| For years, US corporations
operating in Europe have had to administer and finance
separate pension programmes for employees in each European
country where they do business. But with an increasing
number of multinational companies faced by the challenge
of running offices and factories in countries from the
UK to Spain, EU regulators have finally agreed to ease
the costly burden of operating under a patchwork of
pension regulation for millions of employees.
The solution is a new pan-European pension system created
under EU Directive 2003/41/EC, which recently became
EU law. The complicated provisions of the European Pension
Funds Directive are to be adopted by each of the member
states by 23 September 2005. Multinational companies
must comply with the Directive immediately afterward.
Ultimately, a pan-European pension system would make
companies operating in Europe – especially US-based
corporations – more competitive and profitable.
The Directive also makes cross-border mobility easier
for employees because it enables them to keep their
pensions going as they move among different EU countries.
The challenges and opportunities
While September 2005 may seem a long way off, the process
of preparing to comply with the new system can be timeconsuming.
Companies operating – or planning to operate –
in Europe should consider whether it is feasible to
establish a single pension benefit structure that allows
flexibility for different tax laws and employee rights
regulations in various countries. Those who act quickly
and learn how to navigate the complexity created by
the overlapping layers of new and existing rules will
reap the most savings up front and for the long run.
An additional motivator should be the impetus that once
a pan-European pension is implemented, there will be
significant financial and internal management economies
of scale, including:
- Greater supervision over all pension plans within
the EU. Although many companies do not wish to over-centralise
– it will always be important to acknowledge
different cultural and local issues – they are
becoming focused on the regulatory risk of running
a number of different arrangements. Mindful of the
balance that will be right for their own company,
multinational companies will have the opportunity
to tighten their control and management over their
pension plans and associated risk areas, such as corporate
governance obligations.
- Common administration, which is likely to lower
costs (although companies will still need to grapple
with language and communication issues)
- Better risk control
- Easier expatriate and mobility administration
- Pooling assets and streamlining investment management
potentially leading to higher returns and cost savings,
and reducing the risk of an unbalanced investment
strategy. A common financial strategy can be implemented
which will enable as much value as possible to be
extracted from the company’s pension assets
But even if you decide ultimately not to implement
a pan- European pension fund, the streamlining and compliance
exercises you undergo to learn the new system will likely
result in cost savings for your company. The trick is
to start learning the new system now and to begin taking
the necessary steps that will help you save your company
time and money when the Directive is implemented in
the EU member states by late summer of 2005. In an increasingly
competitive global economy, you can’t afford to
be left behind.
It is important to note that companies and pension schemes
which do not operate cross-border are also affected.
The Directive applies to every existing occupational
or company pension plan located anywhere in the EU,
with limited exemptions. Within a relatively short period
(member states have less than two years to implement
provisions of the Directive, by September 2005), pension
providers will find themselves having to deal with a
new layer of EU-inspired regulation. This will also
extend to cover the 10 new entrant EU member states
in due course.
Local jurisdiction issues
In many countries, national laws will already incorporate
the provisions of the Directive to some extent. However,
if they are intent on using existing systems to discharge
their new EU responsibilities, member states will need
to ensure that there are no gaps and no inconsistencies
between the domestic and EU requirements. This will
not always be easy.
The Directive requires all schemes to have at all times
sufficient and appropriate assets to cover their “technical
provisions” in respect of the total range of pension
schemes operated, and goes on to provide that any underfunded
scheme will need to adopt a recovery strategy in order
to ensure that it is fully funded within a limited period.
In the UK, the new Pensions Bill has attempted to define
the “technical provisions” required to be
covered under the Directive in a way consistent with
the scheme-specific funding requirement that will shortly
be introduced. In other cases, national laws will not
satisfy the requirements of the Directive, and will
need to be changed. Many EU countries have traditionally
imposed investment restrictions, requiring pension plan
administrators to invest a certain proportion of plan
assets in particular asset classes such as bonds, or
limiting the amount of overseas investment that can
be made.
