Opinion of the Economic and Social Committee on the "Proposal for a Directive of the European Parliament and of the Council on the activities of institutions for occupational retirement provision"

(2001/C 155/07)

On 27 November 2000 the Council decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned proposal.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 14 March 2001. The rapporteur was Mr Van Dijk.

At its 380th plenary session of 28 and 29 March 2001 (meeting of 28 March), the Economic and Social Committee adopted the following opinion by 79 votes to 27 with 10 abstentions.

1. Background

1.1. There are large disparities in the EU with regard to retirement provision for workers. The system can in general be said to have three pillars. The first of these is the state-financed pension. The second is the supplementary pensions to which many workers subscribe through their employment. The third pillar enables citizens to build up their pension entitlements further on an individual basis(1).

1.2. The relationship between the various pillars varies from one Member State to another. This directive applies exclusively to institutions providing supplementary pensions, i.e. the "second pillar". It does not apply to:

a) institutions managing social security schemes that are covered by Council Regulation (EEC) No. 1408/71(2), or are listed in Annex II thereto, and Council Regulation (EEC) No. 574/72(3);

b) institutions that are covered by Council Directive 79/267/EEC(4), Council Directive 85/611/EEC(5), Council Directive 93/22/EEC(6) and Directive 2000/12/EC of the European Parliament and of the Council(7);

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.

1.3. In the early 1990s the European Commission tried to establish an internal market for supplementary pensions. In 1990 it published a working document on completion of the internal market in private retirement provision. In this document the Commission announced measures aimed at enlarging the freedom of cross-border investment management and activity and cross-border access to institutions for retirement provision. In attempting to turn these intended measures into a specific directive, however, the Commission encountered a great deal of opposition from the Member States. The directive published in 1991(8) was withdrawn in 1994. The greatest stumbling block was the provision that pension institutions were only required to invest a certain percentage of their funds in assets denominated in their home currency. This watering down of the legal requirement was unacceptable to many Member States.

1.4. In 1997 the Green Paper on Supplementary pensions in the single market was published(9). This was followed in 1999 by a Communication entitled "Towards a Single Market for Supplementary Pensions"(10). This announced legislation for the coming years. The first of the new legislative proposals was to be a directive on institutions for retirement provision, which aimed to improve the protection of members of pension funds. A proposal for a directive was published on 11 October 2000.

2. Content of the directive

2.1. The aims of the directive under consideration are as follows:

- ensuring a high level of protection for members,

- free choice of portfolio managers,

- level playing field for institutions offering supplementary retirement provision,

- elimination of obstacles to cross-border operations,

- secure and efficient investment,

- establishment of a single market for financial services and supplementary pensions.

2.2. The directive defines institutions for occupational retirement provision. They must:

- be related to occupational activity;

- operate on a funded basis for the sole purpose of providing retirement benefits to members;

- be established separately from the sponsoring undertaking.

2.3. Article 2 lists institutions to which the directive does not apply. In principle these are pension institutions which serve the first and third pillars of the pensions market. Other directives and regulations apply to these institutions.

2.4. Article 8 stipulates a legal separation between the sponsoring undertaking, i.e. the company which pays contributions to the institution for retirement provision on behalf of its employees, on the one hand, and the institution on the other. This provision is important as a way of safeguarding the rights of members, and ensuring that their pension entitlements are not affected in the event of the bankruptcy of the company which employs them.

2.5. Article 9 lays down a number of quality requirements for the institution for retirement provision, such as qualified managers, rules regarding the functioning of the pension scheme and realistic evaluation of liabilities by an actuary.

2.6. Articles 10 and 11 lay down a number of requirements regarding information for members. Thus, members and beneficiaries may request the annual accounts and the annual report. They are also to receive, within a reasonable time, any relevant information regarding changes to the pension scheme rules.

2.6.1. Members are also to receive, on request, information regarding the amount of pension benefits they should receive, their accumulated rights in the event of early withdrawal from the scheme, the way in which the accumulated rights are financed and, where the member bears the investment risk, full information on investments.

2.6.2. Beneficiaries are also to be provided with full information on the retirement benefits due and the corresponding payment options.

2.7. Information must also be provided to the competent supervisory authority on the investment principles and risk management methods applied by the institution (Article 12).

2.8. Articles 13 and 14 contain provisions relating to the competent supervisory authority, thus fleshing out the supervisory requirements.

2.9. In order to protect members' rights, Articles 15 and 17 stipulate that the institution must always have sufficient assets to cover its liabilities. Deviations from this principle are permitted only for a limited period, on condition that a plan is drawn up to make good the temporary shortfall.

