Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the activities of institutions for occupational retirement provision

(presented by the Commission)

EXPLANATORY MEMORANDUM

The Lisbon European Council placed strong emphasis on the need to integrate financial services and markets within the Union. A single financial market will be a key factor in promoting the competitiveness of the European economy, the development of the new economy and social cohesion. That is why the Heads of State and Government called for the Financial Services Action Plan to be implemented by 2005. In its conclusions, the Presidency stresses that priority must be given to removing the remaining barriers to investment in the field of pension funds.

Such funds play a major role in promoting social cohesion in many Member States and in financing Europe's economy. In view of the ageing of the Union's population, it is vital to ensure that they can operate with maximum security and efficiency.

The security of pensions is of prime importance: the rights of future pensioners must be protected by strict prudential standards. However, attention must also be paid to the cost of pensions. If pension benefits are too expensive given low returns or excessive administrative constraints, everyone will lose out. The competitiveness of firms will be affected, it will be more difficult for the pension schemes to break even and pensioners might end up receiving smaller benefits.

Consequently, this proposal for a Directive on institutions for occupational retirement provision is designed to strike the best possible balance between security and affordability.

1. General comments

1.1. The need for a Community legal framework covering institutions for occupational retirement provision

(a) Institutions for occupational retirement provision and their social and economic importance

There are three main categories of pension schemes in the Member States: social security schemes, individual schemes, which generally take the form of contracts or products taken out with life-assurance companies, and occupational schemes. The general organisation and financing of these schemes is the responsibility of the Member States.

Occupational schemes generally involve employer and employees paying into a savings scheme, out of which retirement benefits will be paid to these same employees. Such schemes may be set up within the company itself or may use the services of a separate financial institution (e.g. pension fund, "Pensionskassen" or investment fund) which receives the contributions, invests them and pays out the retirement benefits.

Such institutions, which will here be referred to as "institutions for occupational retirement provision" (IORPs), play a major role in retirement and social protection systems in a number of Member States. It is estimated that close on 25% of the Union's active population is covered by an occupational pension scheme. The proportion can be higher than 80% in some countries, such as the Netherlands or Denmark, while relatively low in others. The share of occupational pensions in total pensions is around 10%.

The value of the assets held by these institutions exceeds EUR 2 000 billion, i.e. it is equivalent to about 25% of the Union's GDP (a little more than 45% for the assets of insurance companies). They thus play, along with the other financial institutions, a key role in financing Europe's economy and in the operation of the Union's capital markets.

IORPs are also characterised by the very long-term nature of their activities, both in terms of commitment of the sponsoring undertaking and in terms of investment. They invest for several decades and, since contributions paid to an IORP can in general not be withdrawn before the age of retirement, they ought to have a very good idea of what their cash requirements will be. This allows them, if they consider it appropriate in the light of the nature and duration of the liabilities, to invest significantly in relatively non-liquid assets such as shares, including those issued by small businesses, or even unlisted securities. IORPs can thus contribute to risk capital development in accordance with the guidelines set out in the Risk Capital Action Plan [1], which was endorsed by the Cardiff European Council. With a view to improving the diversification of their investment portfolios, they can also invest substantially in foreign securities. 75% of the assets of UK pension funds in 1998, for example, were in shares. A third of these shares were foreign.

[1] SEC(98) 552 final.

Institutions for occupational retirement provision thus play a major role in national social protection systems, in the financing of the Union's economy and in the integration of its capital markets. There is good reason to think that, in the decades to come, they will remain at the centre of economic and social change in the Union. Demographic developments (extension of life expectancy and fall in birth rates) are prompting the growth of pension savings. The latter can help to reduce public expenditure while also guaranteeing a high level of retirement benefits and thus the preservation of the European social model. IORPs are investing more in shares, considered more advantageous in the long term. In doing so, they contribute to the increase of the stock market capitalisation of the Member States, which is still about half that of the United States. Lastly, it may be desired by sponsoring undertakings and beneficiaries that IORPs provide pension services across Europe.

These developments mean that an appropriate Community framework must be set in place.

(b) The absence of a Community framework and the negative consequences of this gap

The European Union now has detailed prudential rules for credit institutions, insurance companies and undertakings for collective investment in transferable securities (UCITS). These rules provide security for consumers and investors. A proposal for a Directive relating to the freedom of management and investment of funds held by institutions for retirement provision [2] had to be withdrawn by the Commission in 1994 since no satisfactory agreement could be found in the Council. To date, the activities of IORPs have not been subject to any specific Community rules. This gap has several negative consequences.

[2] COM(93) 237 final.

- Investment. There is no agreement within the Community on how IORPs can use the single market and the euro to optimise their investments in financial markets. The rules to which they must adhere vary greatly from one Member State to another. The possibility cannot be ruled out that some of these rules go beyond what is necessary to ensure the IORPs' prudential soundness. If so, this could hinder the application of the principle of the free movement of capital and damage the IORPs' returns. Between 1984 and 1998, average annual real return on investments by IORPs was around 6% in the Member States with strict quantitative investment rules and more than 10% in Member States with rules that give managers more freedom. Lower returns mean lower pay-outs or higher contributions. The indirect cost of labour rises, as does the cost of financing retirement systems. Investment policy in the field of supplementary pensions depends on the pension product and the contractual obligation of the pension provider. By limiting opportunities for diversification of assets, rules that are too restrictive might also complicate risk management and reduce the security of investment portfolios. Excessive restrictions on shares, which are usually less volatile than government bonds in the long term given their link to economic and productivity growth, can have a negative impact in this regard. It is therefore vital that an agreement be reached on investment rules that are suited to the more extensive and more liquid capital market that is the result of economic and monetary union.

- Allocation of savings. IORPs have a key role to play in the integration, efficiency and liquidity of these markets. As very long-term investors, they are ideally placed to assist the financing of private initiatives. While the security and profitability of investment portfolios is a priority objective, a Community framework can also ensure that the IORPs participate in the efficient allocation of savings in the Union.

- Managing and custody of assets. IORPs may find themselves obliged to use only the services of custodians or asset managers established in the same Member State as themselves. However, if IORPs are to be given the means of improving their investment policy, they must be able to choose their managers freely. Investment in a given sector or region may require the services or advice of a specialised manager, who may not necessarily be based in the same Member State as the IORP. Furthermore, if competition between managers and between custodians were increased, this might help to cut management costs and make management more efficient. There ought to be specific community rules giving IORPs the right to use the services of managers duly authorised under the investment services Directive, the Directive on credit institutions and the third life-assurance Directive [3]. This right should be extended to management companies in accordance with a proposal for a Directive on UCITS [4] currently being discussed by Council and Parliament.

[3] Directives 93/22/EEC, 2000/12/EC and 92/96/EEC.

[4] COM(1998) 451.

- Cross-border activities. In the absence of proper coordination at Community level, IORPs are the only major financial institutions unable to provide their services in a Member State other than their own on the same conditions as banks, insurance companies and investment firms. It has been calculated that, for a pan-European company, the cost of setting up separate occupational systems in each Member State is about EUR 40 million per year. Allowing IORPs to manage schemes for companies established in another Member State would result in economies of scale of several types: more efficient investment policies as a result of asset pooling, simplification of administration and compliance with the prudential and reporting rules of a single supervisory authority. Furthermore, labour mobility would become easier: workers could more easily take up a job in another Member State if they could remain members of the same IORP, as is foreseen, for posted workers under the terms of Title II of Regulation (EEC) No 1408/71, in Directive 98/49/EC on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community; multinationals would come up against fewer obstacles to moving their employees from one Member State to another.

- Growth of the IORPs. Promoting occupational retirement savings can help to balance the financing of pension systems and put state schemes on a sounder financial footing. This decision is for the Member States to take and requires in particular that appropriate tax incentives be set in place. The existence of a legal framework containing European prudential standards and allowing cross-border management of occupational schemes would however be more conducive to the growth of IORPs than are the partitioning of markets and the regulatory patchwork that prevail today.

