The Ongoing Development of Pan-European Pension Plans—Where Are We Now?

Pan-European pension plans are a popular topic of discussion for many multinational companies today. Interest among multinationals in the implementation of cross-border pension arrangements has increased, with many companies keeping a close eye on developments in Europe.

Companies are attracted to the benefits provided via these arrangements but few have actually implemented a pan-European pension plan due to the complexities involved in executing such a plan across the member states. However, the fact that we do not see many pan-European pension arrangements in place does not mean that we won't in the future. Although there are still issues to resolve, there has been a concerted effort to move forward in the pan-European pension arena and the impediments are being addressed.

The IORP Directive

European Directive 2003/41/EC on the Activities and Supervision of Institutions for Occupational Retirement Provision (IORP), commonly known as the IORP Directive, was published in the European Union's Official Journal on September 23, 2003. E.U. member states were given two years to implement the IORP Directive and all member states were in compliance as of June 2007. On April 12, 2007, the IORP Directive came into force in all European Economic Area countries, which means that it now includes Norway, Iceland and Liechtenstein in addition to the 27 E.U. member states.

One of the primary objectives of the IORP Directive is to establish regulatory mechanisms to support the operation of cross-border occupational pension schemes. It applies only to funded occupational pension schemes and does not apply to state schemes or personal pension arrangements. The benefits of a pan-European pension plan have been acknowledged and include:

• Direct cost savings though gains in efficiency and economies of scale as a result of the consolidation of investment and administration arrangements across several E.U. member states
• Improved governance and compliance standards through the operation of a single vehicle
• The ability to work with one prudential regulatory entity (but still needing to comply with the social and labor laws of the requisite member states)
• Assisting with mobility of employees across the European Union and avoiding the need to set up several plans
• Assisting with the implementation of similar corporate benefits and branding of benefits across the member states

In March 2008, the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS) released a comprehensive report that provides in-depth analysis of the IORP Directive and areas that require clarification. While the advantages of implementing pan-European pension arrangements include reduced costs, improved governance and risk management, companies considering such a step should be aware of the CEIOPS findings set out in this report.

The CEIOPS report, Initial Review of Key Aspects of the Implementation of the IORP Directive, incorporates comments from member state supervisors on areas that have been problematic due to differences in interpretation and implementation of the IORP Directive across the E.U. member states. The report confirms that the supervisory process is working under the IORP Directive, but that there are "some areas where action appears to be needed for clarity and for supervisory convergence" across the member states. The report also confirms that member states have "definitional differences" and that clarification is required in four areas: cross-border activity, subordinated loans, ring-fencing and investment regulations. The report will inform the European Commission around certain key terms in their planned review of the IORP Directive.

CEIOPS has also published its Survey on Fully Funded, Technical Provisions and Security Mechanisms which provides an overview of the valuation assumptions and security mechanisms used for pension funds in the national supervisory frameworks. The report finds that the existing prudential frameworks for pension funds/IORPs in the member states are very complex and diverse, in part reflecting differences in nationally determined social and labor laws. The report will also assist the European Commission in their current consultation on pensions and solvency.

Member State Domicile for Pan-European Pensions

Certain E.U. member states have strived to be the member state of choice and the jurisdiction that offers the most advantageous domicile for establishment of a pan-European pension plan—these member states include Belgium, the Netherlands, Luxembourg, Ireland and, most recently, the United Kingdom.

In the United Kingdom, the HM Revenue & Customs (HMRC) has issued an overview clarifying pension plan rules which aid in the implementation of U.K.-domiciled cross-border pension plans. These changes assist in making the United Kingdom one of the cross-border centers, in line with Ireland, Belgium, the Netherlands and Luxembourg.

Prior to this clarification, occupational pensions in the United Kingdom were treated as a single entity which covered both the pension fund and the plan rules. Consequently, this was an obstacle to the development of cross-border pensions in the United Kingdom as it effectively barred foreign schemes from operating under their own tax regimes when the fund was domiciled in the United Kingdom. This is no longer the case. The HMRC has issued a written clarification that a restricted application is possible which will assist in the development of cross-border pensions in the United Kingdom. The United Kingdom will now be considered as a domicile of choice for pan-European pension plans.

