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International Pensions

By Lowtax Editorial
31 October, 2013


This feature looks at the European Union’s efforts to improve the portability of occupational pension rights and to remove barriers preventing the establishment of a true EU pensions market generally.


Background

Statutory pension rights of people working in another EU member state have actually been well protected nearly since the beginning of the European Economic Community thanks to EU-wide coordination of social security systems. However, an equivalent protection for the increasingly important occupational or 'second pillar' pensions has never been established. Therefore, citizens who move between Member States – or even between different occupational schemes within one state – may lose out on their occupational pension.


Portability

The European Commission, which proposes and drafts new European laws, has in fact been trying to improve the portability of pension rights for almost a decade, and it was back in October 2005 that it grandly announced that workers switching jobs or countries would no longer have to worry about substantial loss of work pension benefits under the 'portability of pensions' Directive that it had proposed. Previously, changing job or country could mean losing occupational pension benefits in some Member States. But the proposal announced by the EC would mean avoiding major losses, and in many cases allowing benefits to transfer with the worker across sectors and countries in the EU.

The Directive aimed to help the growing numbers of EU workers who are switching jobs, and was designed to reduce the obstacles to mobility within and between Member States caused by supplementary pension schemes provisions. These obstacles relate to: the conditions of acquisition of pension rights (such as different qualifying periods before which workers acquire rights), the conditions of preservation of dormant pension rights (such as pension rights losing value over time) and the transferability of acquired rights. The proposal also seeks to improve the information given to workers on how mobility may affect supplementary pension rights.

The proposed legislation has not however had an easy ride. After the European Parliament did considerable damage to the main planks of the Directive in 2007, the Commission announced in October 2007 that it had adopted an amended proposal taking on the majority of the European Parliament's amendments, focusing on the setting of minimum requirements for better access to pension rights, clearer rights of preservation so mobile workers' pensions are treated fairly, and improved access to useful and timely information. The aim of the Directive is now to ensure that workers are not penalised because of mobility rather than to enforce transferability, the original goal of the legislation.

Finally, in June 2013, the EU's Council of Employment, Social Policy, Health and Consumer Affairs agreed on the Commission’s general approach for a directive on improving portability of supplementary pension rights. The Commission says that the proposed directive constitutes “a first, but very important, step” on removing obstacles to free movement relating to supplementary pensions. However, this Directive does not cover the "portability" of supplementary pensions, i.e. the possibility of acquiring pension rights (even for shorter periods of employment than the required minimum "vesting period" or at the beginning of one's career) and keeping pension entitlements by transferring them to a new scheme in the event of professional mobility.

The agreement was welcomed by László Andor, European Commissioner for Employment, Social Affairs and Inclusion, who said that: "The Council's endorsement of the proposed pension portability Directive is an important step towards ensuring that people can move to work in another Member State without losing their occupational pension benefits. People who exercise their right to free movement should not be penalised. This is important not only for the mobility of individuals, but also for the functioning of a genuine EU labour market. I now urge the European Parliament to adopt the Directive as soon as possible."

The European pension and insurance industry seems unimpressed by the proposed directive though. The German pensions association, aba, for instance, commented in a position paper on the proposals that: "It cannot be expected that the coverage of occupational pensions will increase as a result of this Directive." The Aba argued that the Directive’s regulations regarding vesting periods and the protection of deferred pension rights would limit the "established function" of occupational pensions to retain employees in a company.

"So far, occupational pensions have been used in countries like Germany to retain mostly qualified employees and strengthen their ties to their employer," the association observed. "Very high mobility of workers, which inhibits the creation and preservation of company-specific human capital, negatively impacts the medium and long-term economic success and is therefore neither in the interest of individual companies nor the overall economy."

The association argued that mutual tax recognition for occupational pensions within the new Directive for periods when workers are posted abroad would be a better way to enhance worker mobility and increase the attractiveness of occupational pensions.

In a position paper published in May 2013, Insurance Europe welcomed the European Commission’s efforts to address the development of pension systems in Europe. However, it said that “a number of issues should be appropriately dealt with to avoid unintended consequences.”

Insurance Europe stated that it “strongly” believes that conditions relating to the acquisition and the preservation of pension rights should be dealt with at national level. “The differing approaches to state pension provision and the wide variation in supplementary pension provision between member states further justify the argument for action at member state level only.”