(c) The results of the consultation process launched by the Commission and the Financial Services Action Plan

The European Parliament, Economic and Social Committee and the financial services sector have been pressing for several years for the establishment of a European framework for IORPs. This is quite clear from the consultation process and the proposals made by the Commission in a Green Paper [5] in 1997 and a Communication [6] in 1999. On 13 April 2000, the European Parliament adopted a Resolution [7] which welcomes the Commission's intention to propose a Directive on supplementary pensions.

[5] COM(97) 283.

[6] COM(1999) 134.

[7] Resolution A5-0053/2000.

Several Member States also expressed their support, in their responses to the 1997 Green Paper, for the adoption of a directive. Furthermore, the Member States, at the Cologne European Council in June 1999, endorsed the Financial Services Action Plan [8] proposed by the Commission in May 1999. One of the strategic objectives of this Plan consists in establishing a genuine single market for wholesale financial transactions. The adoption of legislative provisions on investments by IORPs is presented in the Plan as a prerequisite to attaining this objective.

[8] COM(1999) 232.

The proposed Directive lays down prudential rules designed to ensure that occupational pension transactions attain a high level of security and efficiency. These rules also allow mutual recognition of the supervisory systems of the Member States, a prerequisite for cross-border management of occupational schemes.

1.2. The objectives of the proposal

(a) Secure and efficient investment

The proposed Directive stresses a qualitative approach to investment rules. Investment portfolio management should preferably comply with principles (security, quality, liquidity, return, diversification) and not uniform quantitative requirements. In this way, each IORP can apply the principles listed according to the nature and duration of its liabilities. This will guarantee security and efficiency. In Member States which take this approach, the returns on investments by IORPs are usually higher than those in Member States with a more quantitative approach.

Discussions so far have tended to indicate that some Member States would nevertheless prefer to continue to apply certain quantitative rules to IORPs established on their territory. This is essentially because supervisory methods used in those Member States are closely linked to the application of quantitative rules. The proposed Directive takes their wishes into account. However, it does propose that three types of investment should not be restricted excessively: shares, securities denominated in a non-matching currency, and risk capital. Where IORPs have very long term liabilities and face relatively low liquidity risks, they should be given the possibility to invest significantly in securities that are not very liquid and are denominated in a different currency from that in which the liability is denominated.

(b) Free choice of asset managers and custodians

As indicated above, IORPs should be guaranteed the right to use the services of any duly authorised manager or custodian within the Union.

(c) Level playing-field between all service providers

Life-assurance companies operate on the market for occupational pensions via group contracts. Such companies are regulated at Community level by the life-assurance Directives. Prudential rules for other IORPs should therefore be determined in such a way as not to introduce distortions of competition. The establishment of a real prudential framework should in general avoid such distortions. In addition, where the services of IORPs resemble those offered in group contracts - for example, where the IORP offers a financial guarantee - similar rules to those set out in the life-assurance Directives are suggested for own capital requirements. If a Member State considers that greater consistency must be implemented in the prudential treatment of IORPs and life-assurance companies, it should be able to apply certain prudential provisions of this Directive to the occupational pension business of life-assurance companies. This option is given to Member States.

(d) Cross-border activities

By harmonising certain basic prudential rules, establishing mutual recognition of national prudential systems and proposing a system of notification and cooperation between competent authorities, this Directive removes all prudential barriers to cross-border management of IORP pension schemes. If cross-border activities is to become a reality, a certain degree of tax coordination between Member States will also be necessary. It should in particular be possible for companies and employees to obtain tax relief on contributions that are paid into a IORP established in another Member State. In other words, contributions to domestic IORP's and to IORP's established in other Member States should be treated with neutrality. This aspect is not dealt with here but will be the subject of a separate proposal by the Commission.

Furthermore, the Directive stipulates that cross-border management must comply with social and labour legislation in the country of the company within which the scheme is established. Schemes must be run in conformity with national provisions, regardless of where the IORP is located.

(e) Protection of beneficiaries

Cross-border activities require a certain level of prudential harmonisation. Before allowing an IORP established in another Member State to manage pension schemes on its territory, each Member State must ensure that the IORP in question is regulated and supervised in such a way that the rights of beneficiaries are given appropriate protection. This proposal therefore includes a set of basic prudential rules (competence and good repute of managers, conditions for access to the activity, information provided to members and beneficiaries, regulatory own funds, investment rules), together with rules on IORP liabilities including technical provisions.

Generally speaking, affording the best protection to future pensioners is the Commission's primary objective. Contributions paid to an IORP are a form of deferred salary. The rights acquired by the payment of these contributions determine the standard of living of those concerned. Protecting these rights is thus at the very heart of the wider objective of strengthening the European social model.

(f) The single market for financial services

Coordinating investment and management rules applicable to IORPs is one of the components of the Financial Services Action Plan. With a major gap in current Community legislation on financial services filled, a decisive step will have been taken in the direction of a single market for financial services capable of fully promoting growth and employment.

(g) The single market for supplementary pensions

The adoption of this Directive would also be a step towards allowing supplementary pension provision to be organised at the level of the Single Market. Investors would have access to a wider choice of service providers and workers could move around without running the risk of losing part of their pension rights. This would contribute to economic and social progress, but will require greater coordination of the tax, social and labour legislation of the Member States.

1.3. The approach taken

(a) Avoiding any interference in the organisation of pension systems in the Member States

The general organisation of pension schemes, the choice of financing mechanisms and the precise arrangements for the operation of IORPs fall within the competence of the Member States as long as Treaty rules are respected. This prerogative is not compromised by the current proposal.

(b) Ensuring consistency with Community financial services legislation

The approach taken in preparing this proposal was institution-based, in accordance with the approach taken in all other Community legislation adopted in the financial services field. Such an approach is also suited to the cross-border activity mechanisms that, it is hoped, will be set in place. None the less, the prudential rules are inseparable from the benefits promised by the IORPs (defined benefits or contributions, possible cover of biometric risks). The proposed Directive therefore includes, where necessary, rules that are differentiated according to the type of scheme.

(c) Establishing a coherent scope

The Directive covers all IORPs which operate on a funded basis and are outside the social security systems. This ensures that, in a field where disparities between countries are very wide by comparison with other financial activities, the scope of the Directive is relatively coherent.

Briefly, any institution that receives contributions and invests them with the sole purpose of paying out retirement benefits is considered to be an IORP. It is vital that the assets held by IORPs cannot be used for any purpose other than the payment of capital or an annuity at retirement age. In other words, the rights acquired cannot be "surrendered" before the age of retirement, otherwise the scheme does not constitute a pension scheme but a savings product.

The Directive does not stipulate that benefits must be paid out in the form of an annuity or that precise biometric risks need to be covered by the institution. When discussing the Communication on supplementary pensions, the Parliament focused a great deal on this specific issue and finally came to the conclusion that longevity risks needed to be insured.

From the point of view of the Commission, it is desirable that the precise arrangements for the payment of benefits, which are often dependent on national tax, labour and social law, be decided inside the Member States. Moreover, prudential standards need to be established which apply to all occupational pension products. Companies and investors would gain nothing from certain products (in this case defined contribution schemes which provide only for the payment of capital without covering biometrical risks) being excluded from all European legislation. Therefore, all types of IORP schemes are covered in this Directive, even if the Commission considers that cover for longevity risks in particular is an important aspect of the fight against poverty and insecurity among elderly people.

The few IORPs which operate on a pay-as-you-go basis are not covered by the proposed Directive. This does not pose any problems given the main policy objectives of the proposal. The efficiency of financial investments and the use of managers from other Member States are not issues for these institutions, which use contributions to finance pay-outs directly. Member States or competent institutions cope with mismatches between contributions and benefits through additional contributions or tax revenues.

