COMMISSION COMMUNICATION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the common position of the Council on the adoption of a directive on the activities and supervision of institutions offering occupational retirement provision services

2000/0260 (COD)

COMMISSION COMMUNICATION TO THE EUROPEAN PARLIAMENT pursuant to the second subparagraph of Article 251(2) of the EC Treaty concerning the common position of the Council on the adoption of a directive on the activities and supervision of institutions offering occupational retirement provision services

1. BACKGROUND

Commission proposal transmitted to the European Parliament and the Council

(document COM(2000)507 final - 2000/0260 (COD)) // on 11 October 2000

Economic and Social Committee opinion delivered

// on 28 March 2001

Parliament opinion (first reading) delivered // on 4 July 2001

Council common position adopted // on 5 November 2002.

2. AIM OF THE COMMISSION PROPOSAL

The Lisbon European Council issued a forceful reminder of the need to complete the internal market in financial services. This will include full implementation of the Financial Services Action Plan [1] by 2005. Coordination of the rules applicable to institutions for occupational retirement provision (IORPs) - which currently lack an appropriate Community framework - is a central plank of the Action Plan. These institutions must be able to carry out their activities securely within the internal market, for the benefit of firms and workers who require their services to manage their retirement savings.

[1] COM (1999) 232.

In drawing up the proposal for a Directive, the Commission paid careful attention to two issues: security and efficiency. It is vital to ensure a very high standard of protection for the income of future pensioners. But IORPs must also be efficient, particularly as regards investments and cross-border transactions. Insufficient protection is a threat to retirement benefits. Inefficiency increases the cost of saving, to the detriment of the competitiveness of firms and the financial balance of pension schemes. Consequently, the proposal for a Directive contains:

-Strict prudential rules to protect beneficiaries. IORPs must be subject to detailed rules of operation. Members and beneficiaries must be properly informed of the terms of the scheme, the financial situation of the institution and their rights. Benefits promised must be calculated prudently and be covered by sufficient assets. If an IORP offers any financial guarantees, it must hold own funds. Finally, the supervisory authorities must have the necessary powers to monitor adequately the IORPs for which they are responsible;

-Investment rules tailored to the characteristics of IORPs and geared towards effective savings management. IORPs invest on a very long-term basis and can predict with relative ease the amount of benefits they will have to pay out. They should, therefore, be allowed a certain amount of freedom in determining the investment policy which best suits their commitments. They should, in any event, ensure that their assets are fairly widely spread. Member States may, if necessary, lay down more detailed rules for supervision of the institutions within their territory. However, such rules should not interfere excessively with the international diversification of investment portfolios and investment in shares, which generally offer high long-term returns and satisfactory security;

-Rules enabling cross-border (and consequently more efficient) management of occupational pension schemes. At present, it is impossible for an IORP to manage a pension scheme for a company located in another Member State. A firm which has offices in the fifteen Member States must set up fifteen different schemes. Substantial economies of scale could be achieved if one institution managed all the schemes, while respecting local social and labour law requirements. This would require mutual recognition of supervisory regimes, which is one of the key objectives of the proposal. The proposal also provides for a cooperation procedure between supervisory authorities where occupational schemes are managed on a cross-border basis.

3. COMMENTS ON THE COMMON POSITION

3.1. General remarks on the common position

Thanks to the substantial efforts of the Spanish Presidency, the Council adopted the common position on 5 November 2002. The Commission is able to accept the amendments introduced in the Council common position, which preserves the main thrust of the Commission proposal.

The common position furthermore takes account of nearly all the amendments proposed by Parliament and accepted by the Commission. These have been incorporated, in some cases after being reworded in the interests of internal consistency of the text. Three of Parliament's amendments that were accepted by the Commission have not, however, been taken on board, chiefly on account of reorganisation of the text and for the sake of internal consistency. The common position develops and clarifies the main provisions of the Commission proposal concerning in particular the scope of the instrument (Article 2), optional application to life assurance companies (Article 4), conditions of operation (Article 9), information to be given to members and beneficiaries (Article 11), technical provisions (Article 15), investment rules (Article 18), management and custody (Article 19) and cross-border activities (Article 20). A new Article 21 on cooperation between Member States and the Commission has also been added.

