UK/EU - Britain has been given two years to bring its pension policies in line with European law.
The European Pensions Directive – which aims to slash the time underfunded schemes are given to make good any shortfall – will take effect from September 2005.
The directive requires every pension scheme to have sufficient and appropriate assets to cover “technical provisions” – a term lawyers say is deliberately vague to account for the UK’s specific funding requirements – at all times.
Hammonds’ head of international benefits practice Jane Marshall said: “There was a lot of concern whether there would be a Europe-wide funding standard in some way.
“We have taken this to mean it will allow for scheme-specific funding requirements. It’s not an additional funding requirement.”
However, the directive does state that institutions can only be underfunded for “a limited period of time”, which the government will have to work into its new regulations.
Currently, OPRA can grant firms elongated repayment extensions to make good a minimum funding requirement deficit.
But Sacker & Partners partner Peter Docking said this might have to change.
“There are areas where the department for work and pensions will have to think hard.
“Funding deficits are only permitted for a ‘limited period of time’. How does this fit in with common UK practice of spreading deficits over the average expected future working lifetime of active members? This might typically be 10 to 15 years. Is this too long?”
The directive also sets out “investment rules” for schemes. It states that assets should be “properly diversified in such a way to avoid excessive reliance on any particular asset, issuer or group of undertakings and accumulations of risk”.
Schemes will not be allowed to invest more than 70% of their whole portfolio in equities, negotiable securities treated as shares and corporate bonds.
An upper limit of 30% will also be placed on investing in “assets covering technical provisions in assets denominated in currencies other than those in which the liabilities are expressed”.
The pensions directive came into effect last month when it was formally published in the EU’s Official Journal.
*Separately, nearly half of Europe’s top multinationals are not considering the creation of a pan-european pension fund.
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