BRUSSELS, Belgium - European Union member states would be required to reduce minimum vesting periods to five years by 2010 under a pension portability directive drafted by the European Commission.
Most European states already meet the proposed vesting provision. But it might cause an uproar in Germany, which generally requires workers be employed for at least 10 years before they vest in their pension plans. Some experts fear Germany will block the directive.
The cost of shifting to five-year vesting might be too painful for Germany, which still is absorbing the burden of reunification, some observers believe.
Reducing the minimum vesting period to five years could boost pension costs by up to 30%, depending on worker mobility and a plan's structure, said Dieter Kleylein, a Frankfurt actuary who heads his own benefits consulting firm. The lack of pension portability rights is viewed as a major obstacle to the free movement of labor across Europe - one of the central planks of the European Union.
The European Commission's social policy and action division has drafted a directive that provides a framework for portability, but fails to address most details.
"It would be a significant step, but by no means the answer, to solving the problem of moving people around Europe," said Richard Malone, European policy director for Sedgwick Noble Lowndes, Croydon, England.
"To me, that document reads like a statement of good intentions. It doesn't have any nitty-gritty. It doesn't say how things will be achieved," he explained.
For example, the document, which has been obtained by , says the value of individual pension benefits in defined benefit plans should be guaranteed wherever possible. Actuarial calculations of the transfer value would be determined under Europeanwide actuarial guidelines.
That raises the mind-boggling prospect of actuaries across Europe trying to draft a common set of rules and practices. The problems are abundant. For example, some countries now dictate the interest-rate assumption in calculating transfer values. In contrast, in France's two mandatory systems, benefits cannot be paid out until retirement.
For defined contribution plan benefits, the draft document said the benefit "should be increased in accordance with the return on the assets invested prudently with (an) approved institution." Given the failure of EU member states to determine prudent investment policy in the now-withdrawn pensions directive, this issue could reopen a similar can of worms.
The biggest obstacle is that tax treatment of pension contributions and retirement benefits differs across Europe. Under some rules, retirees could be taxed by both the country where their benefits accrued and the country where they reside.
Still, the vesting provision is viewed as the most controversial rule in the draft. From the time of its adoption, the directive would require that minimum vesting be no more than eight years, and should be reduced to five years by 2010.
For most EU member states, the change will not cause a problem. In the United Kingdom, vesting occurs after two years of service. In the Netherlands, an employee vests at termination after one or more years of service.
Elsewhere, Ireland passed legislation in 1990 that requires five-year minimum vesting. In Switzerland, which remains outside the EU, a law that went into effect Jan. 1 requires immediate vesting.
Some countries, such as Italy, France, Sweden and Finland, are dominated by industrywide plans, which avoid portability problems, noted Colin Pugh, managing director of William M. Mercer International SA, Brussels.
But others still face problems. Portugal has no vesting rules meaning employees cannot vest in their pension benefits until retirement, regardless of how many years they work, Mr. Pugh said. Portuguese officials are discussing adoption of a vesting rule, he added.
Portugal, however, has few employer-provided pension plans. The real problem is Germany.
Minimum vesting rules in Germany provide for vesting after age 35 and at least 10 years of membership in the plan. Alternatively, an employee must have 12 years of service and at least three years of participation in the plan.
German companies discussed voluntarily shortening vesting periods prior to reunification with East Germany. But the costs involved have deferred any further discussions, Mr. Kleylein said.
Rather, German companies have reduced their pension costs by lowering benefit formulas, lengthening periods used for determining benefits or even not accepting new workers into pension plans, he added.
Lowering the vesting period to five years probably would accelerate the trend of reducing or eliminating pension benefits, he said.
Gunter Becher, director of The Wyatt Co. S.A.'s international consulting Europe group in Brussels, said he doubts "this draft directive will ever see the light of day in the form of a final directive."
Mr. Becher added that German pension industry group officials recently called for reforming German pension law. The association called for shortening vesting periods to five years, but only if the interest rate used in calculating pension liabilities were reduced to 3% to 5.5% instead of the current statutory level of 6%. This would substantially reduce pension liabilities and tax charges, he explained.
But Alan Broxson, chairman of the European Federation of Retirement Plans, said he senses a change in attitude among his German counterparts. "I have detected within my conversations with a number of a Germans a willingness to compromise on this issue," he said.
He said giving countries until 2010 to shift to five-year vesting might provide adequate time to effect the shift.
A European Commission official acknowledged that shortening the vesting period could be a sticking point, but he was hopeful of presenting a directive to the full commission by the end of May.
He said the document is designed to provide a framework only.