Cross-Border Portability of Pension Rights: An Important Condition for an Integrated Market for Pens

This report gives recommendations on how pension portability could be improved in the EU based on discussions in a CEPS Task Force on Cross-Border Portability of Pension Rights.

Executive Summary

General Assessment

The lack of pension portability is a source of additional costs for European enterprises, both directly and indirectly, through loss of competitiveness and inefficient allocation of resources:

• Many multinationals are obliged to invent internal mechanisms to compensate employees previously benefiting from occupational (employment-related) pension schemes but who have lost their pension rights due to cross-frontier movements within the firm.
• Individuals moving to another EU country before full vesting of pension rights in an occupational pension scheme or “backloading” of vesting (see glossary) frequently are obliged to choose between two evils: leave the pension scheme in their country of origin or maintain this membership without being allowed to deduct the premiums from their taxable income in the country of residence.
• Lack of pension portability may induce multinational firms to abstain from moving employees to another EU member state or individuals to abstain from taking up residence in another country (and to change job within the country).
• In most EU member states, tax deductibility of premiums paid to pension schemes (including individual savings schemes) is allowed only if those premiums are paid to a pension scheme or insurance company located in the country. This segmentation of the pension markets (coming in addition to restrictions on the investment policy of pension funds) results in considerable hidden economic costs due to inefficient allocation of resources and fragmentation of the pension market.

With the specific aim of analysing and making recommendations with respect to pension portability, CEPS took the initiative in 2001 to convene a “Task Force”, inviting participation from all the major players in the pension field: pension funds, PAYG (pay as you go) pension institutions, fund managers, benefits consultants, financial institutions and multinational corporations with a particular interest in pension portability.

Whereas the issue of pension portability has several dimensions, the Task Force decided to focus in particular on the cost of and the scope for eliminating obstacles to cross-frontier mobility and to formulate recommendations in this respect.

We see several benefits accruing from increasing the portability of pensions and minimising portability losses in general:

• Increased portability will facilitate labour mobility both within and between member states. The free movement of workers within the single market is a fundamental right and we encourage the Commission to continue to press for the elimination of all measures of discrimination between sedentary and mobile workers within the various pension regimes.
• Increased portability and, ultimately, the possibility to create a pan-European pension fund for all staff members will lead to reduced administrative costs of the increasing number of firms undertaking cross-frontier production and distribution in an integrated approach.
• Revenues from occupational pension schemes are likely to improve as a result of increased competition and product development among scheme providers. With a better performance of second-pillar schemes, the pressure on first-pillar schemes will be alleviated. This is particularly welcome in view of the increasing pressure on first-pillar schemes as a result of the ageing of the European population over the coming decades.
• Minimising portability losses for employees without necessarily interfering with the basic nature of the pensions schemes (which for many firms remain an essential feature of the management of human resources) will also contribute to a reduction of costs and an increase in the scope for enhancing flexibility in the labour market.

Re commendations

In the course of its four meetings, the Task Force discussed a number of issues in the field of pension portability, including general portability issues, the role of taxation, methods of calculation of the actuarial value of pension claims and the relationship between pension portability and labour mobility.

We see a number of ways to improve cross-border portability of pension rights within the EU’s internal market:

• Improvement of the scope for transferring the capitalised value of pension rights between pension schemes;
• Coordination of, and increasing transparency in, actuarial calculation of the pension liability (claim);
• Mutual recognition of prudential surveillance of pension funds;
• Elimination of national restrictions on the cross-border membership of pension schemes;
• Elimination of restrictions on deductibility of premiums paid to pension schemes in other EU member states; and
• General shift to the EET (Exemption of contributions, Exemption of pension fund income and Taxation of retirements) principle of taxation of pension provision.

Best practice

• vesting of pension rights;
• degree of backloading;
• procedures for adjusting vested pension claims for general inflation; and
• approach to adjusting open-ended pension schemes for changes in life expectancy (as already introduced at least in one member state) and general approach to the actuarial standards for calculating the liability of pension schemes vis-à-vis their members.

  The following section highlights those cross-border issues that we take as being of special importance for the approach to pension portability at the European level.

