prior to their accession to the EU. 

Pensions Directive Review

As a precursor to the EU Commission review expected later this year, CEIOPS has published its own Initial review of key aspects of the implementation of the IORP directive. The main conclusions (from the press release) are:

there is considerable diversity in the way some key aspects of the IORP Directive have been interpreted and implemented;

there is little evidence of major issues arising from these differences;

given early days and limited experience of the Directive's implementation in some areas, it would be premature to recommend changes to the Directive.

More to follow ...

EFRP opposes legislative review

On the occasion of last month's conference last month, EFRP presented the results of a member survey about the Pensions Directive. The Federation underlines the innovative nature of the Directive and suggests that the legislative review which is planned by the EU Commission for next year is premature since the Directive has not been given enough time after implementation. There are a number of interesting comments on important "details" such as mandatory second pillar, or that there are more than 48 cases of cross-border pension plans as reported by CEIOPS earlier.

Asset pooling

epn has an interesting story mostly about the competition between asset pooling locations in Ireland, the Netherlands and Luxemburg. The Belgian approach with its relaxed solvency regime gets bad marks, especially with regards to next year's Commission review of the Directive and its transposition. 

Pensions directive to be revised 2008

In its annual report, CEIOPS gives an overview (p. 47f) of its past & current activities. Its Occupational Pensions Committee (OPC) is working on putting together materials for the revision of the Pensions Directive that is scheduled by the Commission for next year. Areas of material legal uncertainty to be clarified are concepts such as fully funded, ring-fencing or the calculation of technical provisions.

Opening up Switzerland

According to VF, ASIP's new president Christoph Ryter named opening up of Switzerland for European retirement solutions as one of four main challenges that the influential Swiss association will have to live up to during his presidency.

War on regulatory arbitrage?

As indicated earlier, some stereotypical anti-competitive reflexes begin to rear their ugly heads in the wake of the open conflict between Belgium and the Netherlands on pensions regulation. The President of DUFAS asks for a war on regulatory arbitrage, which can be translated into war on competition, of course. This brings the Pensions Directive to a critical juncture in its application relatively early on - here's to hope that the Commission will handle this diligently.

One is tempted to refer the Dutch back to the basics of the Cassis de Dijon principle and following jurisdiction. Applied na?vely to IORPs and the Pensions Directive, that principle would entail that the set of regulatory norms (for instance lower solvency) deemed sufficient by one member state's authorities needs to be recognised by every other member state (with the famous exception of measures required for the "effectiveness of fiscas supervision, the protection of public health, the fairness of commercial transactions and the defence of the consumer", of course).

Therefore, regulatory arbitrage is part & parcel of the Pensions Directive. The only alternative is harmonisation of occupational pensions, and that is what member states shied away from at the inception of the Pensions Directive.

Polar pensions

IPE reveals that Iceland is the latest (and last) EEA country to adopt the Pensions Directive into its national body of law. It will be interesting to observe how Iceland proceeds with the transposition given the Belgian example. The Icelandic Association of Pension Funds will certainly provide more background.

The chocolate connection

Last Tuesday saw an interesting convention on the shores of lake Geneva at the sumptuous estate of Baron Rothschild and his company. The topic of the well attended conference was pan-European pensions in general and the Belgian incarnation thereof in particular. The list of speakers could not have been of higher calibre: The Prime Minister together with two cabinet ministers and high level representatives of the EU Commission and the Belgian pensions supervisor. Their objective was to introduce the Belgian legal framework for the newly created legal entity Organisation for Financing Pensions (OFP). They did this quite effectively, albeit on the only neutral territory in Europe where the Pensions Directive is not applicable.

The OFP seems to be a highly attractive entity to provide pan-European pensions with. It operates on zero (income, capital, VAT) tax, it can provide solidarity across several pension plans (which is attractive for efficient capital allocation), it reflects no other restrictions on asset management than the Directive's prudent person principle, it may rely on Belgium's extensive network of double taxation treaties, it takes advantages of Belgium's recent transition to EET, it is not encumbered by a Pensions Protection Fund levy and last, but by no means least, the valuation of its liabilities may be based on a discount rate that incorporates expected returns, thus may go as high as 6%. A word of caution may be in order here, though: It is not clear whether the long term consensus expected return used to derive that attractive discount rate takes into consideration recent literature on the proper calculation of expected rates of return.

Jean-Pierre Steiner of Nestlé Capital Advisers shed some cold water on participants' hopes that pan-European pension plans might fully replace local plans in the near future. In his view, this is an ambitious long-term objective reaching beyond his active lifetime. Nevertheless, he put Nestlé's considerable weight behind the support of Belgium as the currently most attractive location for pan-European pension funds.

Also of interest was Mr Van Hulle, the EU Commission's representative's comment that he wasn't opposed to supervisory shopping, which is of course tantamount to regulatory shopping - something that tends to be frowned upon elsewhere. Equally interesting to Swiss listeners was Mr Wymeersch's note that Belgian first pillar institutions may be falling under the Directive, which seems to be in direct contradiction to the Directive's scope and is of particular interest to Liechtenstein as well.