Firms which establish book reserves in order to provide retirement benefits to their employees are also not covered by this Directive. The use of book reserves, which is permitted in a limited number of Member States only, leaves firms completely free to decide how to use the assets covering their liabilities. Guaranteeing freedom of investment and management by means of a Directive therefore does not seem necessary here. Moreover, a guarantee or insolvency insurance fund generally replaces any prudential rules.

Lastly, consultations so far have shown that neither IORPs operating on a pay-as-you-go basis nor firms which establish book reserves wish to benefit from cross-border activities, at least by using these types of schemes.

(d) Taking account of national diversity while ensuring a high level of protection

IORPs operate very differently from one Member State to another. In some Member States, they resemble life-assurance companies. In others, they are more like investment funds. The Directive proposed takes account of these differences, which are often linked to tax and social security legislation in the Member States. It cannot seek to harmonise in detail the conditions under which IORPs operate.

Their diversity also necessarily restricts the degree of prudential harmonisation that can be attained by this initial proposal for a Directive. However, an extremely rigorous approach has been adopted for the most crucial prudential aspects (financing liabilities, diversification of assets, information to be provided to the supervisory authorities, members and beneficiaries). This should enable the fundamental objective of a high level of protection for the rights of present and future pensioners to be attained and to permit mutual recognition.

2. Description of articles

Article 2 - Scope

- This proposal is concerned with institutions operating occupational pension schemes. These are private schemes, usually seen as supplementing statutory social security schemes. It is essential to preserve a clear distinction between statutory social security and private/supplementary schemes. This proposal is therefore not concerned with social security schemes which are covered by the term "legislation" as defined by Article 1 of Regulation (EEC) No 1408/71 or in respect of which a Member State has made a declaration under that Article.

- Life-insurance companies, Undertakings for Collective Investment in Transferable Securities (UCITS), credit institutions and institutions covered by the Investment Service Directive already benefit from a Single Market framework. It does not seem to be necessary to include them in this new Directive, even though they might be capable of providing occupational pension services.

- In Germany, institutions known as "Unterstützungskassen" are one of the practicable forms of financing occupational pensions. Unterstützungskassen are support funds and similar to IORPs in that the accumulation of assets is external. The difference between these funds and IORPs is that no legal right to benefits of a certain amount is established for members. For tax reasons Unterstützungskassen are generally underfunded. The employer can redeem the assets at any time and not necessarily meet its obligation for payments. A statutory insolvency insurance is compulsory in order to protect the interests of the members adequately. Thus Unterstützungskassen are not subject to any prudential supervision. Given these characteristics, such funds cannot be compared to IORPs in other Member States covered by this Directive and are therefore excluded.

- Firms which establish book reserves in order to provide retirement benefits to their employees are also not covered by this Directive. The use of book reserves, which is permitted in a limited number of Member States only, leaves firms completely free to decide how to use the assets covering their liabilities. Guaranteeing freedom of investment and management by means of a directive therefore does not seem necessary here. Moreover, a guarantee or insolvency insurance fund generally replaces any prudential rules.

- The few IORPs which operate on a pay-as-you-go basis are also not covered by the proposed Directive. The efficiency of financial investments and the use of managers from other Member States are not issues for these institutions, which use contributions to finance pay-outs directly. Member States or competent institutions cope with mismatches between contributions and benefits through additional contributions or tax revenues.

Article 3 - Application to institutions operating social security schemes

In at least one Member State, IORPs have to operate two types of schemes: voluntary employment related pension schemes (considered as supplementing social security) and compulsory employment related pension schemes (considered as social security). It is proposed to include these institutions for the voluntary/supplementary part of their activity.

Article 4 - Optional application to institutions covered by Directive 79/267/EEC

As already mentioned as regards Article 2, it does not seem necessary to include life-insurance companies, Undertakings for Collective Investment in Transferable Securities (UCITS), credit institutions and institutions covered by the Investment Service Directive in this Directive. However, any inequality of treatment resulting from separate prudential frameworks must be avoided. The problem could arise in particular in the case of life-assurance companies, which have a strong presence on the occupational pension market (through group contracts) in some Member States. The establishment of a genuine prudential framework should in itself largely eliminate the risks of distortion of competition. The draft also provides that institutions that are similar in some respects to life-assurance companies (in that they give an interest-rate guarantee and/or cover biometric risks) will also be the subject of equivalent provisions for own funds (see in particular Article 17). In addition, the Directive gives the possibility to Member States to apply the prudential requirements of this Directive to the occupational pension business of life-assurance companies.

Article 5 - Small pension schemes and statutory schemes

- A "de minimis provision" is proposed, as an option for Member States, for IORPs managing small pension schemes. These institutions are likely to be not interested in any form of cross-border activity. Such a provision could facilitate supervision in Member States where tens of thousands of occupational pension schemes are in place.

- In some Member States, occupational retirement provision can be operated by institutions which are covered by a public authority with revenue raising powers. Such a cover is deemed to be sufficient for the protection of members and beneficiaries.

Article 6 - Definitions

- This Directive is intended to apply to employment-related institutions for pension provision that operate on a funded basis. These are the last major financial institutions which are not covered by an EU regulatory framework allowing them to benefit from the Single Market. The notion of "institution for occupational retirement provision" was chosen because it seems generic enough to cater for the diversity of institutions operating in the Union. The notion of "pension funds", for instance, is not common to all Member States. Some of these institutions may also offer services not only to undertakings but also directly to employees or self-employed persons. The Directive is designed to cover such situations.

- The "sponsoring undertaking" is usually characterised by the fact that it pays contributions into the institution for retirement provision. It can happen, however, that sponsoring undertakings are granted "contribution holidays" because the returns on investment are sufficient to cover the costs. It can also happen that a specific benefit is fully financed by contributions paid by employees. It is understood that these exceptional circumstances do not impact on the validity of the definition.

The definition of "retirement benefits" needs to be sufficiently wide in order to cover the various operations carried out by the institutions concerned

Article 7 - Activities of the institutions

The protection of beneficiaries requires that the IORPs limit their activities to those that will be supervised under the future Directive.

Article 8 - Separation between the sponsoring undertaking and the institution

In the absence of a guarantee or insolvency insurance, legal separation between the undertaking and the IORP is a key element affording beneficiaries protection. This separation in no way prevents the board of an institution of consisting of both the employer and the employees of the company.

Article 9 - Conditions of operation

The essential point for adequate protection of members and beneficiaries of a pension scheme is prudential supervision by a competent authority that can monitor the conditions of operations of IORPs on the basis of the following criteria: competence and good repute of managers, directors and all persons controlling the institution, existence of rules regarding the functioning of the scheme, proper calculation of technical provisions by an actuary or other specialist in this field on the basis of recognised actuarial methods, contractual commitment on the part of the sponsoring undertaking and sufficient information to be given to members on the conditions of operations of the pension scheme (contractual rights and obligations, risks embedded in the pension contract and distribution of the risks among the contracting parties). In case of cross border activity an IORP needs a prior authorisation granted by the competent authority of the home Member State.

Article 10 - Annual accounts and annual report

The annual accounts and the annual report, approved in good and due form by the competent persons, shall constitute the basis for ongoing financial supervision of the IORP by competent authorities.

Article 11 - Information to be given to the members and beneficiaries of the scheme

Proper information is a vital element for the protection of those who have already retired (beneficiaries) and those who will retire in future (members). However, the contents of information shall differ with respect to the recipient (member or beneficiary) and to the contractual conditions of the pension scheme concerned. On request the annual accounts and the annual report shall be made available to members and beneficiaries of the scheme.

Article 12 - Disclosure of investment policy

It is proposed that IORPs disclose every three years, and in any case following a significant change in the investment policy, information on the principles underlying their investment policy with respect to the nature and duration of pension liabilities. This information shall also include a description of the risk measurement methods and risk management processes implemented. The statement of investment policy principles is addressed to the supervisory authorities who verify the coherence of actual investments with the principles spelt out. Such a document is one way of obliging managers to take a detached view of the asset-liability management processes and to put their overall investment strategy into perspective. On request this statement of investment policy principles shall be also be sent to members and beneficiaries of the scheme.

