On the European agenda since the early 1990s, pan-European pensions have finally received approval from all EU bodies. Jeremy Slater reports.

The European Union took a huge step forward in improving employee manoeuvrability when the European Parliament finally adopted a directive on occupational pensions in May 2003.

The directive, when it becomes law in 2005, will allow workers to transfer their pensions throughout an expanded EU of 25 states thus improving labour flexibility and the workings of the internal market, believes the European Commission. Both of these are high priorities for the Commission, which wants to make the EU the most competitive economy in the world by 2010.

The directive will have a significant impact on the way HR professionals work in international companies, as they will now have a legal template to create pan-European pension plans for their employees.

At present, most occupational pensions can operate only in the country in which they are established. A firm that has a presence in the EU must therefore call on the services of several different providers to run pension schemes. The Commission has estimated that for a multinational, this could cost as much as EUR 40 million a year.

The Commission claims that substantial economies of scale will be achieved if a business can manage all the various schemes it operates in several member states from one base.

The adopted directive will mutually recognise the current supervisory regimes that exist in each of the states of the EU.

Part of the thinking behind the Commission’s original proposal was that this will cut the costs of running such schemes and the company’s HR people will be able to manage their scheme using the laws applicable in its home country or hire registered specialists in other countries.

The directive sets a limit of up to 5 percent of all of a company’s assets which could be used to fund this type of scheme. Company-funded occupational pension schemes exist throughout most of the EU, but are most popular with businesses in the Netherlands, Ireland and the UK. These schemes are estimated, according to the Commission, to be worth at least EUR 2.3 billion and cover 25 percent of the EU’s working population.

Industry in general has welcomed the directive, although companies will have to make some changes under the rules. For instance, businesses may have to tell members of their pensions funds how much of their “promised” benefit they would receive if the scheme was wound up, according to Mercer Human Resource Consulting.

Mark Sullivan, European partner at Mercer, says: “Most employers assume their pension scheme will be ongoing, and so they set long-term investment strategies. If the scheme is prematurely wound up, the ratio of assets to liabilities will be a very volatile figure and much lower than planned.”

He adds: "At issue here is the mismatch between pension scheme promises and funding levels on a wind-up basis. Companies will need to invest in educating their members to help them interpret the figures and appreciate the risks.”

Reaction from HR consultancy Watson Wyatt was also fairly positive, but a spokesperson pointed out that an HR department may be involved in extra paper work as the directive expects a company or its representatives to keep policy holders “regularly informed about the funding position of the scheme”.

June 2003