MADRID - A political compromise effectively has eliminated any benefits to multinational companies hoping to set up a single pan-European pension plan.
The current version of the draft European Union pensions directive, published at the end of May, allows plan sponsors of individual member countries to isolate and administer their citizen's pension assets separately within a cross-border pension plan.
That is close to how multinational companies manage their various European pension plans already, said Alan Rubenstein, head of the European pensions group at Morgan Stanley & Co. (Europe) Ltd., London.
A number of multinational companies already pool investment management of all their European pension plans using preferred provider arrangements, but administer the plans locally in each member country.
Multinational companies with operations across the European Union had hoped the directive would enable them to convert multiple European plans into a single pension plan with centralized administration and asset management operations. They also hoped the directive would limit the powers of member countries to specify funding requirements and quantitative investment restrictions and allow plan sponsors to follow the prudent man approach.
A coordinated system to tax cross-border pension contributions and benefits also would have accelerated the development of pan-European pension plans, but the directive did not address the issue. However a number of legal challenges in the European courts and ongoing work at the European Commission intends to address the issue over the next two to three years.
"I cannot see many companies that are going to take advantage of the directive," Mr. Rubenstein said. "It feels like (the terms of the current directive) would require a lot of hassle without much gain. I am not convinced that there are huge savings to be made," he added.
As well as allowing member countries to specify investment rules, the directive also requires cross-border pension plans to be fully funded at all times, which would add to the cost, he said.
"The draft directive does not give a level playing field for European pension funds," said Philip Lambert, global head of pensions and pension fund investments at Unilever PLC, London. "This is the first extremely modest step in a long process and that's the most positive view one could take."
A single set of EU-wide investment and basic solvency guidelines combined with tax harmonization are the ingredients that would make pan-European pension plans a reality.
Mr. Lambert said it was significant that political agreement finally had been reached on the pan-European pension issue but felt the content of the directive was "thin" and unlikely to generate the cost saving many sponsors had hoped to see.
He also was concerned that the legislation would allow member countries to uniformly impose more restrictive limits than specified in the directive on investments of both domestic and cross-border pension plans operating within their territory. The earlier draft of the directive had limited member states to imposing stricter investment rules on local pension plans on a case-by-case basis only.
According to the latest draft of the directive, member countries may request plan sponsors of pan-European pension plans based in other European Union countries to impose the following limits on assets held for their citizens:
* No more than 30% of total plan assets may be invested in non-euro-denominated assets;
* No more than 30% may be invested in unlisted stocks, and at least 70% of plan assets must be invested in listed securities;
* No more than 5% of plan assets may be invested in stock issued by the plan sponsor; and
* No more than 10% may be in shares of a single company.
U.K.-based actuaries are relieved the compromise, designed to get the support of all member countries, does not interfere with the prudent investor approach adopted by U.K. and Dutch pension plans.
There was concern the directive would impose EU-wide quantitative investment rules that were stricter than existing regimes in some member countries, said Gordon Pollock, worldwide partner at Mercer Human Resource Consulting, London.
According to Angel Martinez, deputy director of the Spanish Association of Collective Investment and Pension Funds and a vice president of the European Federation for Retirement Provision, it was necessary to give member countries discretion over investment rules in order to get a consensus on the directive.
"It is important to put the first stone in place, otherwise you cannot change what does not exist. The final writing is not as everyone desired, but there are 15 different states in Europe," he said.
But member countries also are allowed to exclude domestic pension plans with fewer than 100 members from the directive requirements, which will be good news for smaller companies, said Piia-Noora Kauppi, member of the European Parliament.
But she was concerned the current draft does not include an amendment made late last year by the European Parliament that would have required the abolition of quantitative limits for cross-border pension plans after five years.
The European Parliament has been generally supportive of the prudent investor concept, but Ms. Kauppi said she was not surprised quantitative limits had been included in order to secure a political settlement. She said she would lobby again for a five-year sunset clause for quantitative limits during the second reading of the draft later this year.
The directive was reworded earlier this year by the Council, or upper house, of the European Union to gain the support of France and Belgium. In early June, the French delegation to the EU Council accepted the terms of the draft. Belgium also was expected to accept the new draft at the next council meeting on June 21.
Belgium's support for the directive is not necessary, however, for the draft to proceed to its second and final reading in Parliament in September. The directive is expected to become law early next year, and member countries will have two years to incorporate it into local laws.