Even so, it could be some time before the directive actually becomes law. The European Parliament has still to adopt the amended proposal, following which the Council (effectively the member states) must adopt the Directive. After this, the member states would be required to implement the directive in national legislation within three years, although, if necessary, this could be extended by two years.


IORP

Another EU Directive, 2003/41/EC, on the activities and supervision of Institutions for Occupational Retirement Provision, known colloquially as IORP, which attempts to create a Europe-wide market for pensions provision, is a framework directive, and fairly toothless at that - it has been left to individual countries to implement regulations under the Directive. As of 2007 all Member States had notified their implementation measures, although two infringement procedures for incorrect implementation are still open. The European Commission has since announced a review of the IORP Directive which entailed a public hearing in September 2011 and the preparation of an impact assessment in advance of new proposals.

In its Call for Advice (CfA) on the review of the IORP Directive the Commission expressed the intention to introduce a harmonised, risk-based prudential regime for IORPs. The objective of the regime is to increase the number of pan-European pension funds from its current low level. In addition, the new framework should ensure regulatory consistency between sectors and enhance protection of members and beneficiaries.

A key proposal is the “holistic balance sheet”, which is seen by the European Insurance and Occupational Pensions Authority as a way to achieve the Commission’s aim for harmonisation. It is said that this will enable IORPs to take into account the various adjustment mechanisms (conditional indexation, reduction of accrued rights) and security mechanisms (regulatory own funds, sponsor support, pension protection funds) in an explicit way. In other words, the approach proposed by EIOPA is to acknowledge the existing diversity of occupational pension systems in the EU Member States, while capturing all these systems into a single balance sheet.

The pensions industry is worried about key elements of the proposals, however, particularly holistic balance sheet proposal and the imposition on funded pension schemes of Solvency II, a regulatory regime applicable to insurance companies. The UK National Association of Pension Funds (NAPF) for example fears that the changes would significantly increase funding requirements for defined benefit schemes, leading to more scheme closures and sponsor bankruptcies.

However, in May 2013, European Commissioner for the Internal Market, Michel Barnier, postponed plans to incorporate the new funding regime into the new IORP Directive, a decision strongly welcomed by the NAPF.

Barnier indicated his intention to come forward with a proposal for a Directive to improve the governance and transparency of occupational pension funds in the autumn of 2013. As yet though, no proposals have been forthcoming.


Tax

For the time being, therefore, hopes for a Europe-wide pensions market probably rest with the European Court of Justice (ECJ), which has taken several member states to task over the last decade or so with regards tax rules which discriminate against non-residents.

A key ruling was made by the ECJ in 2002 in the Danner case when it held that payments made voluntarily into a pension scheme in another member state should be allowed to benefit from tax breaks available in the state where the pension scheme operates. In the case in question, Rolf Danner, a doctor, had dual Finnish and German nationality. While working in Germany, he began to contribute to two German pension schemes; after moving to Finland, he continued to contribute to the German schemes. The Finnish government, like most governments, attempted to tax the contributions more heavily than if they had been made to a Finnish scheme, but the Court ruled that the Finns must apply the same rules as would apply inside Finland. "Governments should not be restricting or disallowing tax deductions applying to contributions to voluntary pension schemes paid to pension providers in other member states," the court stated.

In 2003, the ECJ dismantled another barrier to an EU pensions market when it rejected the Swedish Government’s arguments in favour of pensions taxation rules that discriminate against non-Swedish insurers. But 2007 was seen as a watershed year in the EU authorities’ efforts to promote harmonized treatment of private pensions. That year, the ECJ ruled that Denmark was in breach of European law on freedom of movement of workers and capital by not granting tax-deductions on contributions to pension contracts with foreign insurers. Also, the Commission launched infringement proceedings against Belgium, Spain, Italy, the Netherlands and Portugal for taxing dividend and interest payments to foreign pension funds (outbound payments) more heavily than dividend and interest payments to domestic pension funds. Then EU Taxation and Customs Commissioner László Kovács said that the European pension industry had complained about higher taxation of pension funds if they exercised their rights under the EC Treaty to invest across the border. "The Commission is taking these complaints seriously and has decided to start formal enquiries," he added.

EU law on the free movement of persons stipulates that member states should not introduce discriminatory policies regarding where a taxpayer chooses to retire whilst retaining their pension.


Conclusion

So, given all the heat and light that has been generated by the EU on these issues, is the situation any better for individuals with occupational pensions who have worked in more than one member state than it was say 10 years ago? Maybe slightly, but generally not much judging by the above. Maybe things will improve, but on current evidence, it is going to take a long time.This feature looks at the European Union’s efforts to improve the portability of occupational pension rights and to remove barriers preventing the establishment of a true EU pensions market generally.