The changes made by the common position do not water down the Commission proposal; in fact they usefully spell out or clarify the arrangements proposed by the Commission, with special reference to the necessary standards for ensuring mutual recognition of national prudential systems, a precondition for allowing cross-border membership.

The main changes made to the Commission proposal in the Council common position are commented on in detail below.

3.2. Action taken on the amendments proposed by Parliament at first reading

Parliament adopted 99 amendments, the letter or spirit of 44 of which was accepted in full or in part by the Commission.

3.2.1. Amendments accepted by the Commission and incorporated in the text of the common position

(a) Title of the common position

The title has been adjusted in line with Parliament's amendment 1 in order to bring out more clearly the fact that the Directive not only relates to the activities of IORPs but is also intended to enable their activities to be supervised.

(b) Recitals

Recital 4 of the common position

This recital stresses the importance of the Directive not only in the absence of a legislative framework allowing IORPs to benefit from the internal market but also in view of the role they play on the financial markets, in particular as long-term investors. This recital takes account of Parliament's amendment 4.

Recital 5

This new recital incorporates part of Parliament's amendment 7. It stresses that the Directive forms part of a set of measures aimed at creating a genuine single market for IORPs and developing this sector. The wording of the amendment has nevertheless been adjusted in line with the content of the new provisions on investment (Article 18).

Recital 6

This is a new recital incorporating Parliament's amendment 8, which has been adjusted in line with the amendments made to the investment rules. It mentions the twin objectives of security and efficient investment as the essential aims pursued by the Directive.

Recital 8

This recital stresses that the Directive does not call into question the Member States' responsibility for organising their pension systems and for the role played by the different institutions providing occupational retirement benefits in the context of the second pillar. It incorporates Parliament's amendment 10.

Recital 12

This recital refers to Article 5 of the common position and spells out the scope of the Member States' freedom to choose not to apply the Directive to small pension institutions and statutory schemes. It stresses that such institutions must nevertheless always be able to benefit from the freedom to provide services as regards the management and custody of their assets, thereby reflecting the spirit of the first part of Parliament's amendment 15.

Recital 15

This recital stresses the importance of legal separation between the IORP and the sponsoring undertaking as an essential means of protecting members, but adds the need for minimum prudential standards as proposed by Parliament in amendment 17 .

Recital 28

This recital has to do with Article 18 of the common position. It states that investment policy must be tailored to the IORP's membership profile and thus incorporates part of Parliament's amendment 25, which the Commission partly took on board. The content of the recital has also been adjusted in line with the new provisions on investment introduced in Article 18.

Recital 32

This recital states that the choice of asset manager should be a matter for the IORP and not the sponsoring undertakings. It incorporates Parliament's amendment 28.

Recital 33

This recital refers to Article 20. It reflects the spirit of amendment 29 called for by Parliament, according to which prudential supervision is the responsibility of the home Member State. It has also been aligned on the new wording of Article 20, whereby the Directive is not intended to interfere with the organisation of pension schemes in the Member States, and spells out the scope of cross-border membership.

(c) Substantive provisions

Article 2 Scope

Article 2(1)

This provision ensures that the Directive applies where IORPs do not have legal personality and are run by management entities, as is the case in some Member States. It has been reworded to reflect the spirit of Parliament's amendment 33.

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

This provision spells out the conditions in which Member States can decide to apply certain provisions of the Directive to life assurance companies. The Council common position states that, in that case, the assets and liabilities corresponding to the occupational retirement provision business must be ring-fenced. It also stresses that the competent authorities of the home Member State are responsible for verifying the strict separation of the relevant occupational retirement provision business. This is in line with the spirit of Parliament's amendment 36.

Article 5 Small pension institutions and statutory schemes

First paragraph of Article 5

The Council common position stipulates that, while Member States may exclude small pension institutions from the scope of the Directive, such institutions must be able at all times to benefit from the freedom to provide services as regards the management and custody of their assets. This incorporates part of amendment 37 proposed by Parliament. The common position nevertheless adds that, where the institutions concerned so wish, they must have the right to apply the Directive, it being understood that any cross-border activity would have to comply fully with the Directive's provisions.

