While a number of hurdles still stand in the path of multinationals looking to implement pan-European pension plans, Mercer's Barry D. Mack argues the time is right to start the process
The theory behind pan-European pensions was that an employer with operations in several EU Member States should be able to base a single plan in one EU location, so why, three years later, have we seen so few multinationals implement them?
To date, employers have largely been concerned with managing the financial risks involved with their defined benefit (DB) plans. The requirement to be fully funded at all times has made pan-European pension plans generally unattractive in the DB market.
However, those employers wishing to use a pan-European pension plan for defined contribution (DC) arrangements, which on the face of it is an easier proposition, have hit upon other difficulties Ð obtaining tax approval in different locations, for example. In particular, the tax treatment of the transfer of existing assets to a new pan-European plan and the tax treatment of some capital and dividend payments. Each member state has transposed the Directive differently, leading to further complexity. An example of this is the social and labour law applied to members in each host country. Further deterrents have been the high levels of initial investment in terms of time and money needed to establish a pan-European pension plan and the lack of available packaged solutions in the marketplace.
The regulatory environment
The opaque regulatory environment is certainly one of the significant factors causing the lack of take-up of pan-European pensions.
The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) recently published two reports that have implications for cross-border pension projects: an initial review of key aspects of the implementation of the Directive and a survey on funding and technical provisions. CEIOPS recommends that the European Commission provide "urgent clarification" of the provisions relating mainly to cross-border activity.
The IORP Directive is indeed unclear as to what constitutes cross-border activity. Is it when the employer and pension funds are each in different EU countries or when employee and pension funds are each in different EU countries?
The latter definition has already led multinationals with cross-border activities operating DB plans in the UK to remove any such employees as soon as possible to avoid triggering cross-border status and the associated immediate full funding requirement.
CEIOPS has also stated that Solvency II for pensions is "not an appropriate course to pursue" and could threaten DB provisions. There is an argument being made in some quarters for stronger, more consistent solvency standards, similar to those being developed for insurance companies, in order to avoid regulatory arbitrage, seducing funds to the lightest regulatory regime. But this would be disastrous (at least from an employer perspective) for DB provisions, particularly in those jurisdictions where there is a more dynamic funding regime, such as the UK and Ireland.
Harmonisation is always an issue surrounding any EU legislation. EU Directives are not about homogenising EU Member States' regulations, but more about harmonising their approach to facilitate, in this case, cross-border activities. In theory, this should encourage member states to mutually acknowledge each others' regulatory approaches. The focus, therefore, should be on opening up the detail of what it means in each member state to operate a pan-European pension from that location as either a home country or as a host country for the plan members/beneficiaries. Then member states can react to their position within the market and allow multinationals to make informed decisions.
However, some intervention is necessary for those areas of law, especially in relation to taxation, where there is no mutual recognition across borders and treatment of foreign and domestic issues is different. The EC and European Court of Justice are starting new and continuing infringement proceedings to address these issues. CEIOPS itself is aiming to create a more level playing field in terms of basic fundamental treatments across member states and greater understanding as to how the IORP Directive can be implemented.
Making a move
Even in the face of such uncertainty, multinationals can begin to separate the possible from the impossible in facilitating cross-border activities, ignoring clear non-starters and perhaps leaving more complex solutions for later. Member state regimes can be reviewed to identify preferred long term locations for pan-European pension plans, taking into account current laws, practice, supervisory expertise and likely developments over the medium term. Indeed, countries such as Luxembourg, Belgium and Ireland have actively encouraged the use of their particular regimes for this purpose. While very few ready-made solutions may currently be available in the marketplace, complete inaction is not an option if multinationals wish to avail themselves of some of the potential benefits now and be ready when more concrete solutions are launched.
Accordingly, multinationals should consider targeting a pan-European solution to help provide the vision, align key stakeholders and determine the strategy or journey to be undertaken. The journey itself is arguably more important as so much can be achieved along the way; indeed, implementing the final step of a pan-European pension plan could then be considered as the icing on the cake. This journey is one of harmonising and standardising the approach to occupational pension provision and is therefore consistent with the philosophy of the IORP Directive.
Priority actions in the following key areas consistent with the agreed-upon objectives should be considered:
Investments Ð While asset pooling on a cost effective basis has arguably only been available to large companies with several billion euros in pension fund assets, providers with multi-employer offerings are coming on stream and there are other options including "virtual pooling" and "preferred providers". In virtual pooling, the assets are not physically transferred into the vehicle, but are left in the individual local pension funds. Preferred providers is the weakest form of asset pooling, achieved through a preferred-provider structure;
Governance Ð The process of creating a pan-European pension plan and the ongoing operation facilitate control over a multinational's pension arrangements. A fit-for-purpose framework that delivers the right amount of governance for the assessed level of risk needs to be rooted in the organisation's objectives, corporate culture and management structure. The level of control required should be assessed in each of the areas of governance, benefit design, funding, investment, administration, communication and provider selections with reference to the strategic objectives for pensions;
Administration Ð In a pan-European context, the aim here could be to centralise and standardise as much as possible the various pension plan operations. Steps can be taken to centralise the authority over some of the operations and to standardise administration processes delivering similar outputs in order to reduce costs of duplication and risks of non-compliance;
Communication Ð A number of steps can be taken by multinationals to "brand" their pension offerings to help ensure that participant experience has the same look and feel from one country's operation to the next. This may be achieved through a combination of a corporate intranet site containing pension information, a more active web front-end to deliver their pension plan(s) and potentially the interface with an HR shared service center.
As each step is reviewed, the multinational should evaluate the likely benefit to the organisation, whether that is one of reduced costs or better risk management. This will also help provide the business case for the investment needed at each stage.
The chart on this page sets out what can be achieved at three different levels while recognising that the journey is not short and may proceed at different rates according to which countries and pension plans are to be included.
As companies continue to focus on extending good corporate governance and seek to limit their exposure to non-core risk through, for example, continued moves to DC or hybrid structures, the opportunity to take the intervening steps and establish a pan-European pension plan will be attractive.
Although many multinationals are currently wary of moving forward with a pan-European pension plan, the potential benefits available from the variety of solutions ranging from cross-border coordination of multi-domestic arrangements to full cross-border integration are such that the IORP Directive is just one feature. Despite the difficulties in the EU regulatory environment and the potential risk of operating in such an environment, these issues in one way or another are being addressed. Consideration of the "roadmap" above will help enable a multinational to be clear on what the right questions are in respect of its own unique occupational pension arrangements.
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