Article 13 - Information to be provided to the competent authority

This Article ensures that the supervisory authorities are sufficiently equipped with information rights to perform their responsibilities properly and safeguard the interests of members and beneficiaries of the scheme.

Article 14 - Powers of intervention of the competent authority

This Article ensures that the supervisory authorities are sufficiently equipped with powers of intervention to perform their responsibilities properly and safeguard the interests of members and beneficiaries of the scheme. The competent authorities may carry out on-site-inspections at the IORPs premises and, where appropriate, on outsourced functions

Article 15 - Technical provisions

In order to safeguard the interests of members and beneficiaries, institutions must establish technical provisions. In cases where the institutions operate schemes in which biometric risks are covered and/or where the institution bears the investment risk, the technical provisions must be calculated on a sufficiently prudent basis.

The calculation of technical provisions shall take place every year and shall be executed and certified by qualified actuaries according to recognised actuarial methods. This calculation of technical provisions may take place once every three years if the IORP provides the competent authority with a certification of adjustments for the intervening years.

The interest rate shall be chosen prudently according to national rules and the amount of technical provisions shall both reflect an actuarial value of accrued pension rights of members and must be sufficient for pensions and benefits already in payment to beneficiaries to continued to be paid.

Article 16 - Funding of technical provisions

In principle, the technical provisions must be fully covered by appropriate assets at all times. However, given the very long-term nature of investments by IORPs and the lower exposure to liquidity risks (stemming from the absence of any redemption possibility, unlike in the insurance field) Member States may permit IORPs, for a limited period, to depart from the full funding requirement. Any departure must be accompanied by a plan to re-establish full cover of the technical provisions.

In the event of cross-border activity the technical provisions must be fully funded at all times to protect the interests of members and beneficiaries of the scheme and in order to allow mutual recognition of the different supervisory regimes established in Member States.

Article 17 - Regulatory own funds

In many cases, it is the sponsoring undertaking and not the IORP itself that either covers any biometric risk or guarantees certain benefits or investment performance. However, in some cases it is the IORP itself which provides such cover or guarantees and the sponsors obligations are generally exhausted by paying the necessary contributions. In these circumstances, the products offered are similar to those of life-insurance companies. The draft requires IORPs offering such products to hold the same additional own funds as life-assurance companies.

Article 18 - Investment rules

A qualitative approach to investment rules is proposed. This is because it is deemed preferable for the allocation of assets to be decided in the light of the liabilities entered into by each fund and not in the light of a single set of quantitative rules. As a general rule, asset allocation must be prudent. This requires, above all, a proper diversification in terms of issuers, types of securities, country/geographical zone, currency and industrial sector. In case of significant investments in the sponsoring undertaking, bankruptcy of that undertaking could have the double effect of depriving employees from their job and jeopardising their pension rights. Self-investment therefore needs to be strictly limited.

Supervisory methods differ a lot from one Member State to another. Therefore, Member States should be given some discretion on the precise investment rules that they wish to require from institutions established in their territories. Such an approach was already adopted in the insurance Directives (see, for instance, Article 22(2) of Directive 92/96/EEC). IORPs are very long-term investors ideally placed to take advantage of the high returns and low volatility traditionally offered over the long term by shares. They need to link pension promises to the long term growth of the real economy. They also need to benefit from international diversification and undertake investments in currencies other than those in which their liabilities are denominated. Such investments should therefore not be restricted excessively.

As very long-term investors, IORPs can help improve the size and liquidity of EU risk capital markets. It is for the IORP itself to decide whether it wishes or not to invest in risk capital. It is therefore essential that the regulatory framework does not excessively restrict this form of investment.

Article 19 - Management and custody

Under this Article, IORPs are free to delegate the management and custodial services to institutions duly approved in another Member State. This article secures the application of the principle of free provision of services for credit institutions and asset managers.

Article 20 - Cross-border activities

The coordination of prudential supervision is one of the necessary conditions for allowing an IORP to manage schemes on a cross-border basis. A greater degree of tax coordination is also essential. This matter is not dealt with in this proposal. Article 20 simply lays down the principle of freedom of cross-border activities and proposes a mechanism for cooperation and notification between supervisory authorities. The Article also establishes that an IORP wishing to manage a scheme in another Member State will have to apply the relevant social and labour law requirements of the Member State where the sponsoring company is established. These requirements essentially relate to what retirement benefits need to be provided.

2000/0260 (COD)

Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the activities of institutions for occupational retirement provision (Text EEA relevance)

THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty establishing the European Community, and in particular Articles 47(2), 55 and 95(1) thereof,

Having regard to the proposal from the Commission [9],

[9] OJ C

Having regard to the opinion of the Economic and Social Committee [10],

[10] OJ C

Acting in accordance with the procedure laid down in Article 251 of the Treaty [11],

[11] OJ C

Whereas:

(1) A genuine internal market for financial services is crucial for economic growth and job creation in the Community.

(2) Major achievements have already been made in the establishment of this internal market, allowing financial institutions to operate in other Member States and ensuring a high level of protection for the consumers of financial services.

(3) The Communication from the Commission implementing the framework for financial markets: action plan [12] identifies a series of actions that are needed in order to complete the internal market for Financial Services and the European Council at its meeting in Lisbon on 23 and 24 March 2000, called for the implementation of this Action Plan by 2005.

[12] COM(1999) 232 final.

(4) The Action Plan for Financial Services stresses as an urgent priority the need to draw up a Directive on the prudential supervision of institutions for occupational retirement provision, as these institutions are major financial institutions not subject to a coherent Community legislative framework allowing them to fully benefit from the advantages of the internal market.

(5) Institutions that are completely separated from any sponsoring undertaking and that operate on a funded basis for the sole purpose of providing retirement benefits should have freedom to provide services and freedom of investment subject only to coordinated prudential requirements, regardless of whether these institutions are considered as legal entities.

(6) Member States should retain full responsibility for the organisation of their social protection systems.

(7) Institutions managing social security schemes, which are already coordinated at Community level, should be excluded from the scope of this Directive. Account should nevertheless be taken of the specificity of institutions which, in a single Member State, manage both social security schemes and occupational schemes.

(8) Financial institutions that already benefit from a Community legislative framework should in general be excluded from the scope of this Directive. However, as these institutions may also in some cases offer occupational pension services, it is important to ensure that this Directive does not lead to distortions of competition. Such distortions may be avoided by applying the prudential requirements of this Directive to the occupational pension business of life-assurance companies.

(9) Giving Member States the possibility to exclude from the scope of national implementing legislation institutions managing schemes with less than 100 members or beneficiaries can facilitate supervision in some Member States without undermining the proper functioning of the internal market in this field.

(10) Institutions such as Unterstützungskassen in Germany, where the members have no legal rights to benefits of a certain amount and where their interests are protected by a compulsory statutory insolvency insurance, should be excluded from the scope of the Directive.

(11) In order to protect members and beneficiaries, institutions for occupational retirement provision should limit their activities to the activities, and operations arising therefrom, referred to in this Directive.

(12) In case of bankruptcy of an undertaking which pays contributions into an institution, a sponsoring undertaking, the member faces the risk of losing both his job and his acquired pension rights. This makes it necessary to ensure that there is a clear separation between that undertaking and the institution.

(13) Institutions for occupational retirement provision operate and are supervised with significant differences in Member States. In some Member States, supervision can be exercised not only on the institution itself but also on the companies that are authorised to manage these institutions. Member States should be able to take such specificity into account as long as all the requirements laid down in this Directive are effectively met.

(14) Institutions for occupational retirement provision are financial service providers and therefore should meet certain minimum prudential standards with respect to their activities and conditions of operation.