Background

Statutory pension rights of people working in another EU member state have actually been well protected nearly since the beginning of the European Economic Community thanks to EU-wide coordination of social security systems. However, an equivalent protection for the increasingly important occupational or 'second pillar' pensions has never been established. Therefore, citizens who move between Member States – or even between different occupational schemes within one state – may lose out on their occupational pension.


Portability

The European Commission, which proposes and drafts new European laws, has in fact been trying to improve the portability of pension rights for almost a decade, and it was back in October 2005 that it grandly announced that workers switching jobs or countries would no longer have to worry about substantial loss of work pension benefits under the 'portability of pensions' Directive that it had proposed. Previously, changing job or country could mean losing occupational pension benefits in some Member States. But the proposal announced by the EC would mean avoiding major losses, and in many cases allowing benefits to transfer with the worker across sectors and countries in the EU.

The Directive aimed to help the growing numbers of EU workers who are switching jobs, and was designed to reduce the obstacles to mobility within and between Member States caused by supplementary pension schemes provisions. These obstacles relate to: the conditions of acquisition of pension rights (such as different qualifying periods before which workers acquire rights), the conditions of preservation of dormant pension rights (such as pension rights losing value over time) and the transferability of acquired rights. The proposal also seeks to improve the information given to workers on how mobility may affect supplementary pension rights.

The proposed legislation has not however had an easy ride. After the European Parliament did considerable damage to the main planks of the Directive in 2007, the Commission announced in October 2007 that it had adopted an amended proposal taking on the majority of the European Parliament's amendments, focusing on the setting of minimum requirements for better access to pension rights, clearer rights of preservation so mobile workers' pensions are treated fairly, and improved access to useful and timely information. The aim of the Directive is now to ensure that workers are not penalised because of mobility rather than to enforce transferability, the original goal of the legislation.

Finally, in June 2013, the EU's Council of Employment, Social Policy, Health and Consumer Affairs agreed on the Commission’s general approach for a directive on improving portability of supplementary pension rights. The Commission says that the proposed directive constitutes “a first, but very important, step” on removing obstacles to free movement relating to supplementary pensions. However, this Directive does not cover the "portability" of supplementary pensions, i.e. the possibility of acquiring pension rights (even for shorter periods of employment than the required minimum "vesting period" or at the beginning of one's career) and keeping pension entitlements by transferring them to a new scheme in the event of professional mobility.

The agreement was welcomed by László Andor, European Commissioner for Employment, Social Affairs and Inclusion, who said that: "The Council's endorsement of the proposed pension portability Directive is an important step towards ensuring that people can move to work in another Member State without losing their occupational pension benefits. People who exercise their right to free movement should not be penalised. This is important not only for the mobility of individuals, but also for the functioning of a genuine EU labour market. I now urge the European Parliament to adopt the Directive as soon as possible."

The European pension and insurance industry seems unimpressed by the proposed directive though. The German pensions association, aba, for instance, commented in a position paper on the proposals that: "It cannot be expected that the coverage of occupational pensions will increase as a result of this Directive." The Aba argued that the Directive’s regulations regarding vesting periods and the protection of deferred pension rights would limit the "established function" of occupational pensions to retain employees in a company.

"So far, occupational pensions have been used in countries like Germany to retain mostly qualified employees and strengthen their ties to their employer," the association observed. "Very high mobility of workers, which inhibits the creation and preservation of company-specific human capital, negatively impacts the medium and long-term economic success and is therefore neither in the interest of individual companies nor the overall economy."

The association argued that mutual tax recognition for occupational pensions within the new Directive for periods when workers are posted abroad would be a better way to enhance worker mobility and increase the attractiveness of occupational pensions.

In a position paper published in May 2013, Insurance Europe welcomed the European Commission’s efforts to address the development of pension systems in Europe. However, it said that “a number of issues should be appropriately dealt with to avoid unintended consequences.”

Insurance Europe stated that it “strongly” believes that conditions relating to the acquisition and the preservation of pension rights should be dealt with at national level. “The differing approaches to state pension provision and the wide variation in supplementary pension provision between member states further justify the argument for action at member state level only.”

Even so, it could be some time before the directive actually becomes law. The European Parliament has still to adopt the amended proposal, following which the Council (effectively the member states) must adopt the Directive. After this, the member states would be required to implement the directive in national legislation within three years, although, if necessary, this could be extended by two years.