Regulatory issues

The framework for prudential regulation outlined in the draft Directive for a European Institution for Occupational Retirement Provision (IORP) is, as should be expected, exclusively based on the principle of home country rule coupled with bilateral cooperation between member states to sort out cross-border issues. This may be appropriate during the first period of “running in” of the framework but it will be insufficient in the longer run. In the long term the EU should, in our view, envisage the creation of a formalised institutionalised framework for cooperation between national supervisory authorities.2 In the intermediate phase, consideration should be given to creating a Conference of Pension Fund Supervisors along the lines of the framework for cooperation existing in the field of insurance. An alternative would be to create a special working group under the Conference of Supervisors of Life Insurance. The agenda of this Conference/Working Group should include the following items:

• Vesting of pensions rights;
• Methods of adjustment of vested pension claims;
• Methods of assessment of bio-metric risks, including the assessment of life expectancy during the coming decades;
• Exchange of information on procedures for providing information to members;
• Exchange of information on methods of surveillance of pension fund investment;
• Guidelines for funding of technical provisions and own funds;
• Actuarial standards for calculating the capitalised value of pension claims;
• Rules for transferring vested pension rights from one pension scheme to another (within and between member states);
• Rules for prudential surveillance of a European Institution for Occupational Retirement Provision (EIORP); and Agreement of the definition of “best practice” towards which member states (old and new) should aim to converge.

Cross-border tax issues

The Task Force fully supports the view of the Commission concerning the need to eliminate all tax-induced obstacles to the cross-border provision of pension services and welcomes the recent judgement of the European Court of Justice on the Danner case. The Commission should make full use of its competence and responsibilities in relation to the effective implementation of single market principles in this area and step up pressure on member states to formulate a viable solution to the remaining issues in this field.

The Task Force recommends the general adoption of the EET principle as the basis for the taxation of pension schemes within the EU.

A pan-European pension fund

The Task Force considers that the creation of a European Institution for Occupational Retirement Provision (EIORP) as proposed by the European Federation for Retirement Provision (EFRP) and endorsed by the Commission would constitute an important step towards the integration of the internal market in the field of pension provision.

We regret that this idea, so far, does not seem to have retained the attention of the Council but invite member states to take steps to explore further the scope for undertaking a pilot scheme, as initially suggested by the EFRP.

The consultation of the social partners

The Task Force is not concerned by the procedure for consultation of the social partners initiated in June 2002, according to Art. 138 of the Treaty.

Nevertheless, we take the opportunity to volunteer a response to the questions put forward by the Commission, as follows.

As indicated above, the Task Force recommends an early creation of a “Conference of Pension Fund Supervisors” within the framework of the implementation of the Directive on IORPs. Whereas in general the cooperative arrangements within financial services cover only elementary rules of prudential surveillance, this Conference should also, in its agenda, include the rules for acquisition, preservation and transferability of supplementary pensions. We would advise against creating a parallel advisory body or “open cooperation” specifically addressing these aspects of pension schemes. We think it is preferable to cover all aspects of the portability of pensions and sustainability of pension schemes within the same framework.

In the opinion of the Task Force, the issue of pension portability should be extensively discussed with the social partners. However, we doubt whether action at the European level could and should be taken in the form of collective agreement. Furthermore, we doubt whether the adoption of a Directive concerning all aspects of the acquisition, preservation and transferability of pension rights would be possible and desirable in the present context. We therefore prefer the elaboration of codes of best practice and guidelines. The latter could, as indicated above, be elaborated within the framework of a “Conference of Pension Fund Supervisors”. We would nevertheless invite the Commission to issue a general recommendation concerning the shortening of vesting periods in all defined-benefit schemes.

As implicit in the answer to the preceding question, we consider that the portability of pensions and the prudential surveillance of pension schemes are matters still largely subject to the principle of “subsidiarity”. We would, however, recommend that the social partners would be associated (possibly in special working groups) with the work of the Conference if it were to be created as proposed above.

We would recommend taking whatever action is envisaged at a global (cross-sectoral) level.

We would have a preference for extending the procedures to all occupational pension schemes covered by the IORP Directive. This would include both schemes sponsored by an individual employer and those sponsored by a branch of industry. Whether or not a distinction should be made between pension entitlements based on individual employment contracts and those based on collective agreement is a matter on which the Task Force cannot judge. We would stress, nevertheless, that in the longer run we would expect an increase in the scope for the individual worker to select a pension provider in accordance with his lifestyle and career prospects.

Increasing flexibility and individual choice

We would therefore, more generally, recommend increasing the flexibility in the provision of pension services, including (as is already the case in certain member states) opting out of a general pension scheme for a firm or a branch in favour of individual savings or pension schemes. This would imply offering better possibilities than is now the case of passing from second-to-third pillar schemes.

Future action in the field of pension portability should therefore also examine ways of increasing the scope for enhancing individual choice of retirement provision, as accompanied by adequate and extended rules of deductibility of contributions to all such schemes. This is clearly not in the field of competence of the European Community but as a common issue it should be considered through a procedure of open coordination.

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Cross-Border Portability of Pension Rights: An Important Condition for an Integrated Market for Pension Provision.

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