(15) The huge number of institutions in certain Member States means a pragmatic solution is necessary as regards prior authorisation of institutions. However, if an institution wants to manage a scheme in another Member State, a prior authorisation granted by the competent authority of the home Member State should be required.

(16) The annual accounts and annual report, reflecting a true and fair view of the institution's assets, liabilities and financial position duly approved by an authorised person responsible for auditing the annual accounts, are an essential source of information for members and beneficiaries of the scheme and the competent authorities. In particular, they enable the competent authorities to monitor the financial soundness of an institution and assess whether the institution is able to meet all its contractual obligations.

(17) Proper information of members and beneficiaries of the pension scheme is crucial. This is of particular relevance for information requests concerning the financial soundness of the institution, the contractual rules, the benefits and the actual financing of accrued pension entitlements, the investment policy and the management of risks and costs.

(18) The investment policy of an institution is a decisive factor for both security and affordability of occupational pensions. The institutions should therefore draw up, at least every three years, a statement of investment principles. It should be sent to the competent authority and made available on request also to members and beneficiaries of the scheme.

(19) To fulfil their statutory function, competent authorities should be provided with adequate rights to information and powers of intervention with respect to the institution and the persons who effectively run the institution. In case the institution for occupational retirement provision has transferred functions of material importance such as investment management, informatics or accounting to other companies (outsourcing), it should be possible for the rights to information and powers of intervention to be enlarged to these outsourced functions to check if activities are carried out in accordance with the supervisory rules.

(20) A prudent calculation of technical provisions is an essential condition to ensure that obligations to pay retirement benefits can be met. Technical provisions should be calculated on the basis of recognised actuarial methods and certified by qualified persons. The interest rate should be chosen prudently according to national rules. The amount of technical provisions should both reflect an actuarial value of accrued pension rights of members and be sufficient for benefits already in payment to beneficiaries to continued to be paid.

(21) Risks covered by institutions vary significantly from one Member State to another. Member States should therefore have the possibility to make the calculation of technical provisions subject to additional and more detailed rules than those laid down in this Directive.

(22) Sufficient and appropriate assets to cover the technical provisions protect the interests of members and beneficiaries of the pension scheme if the sponsoring undertaking becomes insolvent. In particular in cases of cross-border activity, the mutual recognition of supervisory principles applied in Member States requires that the technical provisions be fully funded at all times.

(23) If the institution does not work on a cross-border basis, Member States should be able to permit underfunding provided that a proper plan is established to restore full funding and without prejudice to the requirements of Council Directive 80/987/EEC of 20 October 1980 on the approximation of the laws of the Member States relating to the protection of employees in the event of the insolvency of their employer [13].

[13] OJ L 283, 28.10.1980, p. 23; Directive as last amended by Directive 87/164/EEC (OJ L 66, 11.3.1987, p. 11).

(24) In many cases, it is the sponsoring undertaking and not the institution itself that either covers any biometric risk or guarantees certain benefits or investment performance. However, in some cases, it is the institution itself which provides such cover or guarantees and the sponsor's obligations are generally exhausted by paying the necessary contributions. In these circumstances, the products offered are similar to those of life-insurance companies and the institutions concerned should hold the same additional own funds as life-assurance companies.

(25) Institutions are very long-term investors. Redemption of the assets held by these institutions cannot, in general, be made for another purpose than providing retirement benefits. Furthermore, in order to adequately protect the rights of members and beneficiaries, institutions should be able to opt for an asset allocation that suits the precise nature and duration of their liabilities. These aspects call for a qualitative approach towards investment rules, obliging institutions to act prudently but also allowing them sufficient flexibility to decide on the most secure and efficient investment policy.

(26) Supervisory methods and practises vary among Member States. Therefore, Member States should be given some discretion on the precise investment rules that they wish to require from the institutions established in their territories. However, these rules must not restrict the free movement of capital, unless justified on prudential grounds.

(27) As very long-term investors with low-liquidity risks, institutions for occupational retirement provision are in a position to invest in non-liquid assets such as shares as well as in risk capital markets. They can also benefit from the advantages of international diversification. Investments in shares, risk capital markets and currencies other than those of the liabilities should therefore not be unduly restricted.

(28) Restrictions regarding the free choice of approved asset managers and custodians limit competition in the internal market and should therefore be eliminated.

(29) Institutions should have the possibility to provide their services in other Member States. This would potentially lead to significant economies of scale for these institutions, improve the competitiveness of the Community industry and facilitate labour mobility. This requires mutual recognition of prudential standards.

(30) The right for an institution in one Member State to manage an occupational pension scheme concluded in another Member State should be exercised while fully respecting the provisions of the local social and labour law in force in the host Member State.

(31) In accordance with the principles of subsidiarity and proportionality as set out in Article 5 of the Treaty, the objectives of the proposed action, namely to create a Community legal framework covering institutions for occupational retirement provisions, cannot be sufficiently achieved by the Member States and can therefore, by reason of the scale and effects of the action, be better achieved by the Community. This Directive confines itself to the minimum required in order to achieve those objectives and does not go beyond what is necessary for that purpose,

HAVE ADOPTED THIS DIRECTIVE:

Article 1

Subject-matter

This Directive lays down rules for taking up and pursuit of activities carried out by institutions for occupational retirement provision.

Article 2

Scope

This Directive shall apply to institutions for occupational retirement provision.

It shall not apply to:

(a) institutions managing social security schemes that are covered by Council Regulation (EEC) No 1408/71 [14], or are listed in Annex II thereto, and Council Regulation (EEC) No 574/72 [15];

[14] OJ L 149, 5.7.1971, p. 2.

[15] OJ L 74, 27.3.1972, p. 1.

(b) institutions that are covered by Council Directive 79/267/EEC [16], Council Directive 85/611/EEC [17], Council Directive 93/22/EEC [18] and Directive 2000/12/EC of the European Parliament and of the Council [19] ;

[16] OJ L 63, 13.3.1979, p. 1.

[17] OJ L 375, 31.12.1985, p. 3.

[18] OJ L 141, 11.6.1993, p. 27.

[19] OJ L 126, 26.5.2000, p. 1.

(c) institutions that operate on a pay-as-you-go basis;

(d) German "Unterstützungskassen" and other institutions operating in a similar way;

(e) companies using book-reserve schemes with a view to paying-out pension benefits to their employees.

Article 3

Application to institutions operating social security schemes

Institutions for occupational retirement provision that also operate compulsory employment related pension schemes which are considered to be social security schemes covered by Regulations (EEC) No 1408/71 and (EEC) No 574/72 shall be covered by this Directive in respect of their non-compulsory occupational retirement provision activities.

Article 4

Optional application to institutions covered by Directive 79/267/EEC

Member States may choose to apply Articles 11 to 16, 18 to 19 of this Directive to the occupational retirement provision business of activities of institutions that are covered by Directive 79/267/EEC, provided that the relevant assets and liabilities are managed in a separate legal entity. In this case, such separate legal entity shall not be made subject to Articles 17 and 21 of Directive 79/267/EEC and to Articles 19 to 24 and 31 of Council Directive 92/96/EEC [20].

[20] OJ L 360, 9.12.1992, p. 1.

Article 5

Small pension schemes and statutory schemes

1. Member States may choose not to apply this Directive, in whole or in part, to institutions running pension schemes of which less than 100 persons are members and beneficiaries. Article 20 may only be applied if a Member State chooses to apply all the provisions of this Directive to such institutions.

2. Member States may choose not to apply Articles 9 to 17 to institutions where occupational retirement provision is made under statute and which is guaranteed by a public authority.