Article 6 Definitions

Article 6(a)

The Council common position points out in its definition of an IORP that the latter does not have to take on a particular legal form and that its activities must arise directly from its main purpose of providing retirement benefits. This reflects the spirit of Parliament's amendment 38. It also spells out the conditions in which such institutions can manage occupational pension schemes for self-employed persons, stressing that this must be done in full compliance with national legislation. This point is covered by the new recital 9 (see below).

Article 6(c)

The definition of a sponsoring undertaking has been amended in order to remove any ambiguity concerning the role of individuals, in particular self-employed workers. This reflects the spirit of amendment 40 proposed by Parliament.

Article 7 Activities of the institution

A new paragraph has been added to stipulate that, where an insurance undertaking manages its occupational retirement provision business by ring-fencing its assets and liabilities, the ring-fenced assets and liabilities must be restricted to retirement provision business, in line with the spirit of the first paragraph. This reflects the thrust of Parliament's amendment 46.

Article 9 Conditions of operation

Article 9(1)

The wording introduced in the common position affirms the home-country principle, whereby Member States are entitled to monitor the conditions of operation of institutions established in their territory. It incorporates the spirit of amendment 47 proposed by Parliament.

Point (d) has also been amended by the Council common position to spell out the arrangements for computing and certifying technical provisions. This must normally be done by an actuary or, if the profession is not recognised, by an auditor or another specialist in accordance with national legislation. The actuarial methods used must furthermore be recognised by the Member States' competent authorities.

Lastly, point (f) has been adjusted to take account of the specific features of the law of some Member States in which pension schemes do not always have a contractual basis.

Article 9(3)

This new paragraph allows Member States to permit or require activities to be delegated to other entities operating on behalf of IORPs. It reflects the spirit of Parliament's amendment 52.

Article 10 Annual accounts and annual report

The common position stipulates that the requirements referred to in this Article are to be laid down by the home Member State for the IORPs located in its territory. This is in line with the spirit of amendment 53 proposed by Parliament.

The wording of the Article has also been amended to make it clear that, in a situation in which an IORP operates more than one occupational pension scheme, annual accounts and annual reports will have to be drawn up for each of them. It likewise spells out more clearly the information to be contained in the reports and the standards that information has to meet.

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

Article 11(1)

The common position stresses that it is for the home Member State to lay down the rules on information to be given to members and beneficiaries while fully respecting the acquis communautaire, and in so doing it follows the spirit of Parliament's amendment 54. It has also been amended to stipulate that the list of information to be provided is a minimum and that Member States are free to lay down more detailed rules on information to be supplied by IORPs located in their territory.

Article 13 Information to be provided to the competent authority

The common position stipulates that it is for the home Member State to lay down the rules on information to be supplied to the competent authority. This reflects the spirit of amendment 62 proposed by Parliament.

It also clarifies certain aspects of the information which can be demanded by the competent authority of the home Member State, in particular information on the (not always contractual) relationships between the IORP and other companies or between IORPs, the statement of investment policy principles, the assumptions used in actuarial valuations, and the reports drawn up by the persons responsible for auditing the annual accounts.

Article 14 Powers of intervention and duties of the competent authority

The Council common position has aligned the wording of the title of this article on its actual content, thereby incorporating Parliament's amendment 66.

The provisions stipulate, notably in paragraphs 1, 2, 3 and 4, that it is for the home Member State to lay down the rules on the duties and powers of the supervisory authorities, reflecting the spirit of Parliament's amendments 67, 68, 69 and 71.

Article 16 Funding of technical provisions

Article 16(2)

This provision lists the conditions in which a Member State may allow an institution to depart from the rule that it must always have sufficient assets to cover technical provisions. The Council was anxious to make it clear in the common position that transfer procedures relate not only to assets but also to the corresponding liabilities. It incorporates Parliament's amendment 78.

Article 17 Regulatory own funds

Article 17(1)

This provision sets out the conditions in which the IORP is to be required to hold regulatory own funds. It has been clarified by stipulating that the precise type of risk incurred by the IORP has to be reflected in the size of the buffer. It incorporates amendment 80 proposed by Parliament.

Article 18 Investment rules

Article 18(1)

The Council common position has clarified the wording of this paragraph by referring to the prudent person rule, a well-known concept, and stipulating that the rules of behaviour listed thereafter are the essential aspects of that concept. It thus incorporates Parliament's amendments 82 and 85.