Funding requirements across EU15

IPE refers us to a new comparative study of the minimum technical provisions for DB pensions in the EU by GCactuaries. The paper's title is somewhat misleading as it only covers the EU15 at this point, even though it purports to be up to date, in fact looking into the future (31 December 2006 according to section 2). More likely though is that the results rely entirely on the pre-Directive transposition scenario of 31 December 2005. The study does explicitly not cover demographic assumptions.

It finds a very wide variation between countries in the methods and assumptions for assessing minimum technical provisions, and it expects that subsequent to the transposition in particular of Art. 15 of the Directive, there will be significant changes in the way discount rates and other assumptions are determined, especially where discount rates are not set with consideration to market rates, as is the case in the majority of countries.

A Commissioner's philippic

Here is the text of Commissioner McCreevy's speech at today's IPE Awards. He expresses his disappointment in some member states' defective implementation of the Pensions Directive, especially with regards to national investment limits. He describes the Directive as a "harmonising framework" "to allow the best pension fund managers to administer pension schemes across the single market and pension providers to compete fairly on a pan-European basis". He also announced that court cases have been initiated against three member states today - these are probably Slovenia, the UK and Italy. Interestingly, he singles out Liability Driven Investment as a market innovation to better manage risks. Clearly, deficient implementation will not be cut a lot of slack.

The core focus of the speech was dedicated to the third pillar and forthcoming changes in the regulatory environment as well as existing challenges in the marketplace, such as insufficient availability of annuity products. (More from IPE)

EU Commission sues Italy [IT] [CZ] [HU] [PL]

Following action against the UK and Slovenia, the Commission has decided to refer Italy to the European Court of Justice for non-transposition of the Pensions Directive. Apparently Italy has also not responded to the Commission's reasoned opinion - why it has taken the Commission four months longer than in the case of the UK and Slovenia to discover that they had not received a response is not quite clear.

IPE adds, although it is unclear on what source this information is based, that the Commission has sent letters of formal notice to the Czech Republic, Hungary and Poland. At any rate, the latter two countries have not been involved in infringement proceedings regarding the Pensions Directive to date, even though Poland definitely deserves attention as we noted earlier.

FSAP transposition database

(IPE) The EU Commission has preëmpted our plans by making available a database of member state legislation transposing Financial Services Action Plan (FSAP) directives (see new link in the sidebar). While this looks like a very useful tool indeed, providing original documents and linking to their original location, it remains to be seen how well the database is being kept up to date. The recently enacted Belgian legislation for instance does not show up in the database. It seems that country notification triggers an update. Also not included is EEA transposition legislation.

Belgium transposes Directive [BE]

According to IPE on its redesigned website, Belgium has now escaped further sanction by the EU Commission for non-transposition of the Pensions Directive by passing the law 51K2534 on 13 July.

Evidently, the Belgian Association of Pension Institutions has been instrumental in designing that bill, but search as we might, there was no functioning website of this Association to be found.

Pensions Directive to enter EEA

We hear that it is pretty certain now that the EEA Joint Committee will formally decide to let the Pensions Directive become part of the EEA legal body in its forthcoming meeting of 7 July. The long delay is said to have been caused by Norwegian difficulties in implementing the Directive.

Transposition complete this year?

epn has a fairly good, albeit anecdotal status report on the progress of transposition of the Pensions Directive in some of those countries where it is still lacking.

Directive to cause "significant disruption"

IPE recently reported this news item, which is based on an online survey of the UK Society of Pension Consultants. 52% of respondents indicated that the DIrective's implementation had caused significant disruption.

I just enquired about the background to this news item. The press release is based on 31 responses to a one question online survey sent to the SPC's membership base of about 130 members. While this is a pretty good response ratio, it is notoriously difficult to interpret. According to John Mortimer of SPC, those significant disruptions are attributable to the UK implementation of the Pensions Directive, and they are not indicative of a generic problem. Mr. Mortimer quoted a UK specific issue with foreign secondments of employees which, if handled wrongly, can cause the secondment to be treated as a cross border case the consequence of which would be that the IORP in question needs to be fully funded. That might indeed work out to be a severe disruption - but for the time being, this news item's impact is limited.

Commission takes action

The EU Commission has issued a reasoned opinion against Belgium, Cyprus, Czech Republic, Finland, France, Italy, Lithuania, Slovakia, Slovenia, Spain and the United Kingdom for non- or partial transposition of the Pensions Directive into their national law, thereby capturing all the member states that it has identified earlier for lagging. The next step in the infringement proceedings according to Art. 226 EU Treaty would be court action in front of the ECJ after two months time (via IPE).

Today's the day!

As of today, Directive 2003/41/EC of the European Parliament and of the Council of 3 June 2003 on the activities and supervision of institutions for occupational retirement provision (a.k.a. the Pensions Directive in this blog) ought to be transposed into national law of all EU member states. It will be interesting to observe the progress ...