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Brussels, 11 October 2000

Institutions for occupational retirement provision: Commission proposes directive

The Commission has presented a proposal for a directive on institutions for occupational retirement provision (pension funds, superannuation schemes, etc.). The aim is to create a prudential framework so as to ensure a high level of protection for the rights of future pensioners. The proposal also seeks to ensure that institutions enjoy sufficient freedom to develop an effective investment policy. They must thus be able to invest sufficiently in shares, as in the long run these have generally offered good returns and make it possible to link pension promises to growth in productivity and in the real economy. Institutions will be able to benefit from the greater depth and liquidity of the capital markets resulting from the introduction of the euro, thereby increasing the effectiveness and security of their investments. The proposal for a directive also seeks to enable an institution in one Member State to manage company pension schemes in other Member States. Adopted as part of the action plan to create a single market in financial services by 2005 (see IP/00/556), the proposal heeds the call of the Lisbon European Council of March 2000 to speed up measures "facilitating the successful participation of all investors in an integrated market eliminating barriers to investment in pension funds".

In the words of Internal Market Commissioner Frits Bolkestein, "institutions for occupational retirement provision play a major role in promoting social cohesion in many Member States and in financing Europe's economy. In view of the ageing of the Union's population, such institutions must be able to operate with the utmost security and efficiency. The security of pensions is of prime importance: the rights of future pensioners must be protected by strict prudential standards. But the cost of pensions must also be borne in mind. Benefits must not become too costly through low returns or excessive administrative constraints. Firms' competitiveness would be affected, the financial equilibrium of pension schemes would be more difficult to achieve and pensioners might receive less in the way of benefits. Consequently, the proposal for a directive seeks to ensure both the security and the affordability of occupational pension schemes."

The Lisbon Summit issued a reminder of the need to complete the single market and render it fully operational. In particular, the emergence of stable, efficient and integrated financial markets must be speeded up: by protecting savers as fully as possible and promoting better capital allocation, these markets act as essential vectors of growth and employment.

This is why the Heads of State or Government have called for the Commission's Financial Services Action Plan to be implemented in full by 2005. The establishment of a specific Community framework for institutions for occupational retirement provision (IORPs) is a central plank of that plan.

These institutions (pension funds, superannuation schemes, etc.), which cover about 25% of the Union's labour force and manage assets worth €2 300 billion, must be able to benefit fully from the advantages of the single market and the euro without being hampered by unnecessary restrictions.

Such was the line already taken in the communication on supplementary pensions published by the Commission on 11 May 1999 (see IP/99/328), which announced the drawing-up of the present proposal for a directive.

Twofold objective of security and affordability

It is vital that future pensioners' means of subsistence should enjoy a very high level of protection. But IORPs must also operate efficiently, particularly as regards financial investments and cross-border transactions. An improvement in performance, however small, can in the long run greatly reduce the cost of benefits. Inadequate protection, on the other hand, places retirement benefits at risk. A lack of efficiency increases the cost of saving, to the detriment of firms' competitiveness and pension schemes' financial equilibrium.

The proposal for a directive thus contains three sets of rules designed to ensure both security and affordability:

    1. Strict prudential rules to protect beneficiaries

    IORPs must be subject to detailed rules of operation. Members and beneficiaries must be properly informed of the terms of the scheme, the financial situation of the institution and their rights. Benefits promised must be calculated prudently and be covered by sufficient assets. If an IORP offers any financial guarantees, it must hold own funds. Finally, the supervisory authorities must have the necessary powers to monitor adequately the IORPs for which they are responsible.

    2. Investment rules tailored to the characteristics of IORPs and geared towards effective savings management

    IORPs invest on a very long-term basis (several decades). They receive regular contributions and can predict with relative ease the level of benefits they will have to pay out. They should, therefore, be allowed a certain amount of freedom in determining the investment policy which best suits their commitments. The proposal provides that this policy should, in any event, ensure that the assets are fairly widely spread at all times. It also provides that investment in shares, which generally offer high long-term returns with moderate volatility, and in risk capital should not be unduly restricted. Such investment makes it possible to link pension commitments to growth in productivity and in the real economy. In return, it can also contribute in the long term to better financing of the economy and stronger growth in the Union.

    Under the proposal, Member States would have the option of subjecting IORPs established within their jurisdiction to more detailed investment rules, but they would in any event have to allow such institutions to invest up to 70% of their technical provisions or portfolio in shares and corporate bonds and at least 30% in currencies other than the currency of their future pension liabilities. Lastly, the proposal seeks to grant IORPs the right to appoint any asset manager or custodian duly authorised in a Member State.

    3. Rules enabling cross-border management of occupational pension schemes

    At present, occupational pension providers operate for the most part only in the Member State in which they are established. A firm which has a presence in all 15 Member States must therefore call on the services of 15 different providers. For a multinational, this would cost about €40 million a year. Substantial economies of scale could be achieved if one institution could manage the various schemes of one and the same firm. This would require mutual recognition of Member States' supervisory regimes - one of the key aims of the proposal. An IORP must be able to manage the schemes of firms located in other Member States while applying the prudential rules of the State in which it is established (home-country control).

    As for social security and labour regulations, which are not affected by the proposal, the rules of the country in which the firm is situated would continue to apply (host-country rules). Once adopted, the proposal for a directive will mark the end of the first stage of the process of removing the obstacles which currently stand in the way of such cross-border management. It will need to be followed by suitable tax coordination measures. The Commission intends to present in 2001 a comprehensive approach to the problems connected with the taxation of pension funds.

Respecting Member States' prerogatives in relation to social protection and pension schemes

Organising social protection and pension schemes is a matter for the Member States alone. The choice between pay-as-you-go schemes and funded schemes, the balance between these schemes and the encouragement of this or that form of retirement saving are entirely up to them.

The proposal for a directive leaves all of this untouched. It is designed simply to enable the single market to be exploited to the full, in the interests first and foremost of future pensioners and strictly in accordance with national prerogatives. For all that, a coherent Community framework enhancing the security and efficiency of IORPs and enabling them to profit fully from the single market and the euro will be a major asset for those Member States which wish to develop the role of occupational schemes in their pensions system (see also IP/00/1143 on the communication Safe and sustainable pensions).

The proposal for a directive will be transmitted to the Council and Parliament for adoption under the codecision procedure. The Financial Services Action Plan is scheduled for adoption in 2002.

The full text of the proposal is available on the Europa Internet site:

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