The rule on self-investment (i.e. investment in the sponsoring undertaking) has been confirmed and supplemented with a ceiling of 10% in cases where the sponsoring undertaking belongs to a group. The common position nevertheless stipulates that, where the IORP is sponsored by a number of undertakings, investment in those sponsoring undertakings must be made prudently. This reflects the spirit of amendment 84 proposed by Parliament.

Paragraphs 3, 4 and 6 provide that the rules and principles are to be laid down by the competent authority of the home Member State for IORPs located in its territory; they therefore incorporate Parliament's amendments 86, 87 and 89.

Article 20 Cross-border activities

Article 20(1), (2) and (3)

The common position has amended the wording of these provisions in line with the changes to the definitions in Article 6 relating to the sponsoring undertaking and the inclusion of the notion of individuals in that definition, by deleting the word "individual" from these paragraphs. In this it has followed amendments 91 and 92 proposed by Parliament. It has also clarified, in paragraph 2, the requirement that any IORP wishing to provide services to a sponsoring undertaking located in another Member State must obtain prior authorisation; this incorporates Parliament's amendment 131. Lastly, it has clarified the wording of paragraph 3(c) by specifying that the information to be supplied with the notification to the host Member State must include the main characteristics of the occupational pension scheme to be operated; this reflects the spirit of amendment 132 proposed by Parliament.

The Council was also anxious to make it clear in the common position that any cross-border activity must be developed in full compliance with the provisions of national social and labour legislation on the organisation of Member States' pension systems, including compulsory membership. This is fully in line with the objectives of the Directive, which is not intended to interfere with national pension schemes.

Article 20(8)

This provision clarifies the host Member State's obligation to inform the home Member State of any change in its social and labour law in the field of occupational pension schemes. The amendment reflects the spirit of amendment 94 proposed by Parliament. The common position also stipulates that this exchange of information must likewise cover any changes to the investment rules referred to in Article 18(7) and to the information requirements referred to in Article 20(7).

Article 20(9) and (10)

These new paragraphs introduced by the Council reflect the spirit of Article 14(5) of the Commission proposal and of amendments 72 and 95 proposed by Parliament. They relate to supervision by the host Member State's competent authority of the IORP's compliance with the requirements of the host Member State's social and labour law, inter alia concerning the information to be given to members and beneficiaries. They also deal with the measures that can be taken in the event of a breach of those requirements: such measures are first to be taken by the competent authority of the home Member State; if the latter fails to act or fails to enforce the measures it has taken, the competent authority of the host Member State is then entitled to intervene and may in the last resort prevent the IORP from operating in the host Member State on behalf of a sponsoring undertaking. All these provisions are in line with those existing in the life assurance sector.

3.2.2. Parliament amendments accepted by the Commission but not incorporated in the text of the common position

Amendment 16 aligned the content of recital 14 of the common position on the wording of Article 7 of the Commission proposal. Since that Article was amended in order more accurately to reflect the activities of IORPs in certain Member States, there was no longer any need to maintain this amendment in the text of the common position.

Amendment 43 clarified the definition of "location" and was accepted in substance by the Commission. However, deletion of the reference to location in the definitions of home and host Member State (Article 6(i) and (j)) removed the need for a definition of location, and this amendment was therefore not incorporated in the common position.

Amendment 77 stressed that the provisions of Article 16(2), concerning the possibility of an IORP having insufficient assets to cover technical provisions, were not a one-off. Since the amendment to paragraph 2 no longer used the term "derogation" but described a de facto situation, there was no longer any scope for one-off interpretation. That is why this amendment was not incorporated in the common position.

3.3. New provisions introduced by the Council common position

(a) Recitals

Recital 9

This new recital relates to Article 6(a) of the common position, which defines an IORP. It describes how the situation regarding the participation of self-employed persons in IORPs differs across the European Union: self-employed persons are covered under the third pillar in some Member States and under the second pillar in others. This recital is necessary for a proper understanding of Article 6(a).

Recital 16

This recital explains that in some Member States prudential supervision is exercised not only on IORPs themselves but also on the entities or companies authorised to manage them. The entities managing IORPs may be insurance companies or other financial entities.