Article 6

Definitions

For the purposes of this Directive:

(a) "institution for occupational retirement provision", or "institution", means an institution operating on a funded basis, established separately from any sponsoring undertaking or trade for the sole purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or a contract agreed individually or collectively between the employer(s) and the employee(s) or their respective representatives or between the institution and the individual, both self-employed and employed;

(b) "pension scheme" means a contract, an agreement, a trust deed or rules stipulating which retirement benefits are granted and under which conditions;

(c) "sponsoring undertaking" means any undertaking or other body which pays contributions into an institution;

(d) "retirement benefits" means benefits in the form of payments, whether for life time, a temporary period or as a lump sum, paid on death, disability, cessation of employment or when a defined age is reached, or support payments or services in case of sickness, indigence or death when they are supplementary to those benefits;

(e) "members" means the persons entitled, or who will be entitled, to receive retirement benefits;

(f) "beneficiaries" means the persons receiving retirement benefits;

(g) "competent authorities" means the national authorities designated to carry out the duties provided for in this Directive;

(h) "biometrical risks" means risks linked to human life. This includes death, disability and longevity risks;

(i) "risk capital markets" means markets providing equity financing to a company during its early growth stages;

(j) "home Member State" means the Member State in which the institution is located;

(k) "host Member State" means the Member State where the sponsoring undertaking or the individual member (s) are located;

(l) "location":

- where an institution is concerned, the Member State where it has its registered office or its main administration;

- where a sponsoring undertaking is concerned, the Member State in which it has its registered office or its main administration if that sponsoring undertaking is a legal person, a branch or an agency or the Member State in which its head office is situated if that sponsoring undertaking is a natural person;

- where an individual is concerned, the Member State in which he or she has his or her residence.

Article 7

Activities of the institution

Member States shall require institutions located within their territories to limit their activities to retirement benefits related operations and activities directly arising therefrom, including activities arising from their investment policy.

Article 8

Legal separation between the sponsoring undertaking and the institution for occupational retirement provision

Member States shall ensure that there is a legal separation between the sponsoring undertaking and the institution for occupational retirement provision in order that the assets of the institution are safeguarded in the interest of the members and beneficiaries, in the event of bankruptcy of the sponsoring undertaking.

Article 9

Conditions of operation

1. Member States shall ensure that:

(a) the institution is registered;

(b) the institution is effectively run by persons of good repute who must themselves have appropriate professional qualifications and experience or employ advisers with appropriate professional qualifications and experience;

(c) proper constituted rules regarding the functioning of the pension scheme have been implemented and members have been adequately informed of these rules;

(d) all technical provisions are computed and certified by an actuary or other specialist in this field on the basis of recognised actuarial methods;

(e) if the sponsoring undertaking guarantees the payment of the retirement benefits it must be committed to regular financing;

(f) the members are sufficiently informed of the conditions of the pension scheme, in particular concerning:

(i) the contractual rights and obligations of the parties involved in the pension scheme;

(ii) the financial, technical and other risks embedded in the pension contract;

(iii) the distribution of the risks embedded in the pension contract to the contractual parties.

2. Member States may make the conditions of operation of an institution subject to other requirements, with a view to ensuring that the interests of members and beneficiaries are adequately protected.

3. In case of cross-border activity as referred to in Article 20, the conditions of operation of the institution shall be subject to a prior authorisation by the competent authority of the home Member State.

Article 10

Annual accounts and annual report

Member States shall require that institutions located in their territories draw up annual accounts and an annual report. The annual accounts and the annual report shall give a true and fair view of the institution's assets, liabilities and financial position. They shall be consistent and duly approved by an authorised person responsible for auditing the annual accounts.

Article 11

Information to be given to the members and beneficiaries of the scheme

1. Depending on the nature of the pension scheme established, Member States shall ensure that the information set out in paragraphs 2, 3 and 4 is provided.

2. Members and beneficiaries shall receive:

(a) on request, the annual accounts and the annual report;

(b) within a reasonable time, any relevant information regarding changes to the pension scheme rules.

3. Each member shall receive on request, detailed and substantial information on:

(a) if applicable, the target level of the benefits;

(b) the actual financing of accrued pension entitlements;

(c) the level of benefits in case of termination of employment;

(d) where the member bears the investment risk, the range of investment possibilities and the actual investment portfolio as well as information on risk exposure and costs related to the investments.

Information on issues set out in the first subparagraph shall be provided together with the annual accounts and the annual report as mentioned in paragraph 2(a).

4 Each beneficiary shall be provided with the appropriate information on the retirement benefits that are due and the corresponding payment options.

Article 12

Disclosure of investment policy principles

1. Member States shall ensure that every three years, as well as without delay after any significant change in the investment policy, all institutions located in their territories disclose their investment policies to the competent authority of the home Member State. This shall be done by sending a statement of investment policy principles containing the risk measurement methods and risk management processes implemented and the strategic asset allocation with respect to the nature and duration of pension liabilities.

2. The statement of investment policy principles shall also be made available to members and beneficiaries of the scheme on request.

Article 13

Information to be provided to the competent authority

Every Member State shall ensure that the competent authority has the necessary powers and means:

(a) to require the institution, the members of their boards of directors and other managers or directors or persons controlling the institution to supply information about all business matters or forward all business documents;

(b) to supervise contracts regulating relationships between the institution and other companies, transferring functions to other companies (outsourcing), influencing the financial situation of the institution or being in a material way relevant for effective supervision;

(c) to obtain regularly, in addition to the annual accounts and the annual report, all the documents necessary for the purposes of supervision in particular:

(i) internal interim reports:

(ii) actuarial valuations;

(iii) asset-liability studies;

(iv) evidence of coherence with the investment policy principles;

(v) evidence that contributions have been paid in as planned;

(vi) report of the statutory auditor;

(d) to carry out on-site inspections at the institution's premises and, where appropriate, on outsourced functions to check if activities are carried out in accordance with the supervisory rules.

Article 14

Powers of intervention of the competent authority

1. The competent authority shall require every institution to have sound administrative and accounting procedures and adequate internal control mechanisms.

2. The competent authority may take any measures, with regard to the institution or the persons running the institution, that are appropriate and necessary to prevent or remedy any irregularities prejudicial to the interests of the members and beneficiaries.

It may also restrict or prohibit the free disposal of the institution's assets when:

(a) the institution has failed to establish sufficient technical provisions in respect of the entire business or insufficient assets to cover the technical provisions;

(b) the institution has failed to hold the regulatory own funds.

3. In order to safeguard the interests of scheme members and beneficiaries, the competent authority may transfer the powers which the persons running the institution hold in accordance with the law or its statutes wholly or partly to a special representative who is fit to execute these powers.

4. The competent authority may prohibit or restrict the activities of the institution in particular if:

(a) the institution fails to adequately protect the interests of scheme members and beneficiaries;

(b) the institution no longer fulfils the conditions of operations;

(c) the institution fails seriously in its obligations under the rules to which it is subject;

(d) in case of cross-border activity the institution does not respect the provisions of labour and social law of the host Member State relevant in the field of occupational pensions.

Any decision to prohibit activities of the institution shall be supported by precise reasons and notified to the institution in question.

5. In case of cross-border activity as referred to in Article 20, the institution shall be subject to ongoing supervision by the competent authority of the host Member State as to the compliance of its activities with the labour and social law requirements of the host Member State referred to in Article 20(5).

6. Member States shall ensure that decisions taken in respect of an institution under laws, regulations and administrative provisions adopted in accordance with this Directive are subject to the right to apply to the courts.

Article 15

Technical provisions

1. Member States shall ensure that institutions operating occupational pension schemes establish at all times the adequate amount of liabilities to reflect the financial commitments that arise out of their portfolio of existing pension contracts.

2. Member States shall ensure that institutions operating occupational pension schemes that provide cover against biometric risks and/or where the benefits include a guarantee of either investment performance or level of benefits establish sufficient technical provisions in respect of the total range of these schemes.

3. The calculation of technical provisions shall take place every year. However, Member States may allow a calculation once every three years if the institution provides the competent authority with a certification of adjustments for the intervening years. The certification shall reflect the adjusted development of the technical provisions and changes in risks covered.

