Compromise on EU pensions directive grants boon for cross-border schemes

Rowan Harris contributed to the writing of this blog post.

Revised Directive may permit cross-border schemes to use recovery plans – but is this too little, too late?

The Council of the European Union has published the amended text of a draft revision of the directive which applies to UK workplace pension schemes.  The text includes some interesting changes for sponsoring employers.

Cross-border schemes

The Presidency compromise contains a number of suggested easements and changes. Chief among them is an amendment to the current requirement for schemes which operate cross-border to be fully funded (on a technical provisions basis) at all times. It had previously been reported that the Directive would remove this requirement, but the first published draft did not reflect this.

Under the amended wording, cross-border schemes will only be required to be fully funded at the start of cross-border activity. If underfunding is later apparent, this may be rectified by the use of a recovery plan. This will bring cross-border schemes more into line with other schemes and reduce barriers to cross-border provision – a key aim of the revision of the Directive.

The revised wording also clarifies the processes around transferring all or part of a scheme’s assets and liabilities to a scheme authorised in another member state.

Only 75 schemes operated actively cross-border in July 2014, and the majority of cross-border activity was in relation to the UK and Ireland. Employers including BT have cited the stricter funding requirements as one of several key reasons why employers have not historically had the appetite to set up cross-border schemes. While the revised wording is a step in the right direction, differences in taxation and social and labour laws are likely to mean that the number of cross-border schemes will remain low.

Key functions

The Directive will require schemes to have a number of 'key functions', or administrative tasks:

• risk management
• internal audit
• internal control
• actuarial

Schemes will be required to set out policies in relation to these functions and review them every three years (the earlier draft had required an annual review).

If there is already a person or department carrying out a similar function for the sponsoring employer (with the exception of the internal audit function), the revised wording clarifies that they can fulfil the same function for the pension scheme provided that appropriate steps have been taken to prevent conflicts of interest.  This will be of particular interest to smaller schemes which may not have the resources to set up their own functions.

Questions remain

The Directive is likely to impose additional costs on schemes in relation to its governance aspects. How extensive this is will depend on how the provisions are transposed into UK law, and we are encouraged by the 'where it's not broken, let's not fix it' stance taken by the Government and the Pensions Regulator.

However, it appears that the UK has not yet been able to obtain concessions on new 'fit and proper' requirements for trustees and others running pension schemes. The wording still apparently requires trustees to have adequate 'professional qualifications, knowledge and experience' and it is not clear whether this will apply at the level of the trustee board as a whole, including its advisers – or for each individual trustee.

A representative of the European Commission has recently stated that the wording is not intended to stop trustees from fulfilling their positions as at present, but this is far from clear in the draft Directive.

Parliament and Council will now need to agree the amended proposal for the Directive in order to be adopted.

For more information or to discuss the issues raised in this blog, please contact Rowan Harris on 01242 538500 or rowan.harris@barnett-waddingham.co.uk.