Recital 19

This recital refers to Article 10. It stresses the importance of annual accounts and annual reports as an essential source of information both for members and for the competent authorities and mentions the obligation in all Member States to draw up annual accounts and annual reports for each institution and, where appropriate, each scheme.

Recital 21

This recital has been amended in order to align it as much as possible on the text of Article 12 of the common position. The idea has thus been introduced that investment principles should, once they have been established, be reviewed every three years and made available to the competent authorities.

Recital 23

This recital relates to Article 15 of the common position. It makes a clearer reference to the factors and methods to be used for the prudent calculation of technical provisions.

Recital 27

This recital refers to Article 17 of the common position. It provides that, where biometric risks are covered by the IORP and not the sponsoring undertaking, the IORP should hold own funds at least similar to those required of life assurance companies.

Recital 30

This recital has to do with Article 18. The common position strengthens, in accordance with the prudent person principle, the degree of prudence to be exercised in investing funds, particularly in categories of assets carrying higher levels of risk, and allows certain types of investment to be limited only on prudential grounds.

Recital 31

This new recital relates to Article 18(7), which is also new. It explains the introduction of certain quantitative investment limits into the Directive and specifies the circumstances in which such limits may be enforced.

Recital 34

This new recital refers to Article 20 and states that cross-border membership is possible only if the provisions of social and labour law in force in the Member State in which the sponsoring undertaking is located are fully respected. It also explains what is meant by social and labour law.

Recital 35

This new recital refers to situations where an IORP manages several company pension schemes at least one of which is for a company located in another Member State and where it may be required to ring-fence those schemes' assets and liabilities. It states that in such cases the provisions of the Directive are to apply individually to each scheme and not at the level of the IORP.

Recital 36

This new recital relates to the new Article 21 and stresses the need for close coordination between Member States' competent authorities and between them and the Commission.

Recital 37

This new recital provides, in accordance with Article 21, that the Commission is to be assisted by an Insurance and Pension Committee and that the distinct specificities of institutions for occupational retirement provisions and insurance undertakings are to be taken into account in the organisation of this Committee's work. The creation of this Committee is essential to ensure the proper application of the directive and fits in the discussion currently underway on financial stability, supervision and integration, with special reference to committee procedures.

The Commission nevertheless considers that appropriate measures will have to be taken to establish this Committee and precisely define the role it will have to play. This will be done once the Council has adopted its conclusions on financial stability, supervision and integration.

(b) Substantive provisions

Article 2 Scope

Article 2(2)

The new provisions introduced by the Council common position are intended to make it clear that the scope of the Directive does not include non-life insurance companies covered by Directive 73/239/EEC or institutions operating in a similar manner to the German Unterstützungskassen. In the latter case, the wording has been amended in order to give a more general definition of such institutions without specifically referring to them by name. The common position has also deleted the reference to Annex II to Council Regulation (EEC) No 1408/71, which gives a list of benefits and not institutions.

Article 3 Application to institutions operating social security schemes

The common position provides that, where the Directive is applied to institutions that also operate first-pillar schemes, measures must be taken to ensure that the assets and liabilities corresponding to their occupational retirement provision business are ring-fenced and cannot be transferred to social security schemes.

Article 5 Small pension institutions and statutory schemes

Second paragraph of Article 5

The common position provides that, if Member States choose not to apply certain provisions of the Directive to institutions where occupational retirement provision is made under statute and is guaranteed by a public authority, those institutions may engage in cross-border activities only if all the provisions of the Directive are applied in full.

Article 6 Definitions

Article 6(d)

The common position has clarified the scope of retirement benefits by defining them chiefly as payments made by reference to reaching or the expectation of reaching retirement. They may additionally cover, on an ancillary basis, payments made in certain cases (death, disability or cessation of employment) or support payments or services in other cases (sickness or death). The changes made here serve merely to clarify the Commission's original text.

Article 6(e)

The common position has clarified the concept of members by stressing that it is their occupational activities which entitle them to retirement benefits.

Article 6(h)

The common position has more precisely circumscribed the definition of biometrical risks by linking them to death, disability and longevity.

Article 6(i)

The common position has clarified the definition of home Member State by merging Article 6(j) and the first indent of Article 6(l) of the Commission proposal and stipulating that, if the institution does not have a registered office, the home Member State is the one in which it has its main administration.