2.10. Article 18 contains provisions relating to investments. The general rule is that Member States may not require institutions for retirement provision to invest in particular categories of asset. In principle complete investment freedom is allowed. There are, however, certain exceptions to this general rule:

- No more than 5 % of funds may be invested in the sponsoring undertaking.

- Member States may draw up more detailed rules. The Member States are not, however, allowed to require the institutions for retirement provision to invest more than 70 % of funds in matching currencies, or more than 30 % of funds in securities other than shares.

2.11. Article 20 provides for cross-border membership of institutions for retirement provision. Rules are also laid down regarding the competent supervisory body.

3. General comments

3.1. The Economic and Social Committee welcomes this initial directive and endorses its aims. The Committee believes that protection of members is a matter of high priority and that this directive is a step in that direction.

3.2. The Committee also endorses the objective of establishing an internal market in retirement provision. In this way institutions for retirement provision will be able to make use of the broader opportunities offered by the internal market; at the same time sufficient safeguards are laid down for the protection of members(11).

3.3. The Committee believes that the approach chosen by the Commission, in leaving out of the proposal any consideration of the taxation of institutions for retirement provision, is sensible. This means that the proposal can be adopted by qualified majority, whilst the tax issues would have to be decided unanimously.

3.3.1. The Committee hopes, however, that the directive on the tax treatment of pensions will be submitted by 1 July 2001. The Committee regrets, therefore, that the Commission at present intends to publish only a communication on the subject in April 2001, rather than draft legislation, such as a directive. In drawing up the communication account must be taken of the social security systems of the Member States and their different financing methods. A communication of this kind must not be guided purely by the requirements of the single market.

3.3.2. The Committee would also draw attention to the Pensions Forum in which, inter alia, ways of achieving cross-border transferability of pension rights are currently being discussed.

3.4. The Committee feels, however, that a number of comments are called for on the scope of the directive. The directive applies exclusively to institutions for retirement provision which:

- are separate from the sponsoring undertaking;

- are not responsible for statutory social security schemes;

- operate on a funded basis.

3.4.1. Other institutions for retirement provision do not have to comply with the provisions of the directive. In practice, therefore, this directive will have an impact wherever funded pension schemes exist alongside the pay-as-you-go and balance sheet pension provision systems. Funded schemes play a particularly prominent part in the Dutch, British and Irish systems.

4. Specific comments

4.1. The Committee has a number of questions concerning the exceptions to the investment rules applicable to institutions for retirement provision. The Committee wonders whether it is still necessary for Member States to have the option of requiring pension funds to invest at least 70 % of assets in instruments denominated in their home currency. In view of the introduction of the euro this does not seem to make sense. This could place the Member States not participating in the euro at an advantage vis-à-vis the participating States, as the euro is equated with the national currencies.

4.2. The same applies to investment in securities other than shares. Sufficient guarantees are already laid down elsewhere in the directive.

4.3. The Committee does, however, support the requirement that pension funds invest no more than 5 % in the sponsoring undertaking.

4.4. The Committee feels that Article 20(1) should read in such a way that it does not conflict with requirements to belong to institutions for retirement provision of the kind that exist in a number of Member States. The Albany Judgment(12) clarified the situation with regard to the legality of requirements to participate in company (or sectoral) pension funds.

4.4.1. In the interests of clarity, the Committee proposes that Article 20(1) be amended to read as follows:

"Member States shall allow the undertakings and individuals located within their territories to sponsor institutions for occupational retirement provision authorised in other Member States, unless a collective agreement between workers and employers exists - which may possibly have been declared generally binding - which requires the workers and undertakings covered by the agreement to participate in a company pension fund."

4.5. Arrangements for contributions to second-pillar retirement provisions should preferably be laid down in collective agreements. These agreements should also make it clear that all employees of a firm covered by the collective agreement are required to participate in the pension scheme. It will thus be clear who is to finance the scheme. Logically, the board of management of the pension scheme should be made up of representatives of these groups, i.e. workers and employers.

4.6. The Committee supports the provision of article 16, which requires that the institution must always have sufficient assets to cover its liabilities but permits deviations from the principle for practical reasons for a limited period on condition that a plan is drawn up to make good the temporary shortfall. The Committee believes that in the context of the single market similar provisions should apply to institutions which engage in cross-border activity and that Article 16.3 should therefore be deleted.

4.7. A number of technical comments on the articles concerning supervision:

4.7.1. Article 13(c)(iii) could be mitigated to some extent by wording it as follows:

"(iii) asset-liability studies used in developing investment principles;".

4.7.2. Hardly any EU Member State already applies these provisions. For this reason the Committee feels that there should be a transitional period for the Member States where this provision does not already apply.