4. The calculation of the technical provisions shall be executed and certified by an actuary or other specialist in this field on the basis of recognised actuarial methods according to the following principles:

(a) the minimum amount of the technical provisions shall be calculated by a sufficiently prudent actuarial valuation. It must be sufficient both for pensions and benefits already in payment to beneficiaries to continue to be paid, and to provide members with an actuarial value of their accrued pension rights;

(b) the rate of interest used shall be chosen prudently and determined in accordance with the rules of the competent authority of the home Member State;

(c) the method and basis of calculation of technical provisions shall in general remain constant from one financial year to the other. However, discontinuities may be justified due to a change of legal or economic circumstances underlying the assumptions.

5. Member States may make the calculation of technical provisions subject to additional and more detailed requirements, with a view to ensuring that the interests of members and beneficiaries are adequately protected.

Article 16

Funding of technical provisions

1. Member States shall require every institution to have sufficient and appropriate assets to cover the technical provisions in respect of the total range of schemes operated at all times.

2. Member States may permit institutions for a limited period, to derogate from the provisions of paragraph 1. In order to ensure that the requirements of paragraph 1 are met again, derogation shall be subject to the following conditions:

(a) the institution shall set up a concrete and realisable plan to re-establish the required amount of assets to fully cover the technical provisions in due time. The plan is subject to approval by the competent authority;

(b) in drawing up the plan, account shall be taken of the specific situation of the institution, in particular the asset/liability structure, risk profile, liquidity plan, the age profile of the persons entitled to receive retirement benefits, start-up schemes and schemes changing from non- or partial funding to full funding;

(c) the institution shall establish and disclose to the competent authority a procedure in order to transfer the assets to another financial institution or a similar body in the event of the termination of the pension scheme during the derogation period.

3. In the event of cross-border activity as referred to in Article 20, the technical provisions must be fully funded at all times.

Article 17

Regulatory own funds

1. Member States shall ensure that institutions operating pension schemes where the institution itself underwrites the liability to cover a biometric risk and/or where the institution itself guarantees an investment performance or a given level of benefits hold, on a permanent basis, additional assets above the technical provisions in respect of the total range of schemes operated. These assets shall be free of all foreseeable liabilities and serve as a safety capital to absorb discrepancies between the anticipated and the actual expenses and profits.

2. For the purposes of calculating the amount of the additional assets, the rules laid down in Directive 79/267/EEC shall apply.

Article 18

Investment rules

1. Member States shall require institutions established within their jurisdiction to invest in a prudent manner.

2. Assets held in relation to schemes where the members bear the investment risks shall be invested in accordance with the following rules:

(a) the assets shall be invested in a manner to ensure the security, quality, liquidity and profitability of the portfolio as a whole;

(b) the assets shall be properly diversified in such a way as to avoid accumulations of risk in the portfolio as a whole;

(c) investment in the sponsoring undertaking shall be no more than 5% of the portfolio as a whole. When the institution is sponsored by a group of undertakings, investment in these sponsoring undertakings shall be made prudently, taking into account the need for proper diversification.

3. Member States shall require institutions established within their jurisdiction to invest assets held to cover the technical provisions in accordance with the following rules:

(a) the assets shall be invested in a manner appropriate to the nature and duration of the expected future retirement benefits and to ensure the security, quality, liquidity and profitability of the portfolio as a whole;

(b) the assets shall be properly diversified in such a way as to avoid accumulations of risk in the portfolio as a whole;

(c) investment in the sponsoring undertaking shall be no more than 5% of the technical provisions. When the institution is sponsored by a group of undertakings, investment in these sponsoring undertakings shall be made prudently, taking into account the need for proper diversification.

4. Member States shall not require institutions to invest in particular categories of assets.

5. Member States shall not subject the investment decisions of an institution or its investment manager to any kind of prior approval or systematic notification requirements.

6. In accordance with the provisions of paragraphs 1 to 5, Member States may, for the institutions established in their jurisdiction, lay down more detailed rules to reflect the total range of schemes operated by these institutions.

However, these institutions shall be given the possibilities to:

(a) invest up to 70% of the assets covering the technical provisions or of the whole portfolio for schemes in which the members bear the investment risks in shares, negotiable securities treated as shares and corporate bonds and decide on the relative weight of these securities in their investment portfolio;

(b) hold assets denominated in non-matching currencies to cover an amount of at least 30% of their technical provisions;

(c) invest in risk capital markets.

7. The second subparagraph of paragraph 6 does not preclude the right for Member States to require the application of more stringent investment rules on an individual basis provided they are prudentially justified, in particular in light of the liabilities entered into by the institution.

Article 19

Management and custody

1. Member States shall not restrict institutions from appointing, for the management of the investment portfolio, investment managers established in another Member State and duly authorised for this activity, in accordance with Directives 92/96/EEC, 93/22/EEC and 2000/12/EC.

2. Member States shall not restrict institutions from appointing, for the custody of their assets, custodians established in another Member State and duly authorised in accordance with Directive 93/22/EEC or Directive 2000/12/EC, or accepted as a depository for the purposes of Directive 85/611/EEC.

Article 20

Cross-border activities

1. Member States shall allow the undertakings and individuals located within their territories to sponsor institutions for occupational retirement provision authorised in other Member States. They shall also allow institutions for occupational retirement provision authorised in their territory to accept sponsorship by sponsors located within the territories of other Member States.

2. If an undertaking or individuals wish to sponsor an institution authorised in another Member State, this institution shall notify the competent authorities of the Member State where it is authorised.

3. The Member States shall require institutions proposing to be sponsored by an undertaking or individuals located in the territory of another Member State to provide the following information when effecting the notification:

(a) the Member State within the territory of which the sponsoring undertaking or the individuals are located;

(b) the name of the sponsoring undertaking;

(c) the conditions of the scheme that the institution proposes to manage in the host Member State.

4. Unless the competent authorities of the home Member State have reason to doubt that the administrative structure, the financial situation of the institution or the good repute and professional qualifications or experience of the persons running the institution is not compatible with the operations proposed in the host Member State, they shall within three months of receiving all the information referred to in paragraph 3 communicate that information to the competent authorities of the host Member State.

5. Before the institution starts managing a scheme in the host Member State, the competent authorities of the host Member State shall, within two months of receiving the information referred to in paragraph 3, inform the competent authority of the home Member State, if appropriate, of the relevant social and labour law requirements under which this scheme must be managed in the host Member State. The competent authorities of the home Member State shall communicate this information to the institution.

6. On receiving the communication referred to in paragraph 5, or if no communication is received from them on expiry of the period provided for in the paragraph 5, the institution may start to manage the scheme in the host Member State in accordance with the provisions of the relevant local social and labour law.

7. The competent authorities of the host Member State shall inform the competent authorities of the home Member State of any change regarding the characteristics of the scheme that is managed in the host Member State.

Article 21

Implementation

1. Member States shall bring into force the laws, regulations and administrative provisions necessary to comply with this Directive by 31 December 2003 at the latest. They shall forthwith inform the Commission thereof.

When Member States adopt those provisions, they shall contain a reference to this Directive or be accompanied by such a reference on the occasion of their official publication. Member States shall determine how such reference is to be made.

2. Member States shall communicate to the Commission the text of the main provisions of domestic law which they adopt in the field governed by this Directive.

Article 22

Entry into force

This Directive shall enter into force on the twentieth day following that of its publication in the Official Journal of the European Communities.

Article 23

Addressees

This Directive is addressed to the Member States.

Done at Brussels,

For the European Parliament For the Council

The President The President

FINANCIAL STATEMENT

1. - 9. Non-applicable as no financial assistance provided by the Commission

10. Administrative expenditure (Section III, Part A of the budget)

10.1 Effect on the number of posts

No additional posts required. Administration expenditure related to this Directive can be accommodated within existing Commission resources.

