Proposal for a COUNCIL DIRECTIVE relating to the freedom of management and investment of funds held by institutions for retirement provision
Date: 1991-11-12
Institutions: European Commission
Subjects: financial institution, financial management, freedom to provide services, investment transaction, single market, social-security benefit, social-security contribution

COMMISSION OF THE EUROPEAN  COMMUNITIES 

C0MC91) 301  final  - SYN 363 

Brussels, 12 November  1991 

Proposal  for a 

COUNCIL  DIRECTIVE 

relating to the freedom of management  and  investment  of  funds 

held  by  institutions  for  retirement  provision 

(presented  by the  Commission) 

-  2  -

EXPLANATORY  MEMORANDUM 

l.  INTRODUCTION - 6ENERAL CONSIDERATIONS 

A  number  of  matters  have  combined  in  recent  years  to  make  retirement 

provision  the  subject  of  much  interest  and  debate. 

Perhaps  the  most  important  of  these  matters  is  the  effect  of  social  and 

demographic  changes,  common  to  almost  all  Member  States  of  the  Community, 

which  are  likely  to  result  in  a  significant  increase  in  the  ratio  of 

retired  people  to  working  people  over  the  next  20-30  years. 

Whilst  this 

proposal  for  a  directive  does  not  directly  address  these  developments,  it 

is nevertheless against  this background  that  it must  be  seen. 

At  the same  time  developments  within  the Community  and  progress  towards  the 

Single  Market,  particularly  the  adoption of  the Capital  Movements  Directive 

(88/361/EEC)  and  the  2nd  Life  Assurance  Directive  (90/619/EEC),  have 

highlighted  various  problems  that  exist 

in  occupational 

retirement 

provision  at  a European  level. 

Institutions  for  retirement  provision  and  their  members  do  have  various 

rights  which  can  be  derived  directly  from  the  treaty  or  from  existing 

legislation.  Although  there  is  relatively  little  legislation  at  Community 

level  which  refers  specifically  to such  institutions,  the  treaty  provisions 

on  freedom  of  services  and  free  movement  of  capital,  together  with  the 

Capital  Movements  Directive are of  course  of  direct  relevance  to  them. 

The  various  directives  relative  to other  financial  institutions  are also of 

indirect 

relevance 

in  that 

these 

institutions  offer 

services  to 

institutions  for  retirement  provision,  particularly  the  services  of 

investment  management  and  custody  of  assets. 

Some  comparison  with  the provisions  of  these  directives  is also  inevitable 

in  that  the  benefits provided  by  institutions  for  retirement  provision 

-  3 -

can  also  often  be  provided  by  other  financial  institutions,  particularly 

life assurance  companies. 

The main  provisions of  this proposal  for  a directive  are  concerned  with  the 

effective  application  of  the  rights  which  in  principle  are  already 

guaranteed  by  the  treaty  and  existing  legislation. 

In  addressing  the  problems  which  exist  at  Community 

level,  the 

Commission's  services  have  identified  three  principal  objectives which  were 

outlined-  and  developed  in  a  working  paper  issued  to  Member  States  in 

October  1990  and  discussed  subsequently  in  a  series  of  consultation 

meetings  with  Member  States'  experts.  These  objectives  aim  to  implement 

effectively  the Treaty  given  freedoms of  services  and  capital  movements  for 

institutions  for  retirement  provision.  They  have  been  discussed  under  the 

headings of: 

-  freedom  of  cross-border  investment  management 

-  freedom of  cross-border  investment 

-  freedom of  cross-border  membership of  such  institutions. 

These  objectives  themselves  are  simply  the  expression  of  the  treaty 

principles  of  freedom  of  services  and  free  movement  of  capital.  However 

discussion  of  them  has  highlighted  a  number  of  practical  problems, 

particularly  in the  application  of  the  third  objective  above  which  however 

can  in no way  restrict  the underlying  Treaty  given  freedoms. 

Systems  of  retirement  provision  have  developed  over  many  years  and  in very 

different  ways  in the different  Member  States of  the  Community. 