Article 6(j)

The common position has defined the host Member State as the Member State whose social and labour law relevant in the field of occupational pension schemes is applicable to the relationship between the sponsoring undertaking and members. This replaces the Commission's original text, which defined the host Member State in relation to the registered office of the sponsoring undertaking.

Deletion of a definition

The Council decided to delete the definition of risk capital markets given in Article 6(i), since no such definition exists elsewhere in Community legislation.

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

Article 11(2)

The common position introduces the idea that the information to be given to members and beneficiaries may have to be transmitted to their representatives. It also stipulates that, where an IORP manages more than one pension scheme, the annual accounts and annual reports to be supplied to members and beneficiaries are those relating to their particular pension scheme.

Article 11(3)

This provision has been introduced to stipulate that the statement of investment policy principles must also be made available to members and beneficiaries and/or, where applicable, to their representatives on request. It reflects the spirit of Article 12(2) of the original Commission proposal.

Article 11(4)

The obligation included in the Commission proposal to provide the information listed in this paragraph together with the annual accounts and the annual report has been deleted from the common position since requests for information can relate to certain issues that do not necessarily have to do with the annual accounts and the annual report.

Article 11(5)

This provision relates to the amount of retirement benefits due and the arrangements for payment of these benefits. The common position has added that this information must be provided on retirement or when other benefits become due.

Article 12 Statement of investment policy principles

These provisions require IORPs to draw up, and review at least every three years, a statement of their investment strategy covering certain aspects of their risk measurement methods and strategic asset allocation. The common position has nevertheless split between different articles (i) the principle of drawing up such a statement (Article 12), (ii) the obligation to make it available to members and beneficiaries (Article 11) and (iii) the obligation to supply it to the competent authorities (Article 13).

Article 14 Powers of intervention and duties of the competent authority

Article 14(2)

This provision spells out the measures that the competent authority can take with regard to an IORP in the event of an irregularity. The common position adds that these measures may be, where appropriate, of an administrative or financial nature.

For the sake of consistency, the common position has moved paragraph 5 of the Commission proposal to Article 20, which relates to the specific case of cross-border membership.

Article 15 Technical provisions

Article 15(1) and (2)

The common position provides that it is the home Member State which is responsible for laying down the rules governing the calculation of technical provisions. It also adds that these provisions must relate to the whole range of the IORP's pension schemes.

Article 15(3)

This paragraph establishes the general principle that technical provisions must be calculated every year but nevertheless permits Member States to allow such calculation to take place once every three years. The common position has introduced two changes to the conditions to be fulfilled for this derogation to apply: the IORP must provide its members and/or the competent authority (and not just the competent authority) with a certification or a report (rather than a certification) of adjustments for the intervening years.

Article 15(4)

This paragraph sets out the principles that should govern the calculation of technical provisions and the main parameters involved in the calculation. The amendments introduced by the common position relate to:

-The degree of prudence in the actuarial valuation, which must take account of all the commitments entered into by the IORP;

-The degree of prudence in the choice of the economic and actuarial assumptions, taking account if applicable of an appropriate margin for adverse deviation;

-The maximum rates of interest used, to be determined by reference either to the yield on the corresponding assets held or to the market yields of high quality or government bonds;

-The use of biometric tables that are appropriate in the light of the characteristics of the pension scheme;

-Adjustment of the method and basis of calculation in line with changes in legal, economic and demographic circumstances.

Article 15(6)

The common position has introduced an invitation to the Commission to report every two years or at the request of a Member State on the possible impact of the rules governing the calculation of technical provisions on cross-border activities. The common position specifies that the report is to be addressed to the future Insurance and Pension Committee, which could where appropriate call on the Commission to propose any necessary measures to prevent possible distortions of competition. This amendment should be seen as part of the process of monitoring the impact of the rules on the development of occupational pension schemes. To respond to this invitation and reassure Member States as to its intentions, the Commission adopted the statement reproduced in point 5 below.

The Commission however stresses that article 15(6) will have to be adjusted by appropriate measures or provisions to make it fully consistent with the conclusions on financial stability, supervision and integration that will be drawn by the Council soon.