European Commission Consultation Paper on Solvency II and Pensions

The European Parliament Committee on Economic and Monetary Affairs (ECON) recently voted to agree to the text of the Solvency II Directive, paving the way for the separation of the IORP and Solvency II legislative frameworks. For the past several months, European policy debates have focused on whether the same provisions that apply to insurance products should also be applied to IORPs. A report issued by the European Federation for Retirement Provision (EFRP) titled IORP Directive – securing workplace pensions requests that European MEPs think seriously before imposing Solvency II on IORPs as they have their own E.U.-level regulatory regime―i.e, the IORP Directive.

In tandem, the European Commission is carrying out a consultation process paper seeking input on the cost implications of requiring pension funds to meet the same requirements as insurers under the Solvency II Directive. Under the Solvency II Directive, stringent capital adequacy requirements are introduced for insurers and reinsurers from the year 2011. The Commission's consultation paper does not propose that Solvency II be applied to IORPs in general. Instead, it states that it should apply to two specific categories of IORPs in relation to: (1) schemes which carry out cross-border activities pursuant to Article 17 of the IORP Directive; and (2) schemes which underwrite risks linked to death, disability and longevity or provide an investment guarantee without recourse to a sponsoring employer (known as "Regulatory Own Funds"). The consultation paper is published on the Commission's Web site.

Developments From the U.S. on Cross-Border Pension Pooling Arrangements

On April 10, 2008, the U.S. Department of Labor (DOL) issued an advisory opinion to Northern Trust Company (Advisory Opinion No. 2008-04A) regarding its multinational cross-border pooling products that assist in the development of U.S. pension plan participation in cross-border pension pooling vehicles that meet the specific requirements of section 404(b) of the Employee Retirement Income Security Act of 1974 (ERISA).

Northern Trust asked for an interpretation of whether certain arrangements involving multinational cross-border pooling arrangements were consistent with the indicia of ownership regulations under section 404(b) of ERISA. Specifically, the request concerned use of multinational cross-border pooling products designed by Northern Trust for multinational corporations and affiliates. These cross-border pooling products allow the pension plans of a multinational client, which may be located in different international jurisdictions, to pool its investments into a single entity for investment purposes.

With respect to ERISA section 404(b), which requires that the indicia of ownership of plan assets be maintained within the jurisdiction of the U.S. court system, the DOL concluded that:

(1) The "indicia of ownership" of non-U.S. securities and non-U.S. currency may be held outside the United States in the custody of a non-U.S. "branch."

(2) As long as all of the conditions of the regulations under section 404(b) are satisfied, the indicia of ownership of non-U.S. securities and non-U.S. currency may be held by a qualified non-U.S. subcustodian.

The Advisory Opinion is another positive indication that the globalization of pensions and cross-border arrangements will continue to evolve.

Additional Changes Forthcoming

Setting up a cross-border or a pan-European pension plan is complicated and takes time. Companies should keep in mind, however, that the benefits of these arrangements are viable. Many companies are analyzing their European pension arrangements and there are several pan-European pension products available on the market. However, due to divergent member state transposition of the IORP Directive, differing member states' social and labor laws, and remaining tax issues, there are still difficulties in setting up these arrangements. The European Commission is aware of the issues and additional changes are forthcoming.

These developments indicate we are closer to the creation of pan-European pension plans. As noted above, various member states have begun trying to attract new pension business by stressing the advantages of their regulatory or low tax systems. Belgium, Ireland, Luxembourg, the Netherlands and, most recently, the United Kingdom are promoting their jurisdictions as prime locations for the establishment of pan-European pension arrangements. The location of the plan will ultimately be set by multinational companies that are exploring the different locations and possibilities to offer streamlined benefits plans in Europe, while taking advantage of the opportunity to maintain economies of scale in the provision of occupational pensions.