This  is seen most  clearly  in the different  proportions of  retirement  income 

that  come  through  state,  occupational  or  individual  provision,  through 

funded 

or 

pay-as-you-go 

provision, 

through  publicly  or  privately 

- 4 -

administered  provision,  and  through  compulsory  or  voluntary  provision. 

Occupational  provision  may  be  organised  by  individual  employers  or  on  a 

sectoral  basis.  A  similar  variety  exists  as  regards  the  ways  of 

establishing  occupational  retirement  schemes.  They  may  be  set  up  by 

collective agreements, by single employers, groups or others. 

These  differences  are  deeply  rooted  in  national  cultures  and  economic 

systems  and  no  harmonisation  at  Community  level  is  either  necessary  or 

desirable. 

In particular  it  is not  necessary  to  harmonise  the  levels of  benefit  that 

are provided either  by  individual  components of  retirement  income or by the 

system  as a whole.  Community  action must  be carefully  judged  so as not  to 

upset  or  distort  the  equilibrium  which  has  been  established  at  national 

level.  Indeed  the  Commission  in  its  document  SEC(91)500  'Initial 

Contributions  by  the  Commission  to  the  Inter-Governmental  Conference  on 

Political  Union' draws attention  to the fact  that  there  is no question of a 

general  harmonisation of  the existing  systems.  It may  also  be  noted  that 

the  Inter-Governmental  Conference  is  considering  the  decision-making 

process for Article 51 of the treaty. 

There are however  a number  of  cross-border  aspects of  retirement  provision 

which  can  significantly  impede  the realisation of  the fundamental  freedoms 

of the Community  treaties. 

As  the  single  market  develops,  companies  increasingly  organise  their 

business operations on  a  trans-national  basis, employing  staff  resident  in 

more  than one Member  State, and  this can only  be expected  to  increase with 

closer economic  integration.  This  inevitably  focuses attention on the many 

difficulties  in  organising  occupational  retirement  provision  on  a 

consistent  basis  both  from  the  point  of  view  of  workers  and  companies, 

including many small  companies, for  instance operating  in border areas. 

These  difficulties  are  most  immediately  apparent  in  the  case  of  migrant 

workers  who  have worked  in more  than one Member  State  and  particularly  if 

they  have  done  so  whilst  remaining  with  the  same  employer, or more 

-  5  -

generally  within  the  same  group.  In  such  cases  it  is often  impossible  to 

organise  their  retirement  provision  in  a  consistent  and  tax-efficient 

manner,  and  this  can  constitute  a  significant  barrier  to  the  free  movement 

of  workers.  Such  problems  in  the  area  of  institutions  for  retirement 

provision  have  also  been  highlighted  by  progress  towards  the  single  market 

in  the  area  of  life  assurance  and  particularly  by  the  adoption  of  the  2nd 

Life  Assurance  Directive  (90/619/EEC) which  included  group  life  assurance 

contracts  within  its  scope.  Such  contracts  are  often  used  for  the 

provision  of  pension  benefits  and  it  will  thus  become  possible  for 

occupational  pension  benefits  to  be  provided  across  national  borders  by 

means  of  life  assurance  contracts.  The  Commission  has  also  taken  action 

under  article  169  of  the  treaty  to  remove  fiscal  barriers  to  such 

provision.  The  alternative,  often  more  direct,  provision  through  an 

institution  for  retirement  provision  however  remains  extremely  difficult 

and  there  should  be  equal  opportunities  for  these  alternative  methods  of 

financing.  The  diversity  of  national  systems  for  financing  retirement 

provision  poses many  practical  problems  in this  respect. 