These requirements are already being relaxed, and the
Directive will complete the process. Investments are
now to be made using the “prudent person”
test, subject to the ability of member states to retain
some limited restriction. All this will represent a
sea change for countries like Italy and Germany. The
domestic impact of the Directive will also be linked
to new requirements on disclosure to members and to
the treatment of pensions in company accounts, under
IAS19.
Implications of the Directive
The design of any pan-European plan will, of course,
largely be dictated by the company’s existing
arrangements and its benefits philosophy. However, a
company starting with a clean sheet of paper will naturally
gravitate towards defined contribution or money purchase
plan, if only because the Directive requirements for
cross-border schemes to be fully funded at all times
cease to be relevant.
There are options, as well, about where one can set
up a pan-European plan. For a company that already maintains
a plan in a particular jurisdiction, but simply has
groups of other employees in different countries, then
the established plan may well be the sensible plan to
convert to a pan- European status. On the other hand,
there may be reasons to set up a new pan-European plan
in a particular member state. Various member states
have begun trying to attract new pension business by
stressing the advantages of their regulatory or low
tax systems. In practice, the choice of home plan will
probably be determined by matters of common sense and
simplicity. Clearly, countries that have experience
of pension arrangements with a clear regulatory system
and a community of specialist advisers are likely to
prove attractive.
Finally, it should not be forgotten that any company
expanding by acquisition will have to grapple with other
aspects of EU practice. The recent decision in Martin
v SouthBank University (C-4/01), for example, is likely
to have an impact in relation to employers’ responsibility
for certain early retirement pensions following business
transfers. And the legislative onslaught hasn’t
stopped either. We are expecting that there will be
a new draft Directive on portability and vesting of
pension rights fairly soon. In addition, although the
cross-border pension system is nearly in place, each
country’s thorny national tax rules still hinder
smooth implementation of the Directive. Yet many of
those tax hurdles may be cleared in time, thanks to
legal challenges from European regulators under the
EU legal system.
Action points
So what action should US companies be thinking about
now? Although, the new Directive provides an opportunity
to consider the range of the company’s existing
pension plans, commercial strategy is a better starting
point. For reasons of cost, risk and compliance, many
company plans may already have been subject to scrutiny.
They now need to be looked at in a regional context.
Do the existing plans fit with the company’s objectives
in incentivising its employees? Are there cost savings
that can readily be obtained by using fewer firms of
advisers – asset managers, benefit consultants,
and so on? Next, what must they do now? Taking stock
of the funding positions of schemes would be a useful
and timely response. Planning now for meeting the new
disclosure requirements Europe-wide is another action
that can be initiated. Because both these latter points
will bite on all domestic schemes in the EU from 2005,
the work will not be wasted and could in fact be a good
basis for exploring cross-border issues thereafter.
Companies that are exploring ways of branding their
benefits package are also likely to consider how a common
framework of benefits could provide an opportunity to
reinforce the brand.
US companies operating in Europe should now consider
the part pensions play in their total reward strategy.
Only then should they consider whether it would be advantageous
for them to establish a single structure in order to
take advantage of the potential administrative savings
of one plan with its economies of scale which allows
flexibility for different benefit structures in different
member states. There will be significant opportunities
and consequences for the way these companies arrange
their employee retirement plans.
International benefits at Hammonds
Hammonds’ International Benefits Practice was
established in recognition of the growing need among
multinational clients for assistance in streamlining
their pensions and employee benefit programmes across
borders and in implementing global benefits frameworks
that embrace target benefits, employee contributions
and plan financing. Few law firms have the capability
to advise clients in this integrated fashion, but by
capitalising on the strengths of the pensions, tax and
employment teams across a network of international offices,
Hammonds can.
For more information, contact:
Jane Marshall,
Head of International Benefits Practice
Tel: +44 (0) 870 839 1120
Fax: +44 (0) 870 830 1001
E-mail:
jane.marshall@hammonds.com
Website: www.hammonds.com
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