Article 16 Funding of technical provisions

Article 16(2)

The common position spells out here a number of issues to do with the conditions in which a Member State may allow an institution to depart from the rule that it must always have sufficient assets to cover technical provisions: the main precondition is that it must draw up a recovery plan to re-establish full funding of technical provisions; the plan must also be made available to members and, where applicable, their representatives; and in the event of termination of the pension scheme the transfer procedure may also have to be disclosed to members and their representatives in accordance with the principle of confidentiality.

Article 16(3)

In the event of cross-border activity, the technical provisions must be fully funded. The common position spells out the powers of the competent authority of the home Member State to intervene if this principle is breached. It also stipulates that the home Member State may require assets to be ring-fenced in order to ensure that this requirement is complied with: this could be the case where an IORP manages more than one pension scheme.

Article 17 Regulatory own funds

Article 17(2)

The common position makes it clear that the rules of Directive 79/267/EEC which are to apply are those laid down in Articles 18 and 19 of that instrument. It also adds that they serve to determine the minimum amount of the additional assets to be held.

Article 17(3)

This new provision introduced by the common position nevertheless stipulates that Member States are free to apply to institutions located in their territory more detailed rules on regulatory own funds, provided that these are justified on prudential grounds.

Article 18 Investment rules

Article 18(1)

This paragraph establishes the prudent person rule as the basic principle on which investment policy must be based. The Council nevertheless wished in the common position to supplement this basic rule with a number of general principles by drawing on and expanding paragraphs 2 and 3 of the Commission proposal. These principles state more specifically that assets are to be invested (i) in the best interests of members and beneficiaries, (ii) in a manner to ensure the security, quality, liquidity and profitability of the portfolio, (iii) predominantly in regulated markets, (iv) possibly in derivative instruments insofar as these contribute to a reduction of investment risks, and (v) in a diversified way so as to avoid excessive reliance on any particular type of asset.

Article 18(2)

The common position has introduced this new provision, which is also in line with the prudent person rule and prohibits IORPs from borrowing or acting as a guarantor on behalf of third parties other than for liquidity purposes and on a temporary basis. This is compatible with the nature of the activities of IORPs and the general principle that technical provisions must be fully funded.

Article 18(5)

These provisions allow Member States to apply more detailed, including quantitative, rules to institutions located in their territory. The common position states that these more detailed rules may be those laid down by the Third Life Assurance Directive (92/96/EEC).

The common position nevertheless places certain limits on Member States' freedom to apply such rules: while IORPs in general must be allowed to invest up to 70% of their portfolio in shares or similar vehicles, Member States may apply a lower limit to institutions which provide retirement products with a long-term interest rate guarantee, bear the investment risk and themselves provide the guarantee.

Article 18(7)

This new paragraph introduces certain quantitative limits on investment and specifies the circumstances in which they may be applied. The three limits relate to investments in securities which are not admitted to trading on a regulated market, investments in securities and instruments issued by the same undertaking or group of undertakings, and investments in assets denominated in non-matching currencies. The conditions in which these limits may be applied are as follows: (i) the IORP must operate a pension scheme for a sponsoring undertaking located in another Member State (the host Member State); (ii) the authority of the host Member State must expressly request that the rules be applied; and (iii) it may do so only if the host Member State applies the same or stricter rules to IORPs located in its territory. To ensure that the rules are complied with, the home Member State may require that the IORP ring-fence its assets.

These rules are justified by the desire on the part of certain Member States to provide a safety net to protect their nationals in the event of cross-border membership. They are nevertheless in line with a broad definition of the concept of prudence and diversification and should not have a major impact on asset allocation.

Article 19 Management and custody

Article 19(1)

The Council common position has broadened the freedom to provide asset management services to include services offered by managers authorised in accordance with the new UCITS Directive (2001/107/EC) and the management entities referred to in Article 2(1).

Article 19(2)

The Council was anxious to make it clear in the common position that exercise of the freedom to provide services in the field of the custody of assets is fully compatible with Member States' right to make the appointment of a depositary or custodian compulsory.

Article 19(3)

This new paragraph introduced by the Council common position requires Member States to have arrangements in place under their national law enabling them to freeze assets held by a depositary or custodian, at the request of the authority of the IORP's home Member State. It is similar to an existing provision in the life assurance sector (Article 24 of Directive 79/267/EEC).

