Cross-border schemes
The EU Directive on Institutions for Occupational Retirement Provision 2003/41 (Known as the “Occupational Pensions Directive” and Cross-Border Activity
- To enable an occupational pension scheme established in the UK to accept contributions from employers located in other EU Member States, in accordance with the provisions of the EU Occupational Pensions Directive (Directive 2003/41/EC).
- To allow an employer located in the UK to sponsor an occupational pension scheme established in another EU Member State.
- To ensure that an occupational pension scheme, irrespective of whether it is located in the UK or elsewhere in the EU complies with relevant UK pensions legislation in respect of UK members.
- The Pensions Regulator will be responsible for supervising ‘cross-border activity’ (as defined at bullets 1 and 2). The Regulator will have powers to authorise and approve UK schemes to operate across borders, monitor a scheme’s compliance with UK pensions legislation and take action as necessary where a breach of law is detected.
Find out more about the EU Directive on Institutions for Occupational Retirement Provisions 2003 on the European Union's website.
Background
One of the main objectives of the Directive on the Activities and Supervision of Institutions for Occupational Retirement Provision (commonly known as the ‘Occupational Pensions Directive’) is to put into place regulatory mechanisms to support the operation of pan-European occupational pension schemes. It represents a first step towards a single market for occupational retirement provision.
Although the objective of the Directive is to put in place a framework that removes barriers to the advancement of occupational pension schemes it is not the purpose to force Member States to necessarily develop such schemes. While the provisions of the Directive need to be transposed into domestic law to cover cross-border activity, it will be a matter for individual pension schemes to decide on whether they wish to engage in cross-border business.
- Find out more in our press release on the Directive.
There is no general financial impact as cross-border activity is a purely optional form of business transaction. However, pension schemes that do will be subject to a two-stage authorisation procedure and all also will need to be ‘fully funded at all times’. For defined benefit schemes, this will be a more stringent funding regime than a scheme-specific requirement, as it leaves no opportunity for a ‘recovery plan’. (This is a plan put in place to a bring a scheme up to its scheme specific funding level over a period of time.)
The Directive applies to occupational pensions (second pillar provision). The institutions involved cover about 25% of the EU labour force and manage assets worth 2,500 billion euros (29% of EU GDP) (European Commission Press Release 12.03.03).
What does this Directive do?
- The Directive puts in place regulatory mechanisms to support the operation of pan-European occupational pension schemes. It represents a first step towards a single market for occupational retirement provision.
- Crucially it leaves Member States free to determine the structure of their pensions systems in accordance with the principle of subsidiarity. So it does not aim to define the characteristics of a pension scheme or of the benefits it offers.
- The Directive anchors the prudent person investment approach in Community law whilst respecting the variety of pension systems in the Member States and delivers some liberalisation of investment rules currently applied by some Member States.
- It also establishes the principle that it is acceptable for pension schemes to operate across borders.
- The Directive only applies to funded occupational pension schemes. It does not apply to state schemes or personal pensions.
Worked examples
Multinational model
At present occupational pension providers operate for the most part in the Member State in which they are established. A firm which has a presence in all 25 Member States must therefore call on the services of 25 different providers. Substantial economies of scale may therefore be achieved if a single institution can manage all of the various schemes of a firm operating in several Member States.
Example
A multi-national operating in a number of EU states through subsidiary companies wants to consolidate its pension arrangement in one member state.
The Member State where the scheme is consolidated is the home member state with the Member States of the remaining subsidiary companies being host Member States.
If the UK is the home Member State, the whole scheme would be regulated under the UK system (including having the scheme set up under trust) but the scheme would also have to comply with the host Member State ‘social and labour law’ requirements (see below) – in respect of the members in those Member States.
If, for instance, the Netherlands is the home Member State, the UK could still impose its ‘social and labour law in respect of occupational pensions’ (ie relevant elements of pensions law) on the scheme in respect of its UK members.
The ‘off-shore model’
An employer in one Member State wants to site their pension scheme in another Member State as it prefers the regulatory regime in that Member State.
The Member State where the scheme is based is the home Member State and will regulate the scheme under its national legislation (even if there are no members in that Member State). The Member State where the employer and members are located is the host Member State and can impose ‘social and labour law’ requirements on the scheme.
Therefore, a French employer could seek to locate its scheme in the UK and would be regulated by The Pensions Regulator, but would still have to comply with (as yet unquantified) French pensions legislation. Similarly, a UK employer could locate its scheme in Poland, which would be regulated by the Polish regulator – but it would still have to comply with relevant UK pensions law deemed applicable.
- Find out more about the Government's pension reform plans.