4.7.3. Article 18(7) should spell out the circumstances under which the supervisory bodies are to be allowed to conduct individual prudential supervision. The rules need to be fleshed out at national level.

4.7.4. The Committee notes that specific European rules will be necessary to require the exchange of appropriate information between national supervisory bodies.

Brussels, 28 March 2001.

The President

of the Economic and Social Committee

Göke Frerichs

(1) See Opinion CES 950/99 on the Communication from the Commission - Towards a Single Market for Supplementary Pensions - Results of the consultations on the Green Paper on Supplementary Pensions in the Single Market (COM(1999) 134 final), OJ C 368, 20.12.1999, p. 57. The ILO distinguishes between four pillars, but in the EU a division into three pillars has been generally accepted.

(2) OJ L 149, 5.7.1971, p. 2.

(3) OJ L 74, 27.3.1972, p. 1.

(4) OJ L 63, 13.3.1979, p. 1.

(5) OJ L 375, 31.12.1985, p. 3.

(6) OJ L 141, 11.6.1993, p. 27.

(7) OJ L 126, 26.5.2000, p. 1.

(8) Proposal for a Council Directive relating to the freedom of management and investment of funds held by institutions for retirement provision, COM(91) 301 final, OJ C 312, 3.12.1991, p. 3; ESC Opinion, OJ C 169, 6.7.1992, p. 2.

(9) COM(1997) 283 final of 10 June 1997; ESC Opinion 1403/1997, OJ C 73, 9.3.1998, p. 114.

(10) COM(1999) 134 final of 11 May 1999; Opinion CES 950/99, OJ C 368, 20.12.1999, p. 57.

(11) Moreover, the Report from the Lamfalussy Committee of Wise Men on the Regulation of European Securities Markets has stressed the priority of reforming "out-dated investment rules for pension funds" if an integrated European financial market is to be established.

(12) Judgment of the Court of 21 September 1999: Albany International BV v Stichting Bedrijfspensioenfonds Textielindustrie. Case C-67/96. European Court Reports 1999 page I-5751.

APPENDIX

to the Opinion of the Economic and Social Committee

The following amendments were defeated, but received at least one quarter of the votes cast:

Point 3.1

Amend as follows:

"... endorses its aims, particularly protection of members, which it regards as a priority. It is not yet clear, however, whether the proposal for a directive meets this requirement."

Reasons

Such liberal investment rules are extremely risk-laden, as current developments on the stock markets make clear. It must be possible with an instrument for collective retirement provision to have a rough idea of what future payments will be. This is not the case if most of a pension fund's assets consist of highly-volatile securities.

Result of the vote

For: 44, against: 49, abstentions: 8.

Point 4.2

Replace with the following:

"The Committee expresses reservations, however, about the very liberal investment rules. In view of stock market volatility and the long periods over which these funds are usually invested, these rules carry an unacceptably high risk for future pensioners."

Reasons

Such liberal investment rules are extremely risk-laden, as current developments on the stock markets make clear. It must be possible with an instrument for collective retirement provision to have a rough idea of what future payments will be. This is not the case if most of a pension fund's assets consist of highly-volatile securities.

Result of the vote

For: 44, against: 52, abstentions: 7.

Point 4.4.1, second paragraph

Amplify as follows:

"Member States shall allow the undertakings and individuals located within their territories to sponsor institutions for occupational retirement provision authorised in other Member States,. unlessIf a collective agreement between workers and employers exists - which may possibly have been declared generally binding - which requires thethose workers and undertakings covered by the agreement to participate in a specified company pension fund, the Member States should guarantee that the employees and employers concerned are excluded from it if they become members of an at least equivalent old age pension scheme with an institution in another Member State that is authorised to provide occupational retirement provision."

Reasons

Delete the term "individuals", since it is the standing jurisprudence of the ECJ that the term "undertaking" covers all types of businesses, from a PLC to a one-man business.

The aim of the directive, alongside the equal treatment of all service providers, is to create an internal market for financial services as well as an internal market for supplementary old age pensions. But this goal would be frustrated if, through the conclusion of collective agreements, foreign providers of certain lines of business in a Member State could be excluded, in extreme cases, from the whole of a Member State in the event of the national social partners agreeing on a monopoly for a given national pension fund. For this reason at least, an opt-out possibility should be provided for in the rapporteur's proposal where there is an equivalence of systems.

Result of the vote

For: 36, against: 71, abstentions: 6.

Point 4.6

Reword as follows:

"The Committee believes that institutions for retirement provision must always have sufficient assets to cover their liabilities In the event of a temporary shortfall a plan must be drawn up to make it good."

Reasons

Shortfalls should not be licensed.

Result of the vote

For: 45, against: 59, abstentions: 5.