Article 20 Cross-border activities

Article 20(4), (5) and (6)

These provisions deal with the information to be exchanged between supervisory authorities and between them and the IORP before the latter can start to engage in cross-border activity. The Council common position has clarified the sequence of information exchanges and the reference to the relevant requirements of social and labour law, which are those in the field of occupational pensions, and has included in the information to be communicated any rules that would have to be applied in accordance with Article 18(7) (investment rules - see above) and Article 20(7) (information requirements - see below).

Article 20(7)

This new paragraph introduced by the Council common position requires IORPs operating on a cross-border basis to comply with any information requirements imposed by the host Member State in accordance with Article 11. It is to be seen in the context of the general principle of compliance with the host Member State's social and labour law requirements in the event of cross-border activity and of course applies only to the members of a pension scheme managed on a cross-border basis.

Article 21 Cooperation between Member States and the Commission

This new article introduced by the Council common position establishes the principle of effective cooperation between Member States and the Commission as essential to the satisfactory application of the Directive. Such cooperation is also necessary to ensure the smooth operation of cross-border membership. The article furthermore provides that Member States are to notify the Commission of any major difficulties they encounter in applying the Directive; such difficulties are then to be examined by the Commission and the Member States concerned.

The article also calls on the Commission to present, five years after the entry into force of the Directive, a report on the application of the investment rules and the rules relating to depositaries.

Again in the context of cooperation between Member States, the article gives the host Member State the option of requesting the home Member State to require the ring-fencing of the assets and liabilities of IORPs operating on a cross-border basis, as provided for in Articles 16(3) and 18(7).

Finally, the article specifies that the Commission will be assisted by an Insurance and Pensions Committee. The Commission underlines however that this last provision is incomplete and will have to be adjusted by appropriate measures or provisions to make it fully consistent with the conclusions that will be drawn by the Council on financial stability, supervision and integration.

Article 22 Implementation

The Council common position allows Member States a period of 24 months to bring into force the measures necessary to comply with the Directive. It has also introduced two clauses allowing derogations:

(1) One relating to regulatory own funds and allowing Member States to postpone for five years the application of Article 17(1) and (2) to IORPs which do not have the minimum level of regulatory own funds;

(2) The other relating to the ceiling on investment in the sponsoring undertaking, allowing Member States to postpone for five years the application of Article 18(1)(f).

However, in both cases, institutions wishing to operate occupational pension schemes on a cross-border basis within the meaning of Article 20 can do so only if they comply immediately with all the provisions of the Directive.

4. CONCLUSIONS

The Commission takes the view that the common position adopted unanimously by the Council preserves the main thrust of its proposal as well as the substance of the amendments proposed by the European Parliament and accepted by the Commission. Despite the large number of amendments made to its initial proposal, the Commission is convinced that the common position strikes a satisfactory balance between, on the one hand, upholding a high standard of prudential control and security of pensions and, on the other, maintaining the efficiency of existing schemes and a high level of financial accessibility of pensions.

It therefore hopes that the Directive will be adopted by the end of the year in accordance with the timetable set by the Heads of State and Government at Barcelona.

Subject to the above comments, in particular those related to the full consistency with the conclusions on financial stability, supervision and integration to be drawn by the Council soon, the Commission can approve the common position and accordingly recommend that the European Parliament approve the common position.

5. COMMISSION STATEMENT

The Commission made the following statement on the occasion of the adoption of the common position:

"The Commission considers that the directive aims at providing a high level of protection for members and beneficiaries. A prudent calculation of technical provisions is an essential condition to achieve this objective. This would imply that the interest rate and other economic and demographic factors should be chosen prudently.

The Commission considers that the report provided for in Article 15(6) is an important element to improve transparency and mutual confidence. It undertakes to assess carefully and regularly, in close consultation with Member States whether the situation prevailing in Member States leads to any forum-shopping, and to prudential standards which are not sufficiently prudent. It will also pay particular attention to any information drawn to its attention by Member States regarding the possibilities of such forum-shopping.

After consultation with Member States the Commission will propose any measure necessary to prevent possible distortions and to protect the interests of beneficiaries and members of any scheme."