It has been a more than two years since the IORP Directive was due to be enacted by each of the member states. What has transpired since then? Are pan-European pensions now feasible? Frances Phillips Taft provides an overview of crossborder pension development
The prospect of pan-European pension plans has stirred significant interest in the industry as there are obvious and distinct advantages for companies in consolidating corporate pensions into a single plan. The advantages of such an arrangement are reduced costs, improved governance/ control and risk management. It also makes it easier for employees to work in different EU member states without jeopardising their benefits.
The IORP Directive proposes an EU-wide framework that would allow Institutions for Occupational Retirement Provision (IORPs) to take full advantage of the single market and sets up a structure that permits the establishment of pan-European pensions. The directive requires member states to allow companies in their jurisdictions to sponsor IORPs in other member states and vice versa.
The directive facilitates the creation and operation of cross-border pension arrangements within the EU. It does this by enabling a pension plan established in one member state that is compliant with the regulatory system in that state to extend its coverage to the company's or subsidiary's employees in other member states. This is called the "single-passport concept". The IORP must, however, comply with all the social and labour laws of the countries in which it is operating.
The provisions of the directive were to be adopted by each of the member states by 23 September 2005. However, by that date only four of the member states had complied. However, as of June 2007, implementation of the IORP Directive in each of the member states is now complete. A few problems still remain and these member states are subject to infringement procedures which have been launched by the European Commission.
The formal implementation process is now complete in all member states, though detailed regulation is still expected in some member states with respect to the proper transposition of the directive. The next stage will now turn to ensuring compliance and enforcement of the directive. A review of the implementation of the IORP Directive in the member states is set to take place in the first half of 2008.
Meetings have been held with the pension regulators in each of the member states to help them implement and transpose the directive. These discussions have dealt with those issues identified by the member states as sources of difficulty for enactment. That may give rise to a difference in interpretation by the member states.
The Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) has also been monitoring developments within the member states. The differences in the legal status of occupational pensions in each of the member states and in the management of IORPs have proven to be the greatest challenge.
Authorisation and notification procedures, interpretation of social and labour law, the definition of competent authorities and investment requirements placed on cross-border plans will be the committee's main focus in 2008. Clearer cross-border procedures are also required. Another issue is the clarification of when crossborder activity is actually taking place - the directive is clear that it is the IORP and employer location in different member states that is the trigger for cross-border activity. The commission will review this and the European Commission will shortly issue a second edition of its updated legal commentary.
The level of cross-border activity across the member states is a positive indicator that this aspect of the IORP Directive has been successful. According to CEIOPS, since implementation in 2005, nine cross-border arrangements have been put in place with the largest in Luxembourg. It accepted contributions from the UK, Netherlands, Germany, France, Poland, Austria, Belgium, Italy, Spain and Sweden. Approximately 48 cross-border arrangements have been established in the EU, but most of these arrangements were operable before the implementation of the IORP Directive in 2005 (see CEIOPS Report on Market Development, 7 March 2007).
On a parallel track to the implementation of the IORP Directive, rulings issued by the European Court of Justice (ECJ) have added momentum to the removal of tax barriers to assist in the implementation of pan-European pensions. The ECJ rulings have stated that member states are not permitted to treat pension plans established cross-border differently to domestic plans simply because the former was established in another member state. Member states are no longer permitted to have tax discriminatory practices on cross-border transfers between pension funds.
In the matter European Commission v. Belgium (Case C-522/04), the ECJ ruled it was against European law for the Belgian government to tax the transfer of the capital built up in a Belgian pension fund to a pension fund established in another member state when a similar transfer to another Belgian pension fund would attract no tax. This is the latest success in the European Commission's campaign to end tax policies that discriminate against foreign pension funds, which hinders the free movement of workers within the EU, a fundamental right under European law. Anticipating the decision, the Belgian government amended its tax law for pension funds.
The European Commission has also taken an assertive stance in its dealings with the member states and launched infringement proceedings against several other member states besides Belgium (including France, Spain, Italy, Ireland, the United Kingdom and Portugal) to dismantle unjustifiable tax discrimination legislation. The Commission has sent formal requests to these member states to amend their tax legislation, under which pension contributions paid to foreign funds are not tax-deductible, whereas contributions paid to domestic funds are tax deductible. Further, the Commission is also investigating and has opened infringement proceedings against nine EU member states for their allegedly discriminatory taxation of dividend and interest payments to foreign pension funds. Meanwhile other member states are still under investigation, including: the Czech Republic, Denmark, Lithuania, Netherlands, Poland, Portugal, Slovenia, Spain and Sweden.
The advantages of establishing a pan-European pension plan
These developments taken together indicate we are closer to the creation of pan-European pension plans. A pan-European plan may be established in two different ways; a totally new plan may be constructed or an existing plan may be adapted to meet the new rules.
There are options, as well, about where a company will set up a pan-European plan. For a company that already maintains a plan in a particular jurisdiction, but simply has groups of other employees in different countries, then the established plan may well be the sensible plan to convert to pan-European status. On the other hand, there may be reasons to set up a new pan-European plan in a particular member state. 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 and the Netherlands have promoted their jurisdictions as prime locations for the establishment of pan-European pension arrangements. However, the location of the plan will ultimately be set by multinational companies in particular which 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 occupational pension provision.
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