IMPACT ASSESSMENT FORM THE IMPACT OF THE PROPOSAL ON BUSINESS WITH SPECIAL REFERENCE TO SMALL AND MEDIUM-SIZED ENTERPRISES( SMEs)

Title of proposal

Proposal for a Directive of the European Parliament and of the Council on the activities of institutions for occupational retirement provision

Document reference number

The proposal

1. Taking account of the principle of subsidiarity, why is Community legislation necessary in this area and what are its main aims-

In contrast to banks, insurance companies and securities firms, IORPs are not subject to any Community prudential regulation for the time being. IORPs play a major role in promoting social cohesion and financing economy in all Member States. In view of the ageing of the Union's population and financing future pensions it is vital to ensure that they can operate with adequate security and efficiency by using the advantages of the single market and the euro. Pension business is characterised by the very long-term nature of the activity, both in terms of commitment of the IORPs and in terms of investment.

National legislation prevents Single Market and Euro from being exploited to full. The main objectives of this Directive are:

- adequate protection of interests of scheme members and beneficiaries and to enable secure and efficient investment.

- to enable the free choice of asset managers and custodians within the Community and to maintain equal competition between all pension providers.

- to promote cross border activities and to create a genuine single market for supplementary pensions.

- to promote Community investment by IORPs.

While fully respecting the competence of the Member States to organise pension provision in the light of national circumstances and requirements (e.g. existing local regulations in the fields of labour, social and taxation) the Directive is designed to strike the best possible balance between security and affordability.

The impact on business

2. Who will be affected by the proposal-

- which sectors of business

The proposal will affect both employers of all sectors (especially those with cross-border activity) and the whole industry of occupational pension providers running IORPs (pension funds, "insurance type" institutions such as "Pensionskassen" or Group life-insurance plans, investment funds).

- which sizes of business (what is the concentration of small and medium-sized firms)

All firms potentially in all Member States (big and small entities) as well as the wide range of IORPs operating in Member States (e.g. pension funds, insured programmes and investment funds). However, a "de minimis provision" is proposed, as an option for Member States, for IORPs managing very small pensions schemes (schemes to which less than 100 persons are members and beneficiaries) that are likely to be not interested in any form of cross-border activity. Such a provision will facilitate supervision in Member States where a huge number of schemes is operating.

- are there particular geographical areas of the Community where these businesses are found-

IORPs exist in many forms throughout the Community. However, the bulk of assets (as a % of GDP) is invested by pension funds from the UK, NL and IRL.

3. What will business have to do to comply with the proposal-

Business will have to meet minimum prudential requirements depending on the nature of the IORP and the risks covered. These minimum prudential requirements shall allow mutual recognition of national supervisory regimes and include in particular provisions on: specialisation of business; conditions of operations; annual acounts and annual report; disclosures of information and investment policy to supervisors and members/beneficiaries; technical provisions and funding; capital requirements in particular cases and investment rules.

The proposal does not create a complete new prudential environment for IORPs but coordinates as much as possible national prudential approaches and supervisory principles already existing in Member States.

4. What economic effects is the proposal likely to have-

- on employment

Positive effects can be expected. Most Member States have opted for increased reliance on funded schemes to supplement the basic state social security scheme. The single market and the euro can make the accumulation of these funds more efficient. Increasing efficiency can either lead to higher pensions and thus help to sustain basic state systems or reduce social charges for any given pension and so have positive effects on the employment situation.

- on investment and the creation of new businesses

Positive effects can be expected. IORPs have a key role to play in the integration, efficiency and liquidity of EU capital markets. As very long-term investors, they are ideally placed to assist in the financing of private initiatives. While the security and profitability of investment portfolios is a priority objective, a Community framework can also ensure that the IORPs participate in the efficient allocation of savings in the Community.

Due to demographic changes in EU populations, the demand for funded pensions is growing. At the moment many employers (usually the small and medium sized companies) do not have any alternative to buying insurance plans for their employees. It can be expected that a Community prudential Directive will provide employers with more alternatives for occupational pension provision.

- on the competitiveness of businesses

Positive effects can be expected. In the absence of any coordination at Community level, IORPs are the only major financial institutions unable to offer their services in a Member State other than their own. It has been calculated that, for a pan-European company, the cost of setting up separate occupational systems in each Member State is about EUR 40 million per year. Allowing IORPs to manage schemes for companies established in another Member State would result in economies of scale of several types: more efficient investment policies as a result of asset pooling, simplification of administration and compliance with the prudential and reporting rules of a single supervisory authority. Furthermore, labour mobility would become easier: workers could more easily take up a job in another Member State if they could remain members of the same IORP; multinationals would come up against fewer obstacles to moving their employees from one Member State to another.

5. Does the proposal contain measures to take account of the specific situation of small and medium-sized firms (reduced or different requirements, etc.)-

A "de minimis provision" is proposed, as an option for Member States, for IORPs managing very small pensions schemes (schemes to which less than 100 persons are members and beneficiaries) that are likely to be not interested in any form of cross-border activity. If a Member State makes use of the option this Directive must not apply to these small pension schemes. Such a provision will facilitate supervision in Member States where a huge number of schemes is operating.

Consultation

6. List the organisations which have been consulted about the proposal and outline their main views.

Prior to this proposal the Commission has issued a Green Paper. We received comments from about 80 interested parties (i.a. industry, Member States, consumer protection organisations, trade unions, academics) most of which also participated in a public hearing organised by the Commission. Results of the consultation period following the Green Paper were summarised in a Communication which also provoked massive reactions of interested parties. The general thrust of this past consultation was positive, encouraging the Commission to draft a prudential directive in the field of supplementary pensions. EP and ECOSOC adopted favourable resolutions supporting the general thrust of the Communication.

The Commission has consulted closely with the main European industry associations throughout the preparation of the current proposal:

The European Federation for Retirement Provision (EFRP) - representing the pension fund industry - welcomes the institutional approach. EFRP is strongly in favour of making progress in the field of cross border activity of the IORPs to make use of economies of scales and to find the right balance between security and affordability. However, the regulatory framework should be neutral vis a vis social, labour and fiscal policy choices of Member States and cover all providers in the field of occupational pensions.

The Comité Européen des Assurances (CEA) - representing the insurance industry -also supports the institutional approach. According to CEA a pension product by nature provides benefits of an uncertain duration linked to the duration of human life and the protection against biometric risk should be covered. All institutions regardless of the regime they adopt - defined contributions or defined benefits - must be subject to requirements for the constitution of technical provisions and adequate funding since they assume a "firm commitment" undertaking of a financial (e.g. investment risk) or a technical (e.g. mortality) type.

The Groupe Consultatif des Associations D'Actuaires des Pays des Communautés Européennes - representing the actuarial profession - believes that the proposed measures are a reasonable basis for all European countries to adopt and that they will encourage in particular cross border activity of IORPs. The exact scope of the Directive shall be clearly defined in close cooperation with Member States on a country by country basis. De-Minimus exceptions for certain provisions need to be considered to reduce the burden for small IORPs.

The Fédération Européenne des Fonds et Sociétés D'Investissement (FEFSI) - representing the investment fund industry - welcomes the differentiation between schemes for supplementary retirement provision and traditional (long-term) savings products. Pension schemes may include optional safeguards in order cover biometric risks but the final decision should be determined individually by Member States or by the employees themselves (principle of subsidiarity).

The Association of European Cooperative and Mutual Insurers (ACME) supports the Commission approach in general. As regards provisions on technical provisions, funding and regulatory own funds it would prefer basically the same rules as established for life-insurance companies.

The European Trade Union Confederation (ETUC) is in favour of the initiative. To make real progress in the field of pensions the issue shall be tackled not only from the financing angle but Commission activity should focus also on directly related subjects such as taxation, mobility and transfer of acquired rights. Only IORPs providing products with protection against biometric risks should be included in the Directive.