PENSION FUNDS INIRELAND, FOR EUROPE

Summary of Presentation by Anne Maher, Chief Executive of the Pensions Board Ireland, to 66th Annual ABA Conference on 5th May 2004

EU Influences on Pensions

The European Parliament and the Council of the European Union recognize the need for an internal market for occupational retirement provision organized on a European scale. Completion of this internal market for retirement provision is seen as an essential step in completing the full internal market for financial services. Progress has been very slow, but a number of recent developments have now moved it forward. These are EU Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision (the “Pensions Directive”), recent moves by the EU Commission to enforce tax co-ordination for pensions and the completion of a Joint EU Commission/Council Report on adequate and sustainable pensions.

The Pensions Directive must be implemented into the national legislation of every member state by 23rd September 2005. Its key aims are to ensure protection for pension plan members, to liberalise the investment environment for pension plans in the EU and to remove barriers to cross-border pension plans. The Directive did not go as far as the original aim of the Commission but it is recognized as a good first step.

Effectively, the Pensions Directive provides a framework for Pan-European pension plans. A sponsoring undertaking in one member state (“the host state”) may set up an Institution for Occupational Retirement Provision (IORP) in another member state (“the home state”). This must be set up as a separate legal entity and must meet the information to members, funding, diversification and security of assets, and freedom of investment requirements of the Directive. It must be recognized by the home country supervisor and as a cross-border pension plan it is subject to a number of special conditions.

The Pensions Directive does not deal with tax co-ordination and many people believe that without tax co-ordination the Directive will not achieve its aims. However, the EU has sought to address the taxation issue through an EU Communication issued in April 2001 which dealt with the elimination of tax obstacles to the cross-border provision of occupational pensions. This Communication set out the view that discriminatory tax treatment of pension policies concluded with pensions institutions established in other member states is contrary to the fundamental freedoms of the EC Treaty. The Commission has now set about enforcing thisfreedom and has made it clear that it will enforce it by legal action if necessary. Already the Commission has referred Denmark to the European Court of Justice in July 2003 and infringement proceedings were opened against Italy, Belgium, Spain, France and Portugal in February 2003 and against the UK and Ireland in July 2003.

In the meantime, various parties have been trying to bring about tax co-ordination for pensions through referral of private cases to the European Court of Justice. In particular, the Wielockx, Safir, Danner and Skandia cases have all had Courts rulings supporting the view that preferential tax treatment for domestic pension arrangements is not permissible under European law.

The EU has also begun to co-ordinate information on national pension systems. It continues to confirm the principle of subsidiarity saying that member states retain full responsibility for organization of their pension systems and for the role of each of the Three Pillars of pensions within their systems. However, a Joint EU Commission/Council Report on pensions was completed in March 2003 and there are now some agreed common EU pension objectives relating to adequacy, financial sustainability and responding to changing needs. This showsan increasing interest in national pension activities by the EU. Other areas of interest for the EU, which they are influencing through legislation, are cross-border mobility and portability, gender and non-gender equality and the rights of atypical workers.

Pan-European and Cross-Border Pensions

The Pensions Directive allows an employer with employees in one member state to set up an IORP in another member state. Employers with pension funds in more than one member state would be able to combine the funds into a single IORP. To accomplish this objective, there must be mutual recognition of the supervisory regimes of all member states affected. Thus, if an IORP is established in member state A and it has members in member state B, C and D, those three countries would have to recognize the regulatory regime of member state A.

There are a number of reasons why employers may wish to establish pension arrangements in another member state. In the case of a single member state plan the main reason for deciding to set up its pension plan in another member state would be that it finds the local pension regulations too restrictive, or that the red tape is excessive and expensive. The main reason why employers with members in more than one member state may wish to combine the funds into a single IORP would be better governance and control, cost savings from a single investment strategy and centralised administration, and the ability to have a single corporate culture.

It is expected that there will be competition among member states to attract the registration of IORPs or to provide services or facilities for pooling of investment assets. Services which member states might offer are funds management or administration, legal, accounting, actuarial or investment consulting, and/or benefits administration.

There are already some services on offer and a number of countries are considering what else they may wish to offer and how they can make themselves attractive as locations for Pan-European or cross-border pensions.On the investment side, there are various scheme-specific solutions already in place for large pension funds whereby they have at least some form of centralised asset pooling. In 1996 the UK set up a unit trust exempt from all UK taxes in order to attract pension fund moneys but this did not appear to receive widespread support and there were a number of constraints on its operation. Luxembourg has a fund vehicle known as the Luxembourg Fund Communs de Placement (FCP) which is generally regarded by taxing authorities as a tax-transparent vehicle. Ireland introduced a new fund vehicle in 2003 known as a Common Contractual Fund (CCF) which closely mirrors the Luxembourg FCP.

Ireland as Home for Pan-European or Cross-Border Pensions

Firstly, Ireland has introduced its CCF which is a new investment vehicle aimed solely at enabling pension funds to pool their investments in a tax-efficient manner. It should enable multinationals to achieve investment management, administration and custody efficiencies by pooling the investments of their different pension funds into a single fund. The pension funds may pool all their investments into one fund vehicle or pool their investments in a particular country or region into one vehicle. Essentially the vehicle and its pension fund investors must be exempt from all local taxes where the vehicle is domiciled. The pension fund investors should be no worse off (from a tax perspective) as a result of pooling their investments than if they had invested directly in the relevant investments of the vehicle. This can be achieved by the tax authorities of the pension fund investors’ domicile and the tax authorities where the relevant investments are located agreeing to apply treaty benefits as if the pensions pooling vehicle did not exist i.e. treating it as tax-transparent. CCF is currently only available in the form of a UCITS but a non-UCITS version may be developed if a need for this emerges. This vehicle is seen as giving Ireland the opportunity to be the jurisdiction of choice for pension fund pooling.

Secondly, it has been suggested that Ireland may attract the registration IORPs from other member states. Ireland’s own private pension model consists of company pension plans and personal pensions. The personal pensions include Retirement Annuity Contracts, which are mainly available to self-employed people and a new flexible pensions vehicle known as a Personal Retirement Savings Account (PRSA). PRSA is a flexible, low-cost individual investment account available to all categories of people. Irish pension arrangements can be either on a defined benefit or a defined contribution basis and tax relief is available on employer and member contributions and on investments.

Ireland sees its pensions regulatory environment as an attraction for pension moneys or plans from other member states. The Irish regulatory system has a reasonable balance between necessary regulation and unnecessary cost. It focuses on good standards of information disclosure and an overall policy of promotion of pension security. It also works towards securing compliance without recourse to legal proceedings unless necessary. Ireland, together with the UK and the Netherlands, has the highest level of funded private pension arrangements and has a long tradition of pension provision and a wide range of competitive providers and products.

Amongst its strengths as a home for Pan-European or cross-border pensions, Ireland would offer:

  • its established and relatively simple regulatory regime
  • the Irish Financial Services Centre (IFSC) reputation
  • the familiarity of multinationals with doing business in Ireland
  • an established pool of service providers
  • well-developed pensions experience
  • structural flexibility.

Conclusion

The EU Pensions Directive needs to be properly implemented into the national law of all member states, including the new states joining the EU on 1st May, as an essential ingredient to any form of cross-border activity. Protocols will need to be agreed for cross-border supervision of pensions in order to facilitate cross-border pensions activity. Work has started on this through the new EU Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) and its underlying IORPS Working Party. Tax co-ordination remains an essential ingredient for all Pan-European and cross-border pensions activity and this will need to be seriously enforced by the EU Commission.

In conclusion, it is a time of change for pensions and it is also a time of great opportunity.

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