BRUSSELS - While national governments in Europe are variously tinkering or completely overhauling their state-sponsored pension systems, initiatives to introduce occupational pension plans are gathering momentum.
An innocuous-looking, buff-colored, four-page document is causing quite a stir in Brussels, the seat of the European Parliament.
The document in question is the grandly titled "Proposal for a directive on the activities of occupational pension provision institutions," which if passed into European Union law will allow pension plans to operate across the EU's national boundaries.
This is something pension managers working for multinational plan sponsors dream about at night. Reform of "second-pillar," or corporate, pension plans is now firmly on the European agenda.
While reform of first-pillar, or state, pension provisions by a number of EU member states is key to the long-term stability of the European Union and the euro, it's an area where the European Parliament can't go, according to people from senior ministers on down to low-level civil servants. All the parliament can do is make sure there are no barriers to the free flow of capital or people across Europe's borders.
And when it comes to pensions, that means finding ways to coordinate member states' tax policies on pension contributions and benefits, drawing up laws on what a cross-border pension plan will look like, under what investment rules such a plan will work and how it will be regulated.
The current proposal attempts to walk a fine line between ensuring security of pensions and creating an environment conducive to low-cost, high-value benefits. At this stage, however, the directive covers only pension schemes with 100 members or more.
Smaller pension schemes and their sponsors would have to rely on bilateral agreements between member states to set up cross-border provisions.
The membership limit might be reduced in the next few months, said an EU spokesman.
Realistically, pan-European institutions for occupational retirement provision are unlikely to appear before 2004.
The proposal or draft directive is being examined by a European parliamentary subcommittee that is trying to find consensus and distill it into a bill before it can proceed to a reading and debate in the parliament.
The consensus version of the draft is expected to be completed by June, but it could take at least another 18 months for it to be voted into EU law. Member states then will have about a year to write it into their domestic legislation.
Most lobbyists, whether from the insurance, asset management or plan sponsor fraternities, agree the current draft directive is a step in the right direction.
But a number of contentious issues, such as investment limits and technical provisions for the funds, need to be resolved.
At a public hearing in Brussels last month, Philip Lambert, London-based Unilever PLC's global head of pensions and pension fund investments, launched a stinging attack on the draft directive.
Mr. Lambert's speech had even Kees van Rees, chairman of the European Federation for Retirement Provision, representing European corporate pension plans, shifting uneasily in his seat. Although he is not keen on the proposal, Mr. van Rees fears Mr. Lambert's comments could alienate the European Parliament
Mr. Lambert said the directive was biased toward insurance companies and would increase the cost of pension provision by multinational companies. He said it would discourage smaller plan sponsors from providing pension plans for their employees. If the proposal is not changed, he said, pension plans offering some form of financial guarantee, such as defined benefit plans, will have to set aside regulatory capital in the same way that insurance companies are obliged to do now.
"It would be totally counterproductive to impose a stricter regime of regulations on pension funds just for the sake of creating a level playing field for individual insurance policies. The proposal opens the door to more stringent funding requirements," he said.
Fears about restrictions
Mr. Lambert was particularly concerned that the directive would introduce unnecessary investment restrictions on defined contribution plans.
The proposal also suggests that cross-border defined benefit and defined contribution plans set their investment strategies according to the so-called prudent investor principle. But, and here is the rub, national governments not comfortable with that principle would be allowed to impose investment restrictions that put a 70% ceiling on equity investing and a 30% cap on investments in non-domestic currencies.
"It's a step back and makes pension funds dependent on the willingness of member states to go beyond what is set out in the directive," Mr. Lambert said. "Unless the concept of this draft is fundamentally changed, the conclusion has to be again that it is better to have no directive at all."
Mr. Van Rees was a little more diplomatic in his comments, but also raised concerns that pension plans would have to set aside regulatory capital and be fully funded.
Others, such as Jean-Francois Schock, State Street Global Advisors' head of European sales and marketing, have said that instead of requiring that plans be 100% funded, the directive should have allowed dynamic minimum funding requirements that would give plan sponsors flexibility.
Mr. Van Rees asked that the proposal allowing member states to avoid the prudent-investor rule and set their own investment rules be removed.
Sources close to the Internal Market Directorate-general, the department responsible for drawing up the proposal, say the clause allowing member states to impose investment rules on pension funds should be seen as the lubricant that will ease the legislation through the cogs of the European Parliament.
Without it, the proposal probably would not be passed, they say. Certain lobby groups and some member states such as France, where pension plans are considered anathema in some quarters, already are extremely concerned that the proposal does not do enough to protect plan members and could erode intergenerational solidarity, the foundation of pay-as-you-go schemes.
(In France, a recent attempt to reform industrywide pension plans hit a snag. The French employers group MEDEF reached agreement last month with two trade unions to find ways to merge the administration systems of the mandatory industrywide pension plans AGIRC and ARRCO. But two influential trade unions - Force Ouvriere and Confederation Generale du Travail - walked out of the talks and are not party to the agreement, which is "ambiguous" but part of employers' attempts to reform the system, according to Arnaud D'Yvoire of Observatiore des Retraites, Paris.)
For the EU, reaching consensus on the final document will be tough. But tougher still will be coordinating the taxation of cross-border pension benefits and contributions. Until member states tax contributions and benefits on the same basis, it will be difficult to establish a fully functioning single market for occupational pensions, according to Frits Bolkestein, commissioner for the internal market. The European Commission is expected this month to publish a proposal on the issue of tax coordination across Europe's borders.