IORP

Another EU Directive, 2003/41/EC, on the activities and supervision of Institutions for Occupational Retirement Provision, known colloquially as IORP, which attempts to create a Europe-wide market for pensions provision, is a framework directive, and fairly toothless at that - it has been left to individual countries to implement regulations under the Directive. As of 2007 all Member States had notified their implementation measures, although two infringement procedures for incorrect implementation are still open. The European Commission has since announced a review of the IORP Directive which entailed a public hearing in September 2011 and the preparation of an impact assessment in advance of new proposals.

In its Call for Advice (CfA) on the review of the IORP Directive the Commission expressed the intention to introduce a harmonised, risk-based prudential regime for IORPs. The objective of the regime is to increase the number of pan-European pension funds from its current low level. In addition, the new framework should ensure regulatory consistency between sectors and enhance protection of members and beneficiaries.

A key proposal is the “holistic balance sheet”, which is seen by the European Insurance and Occupational Pensions Authority as a way to achieve the Commission’s aim for harmonisation. It is said that this will enable IORPs to take into account the various adjustment mechanisms (conditional indexation, reduction of accrued rights) and security mechanisms (regulatory own funds, sponsor support, pension protection funds) in an explicit way. In other words, the approach proposed by EIOPA is to acknowledge the existing diversity of occupational pension systems in the EU Member States, while capturing all these systems into a single balance sheet.

The pensions industry is worried about key elements of the proposals, however, particularly holistic balance sheet proposal and the imposition on funded pension schemes of Solvency II, a regulatory regime applicable to insurance companies. The UK National Association of Pension Funds (NAPF) for example fears that the changes would significantly increase funding requirements for defined benefit schemes, leading to more scheme closures and sponsor bankruptcies.

However, in May 2013, European Commissioner for the Internal Market, Michel Barnier, postponed plans to incorporate the new funding regime into the new IORP Directive, a decision strongly welcomed by the NAPF.

Barnier indicated his intention to come forward with a proposal for a Directive to improve the governance and transparency of occupational pension funds in the autumn of 2013. As yet though, no proposals have been forthcoming.


Tax

For the time being, therefore, hopes for a Europe-wide pensions market probably rest with the European Court of Justice (ECJ), which has taken several member states to task over the last decade or so with regards tax rules which discriminate against non-residents.

A key ruling was made by the ECJ in 2002 in the Danner case when it held that payments made voluntarily into a pension scheme in another member state should be allowed to benefit from tax breaks available in the state where the pension scheme operates. In the case in question, Rolf Danner, a doctor, had dual Finnish and German nationality. While working in Germany, he began to contribute to two German pension schemes; after moving to Finland, he continued to contribute to the German schemes. The Finnish government, like most governments, attempted to tax the contributions more heavily than if they had been made to a Finnish scheme, but the Court ruled that the Finns must apply the same rules as would apply inside Finland. "Governments should not be restricting or disallowing tax deductions applying to contributions to voluntary pension schemes paid to pension providers in other member states," the court stated.

In 2003, the ECJ dismantled another barrier to an EU pensions market when it rejected the Swedish Government’s arguments in favour of pensions taxation rules that discriminate against non-Swedish insurers. But 2007 was seen as a watershed year in the EU authorities’ efforts to promote harmonized treatment of private pensions. That year, the ECJ ruled that Denmark was in breach of European law on freedom of movement of workers and capital by not granting tax-deductions on contributions to pension contracts with foreign insurers. Also, the Commission launched infringement proceedings against Belgium, Spain, Italy, the Netherlands and Portugal for taxing dividend and interest payments to foreign pension funds (outbound payments) more heavily than dividend and interest payments to domestic pension funds. Then EU Taxation and Customs Commissioner László Kovács said that the European pension industry had complained about higher taxation of pension funds if they exercised their rights under the EC Treaty to invest across the border. "The Commission is taking these complaints seriously and has decided to start formal enquiries," he added.

EU law on the free movement of persons stipulates that member states should not introduce discriminatory policies regarding where a taxpayer chooses to retire whilst retaining their pension.


Conclusion

So, given all the heat and light that has been generated by the EU on these issues, is the situation any better for individuals with occupational pensions who have worked in more than one member state than it was say 10 years ago? Maybe slightly, but generally not much judging by the above. Maybe things will improve, but on current evidence, it is going to take a long time.





 

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