Despite  these  various  problems,  it  should  be  emphasised  that  institutions 

for  retirement  provision  and  their  members  are  not  without  rights, which  in 

many  cases  can  be  derived  directly  from  the  treaty  or  from  existing 

legislation.  Measures  to  remove  the  remaining  barriers  are  not  included 

within  this  proposal  for  a  directive,  but  the  Commission  is  currently 

reviewing  these  problems  with  the  intention  of  bringing  forward  further 

proposals  or  taking  further  action  in  due  course,  in  order  to  facilitate 

the  free  movement  of  persons  and  services.  In  this  respect  the  Commission 

has already  adopted  on  the  17th  July  1991  a Communication  to  the Council  on 

the  rôle  of  occupational  pension  schemes  in  the  social  protection  of 

workers  and  their  implications  for  freedom  of  movement.  This  proposal  is 

consistent  with  that  communication  and  any  further  proposals  would  of 

course  also be  so. 

-  6  -

There  is strong  pressure  from  consumer  organisations  for  further  proposals 

which  would  give  greater  freedom  for  consumers.  From  their  point  of  view 

the  current  proposal  may  be  considered  unbalanced  in  facilitating  the 

exercise  of  certain  freedoms  for  institutions,  without  providing  any 

freedoms  for  consumers  (in  the  sense  of  members  or  beneficiaries  of  these 

institutions)  to  remain  within  a  single  scheme  while  exercising  their 

freedom  to  work  in  different  Member  States.  This  needs  to  be  balanced, 

however,  against  the  need  to  ensure  that  any  future  proposals  do  not  call 

into  question  compulsory  supplementary  pension  schemes  operating  on  a  pay-

as-you-go  basis  fulfilling  a  'social  solidarity'  function. 

At  this  stage  the  practical  problems  related  to  the  objective  of  cross-

border  membership  require  further  study  before  any  additional  legislation 

could  be  proposed.  This  proposal  for  a  directive  therefore  deals 

essentially  with  the  aspect  of  institutions  for  retirement  provision  as 

financial  institutions,  in  other  words  with  the  first  two  of  the  three 

objectives  outlined  above,  and  not  with  the  third  objective.  Indeed  such 

institutions  represent  some  of  the  largest  financial  institutions  within 

the  Community  in terms of  the size of  assets under  their  control. 

However  the  importance  of  such  assets  varies  a  great  deal  between  the 

Member  States,  and  between  the  different  systems  of  pension  provision. 

Where  pension  liabilities  are  covered  by  book  reserves  in the balance  sheet 

of  an  employer,  there  is no  financial  institution  in  the  above  sense,  and 

such  systems  do  not  therefore  come  within  the  scope  of  this  proposal. 

Indeed  the  requirements  of  this  proposal  would  have  little  meaning  in such 

a  case.  Much  the  same  is true of  pay-as-you-go  systems  where  pensions  are 

paid  directly  from  contribution  income.  However  to  the  extent  that 

reserves  are built  up  in such  systems  and  are  invested  in financial  assets, 

they  clearly  can  be  considered  as  financial  institutions  for  whom  the 

requirements  of  this  proposal  would  have  a  meaning  and  indeed  they  would 

fall  within  the scope of  this proposal  for  a directive. 

- 7 -

However  the  vast  bulk  of  the  assets  covered  by  this  proposal  are  held  by 

those  institutions  for  retirement  provision  established  under  funded 

systems,  where  assets  are  accumulated  to  cover  not  only  current  pensions 

but  also  liabilities for  future pension payments.  For such  institutions it 

is clear  that  the protection of  the pension  rights of members  requires that 

the assets should be  invested prudently. 

The provisions of  the Capital  Movements Directive  (88/361/EEC) have a clear 

impact  on  institutions  for  retirement  provision  but  are  without  prejudice 

to  the  right  of  Member  States  to  take  all  requisite  measures  to  prevent 

infringements  of  their  laws  and  regulations,  inter  alia  in  the  field  of 

prudential  supervision  (Article 4 ). 

In order  that  institutions  for  retirement  provision  may  benefit  fully  from 

the  free  movement  of  services  and  capital,  it  is  therefore  necessary  to 

define  carefully  the  level  and  the  type  of  prudential  investment  rules, 

which  may  not  pursue  any  other  purpose.  Such  rules  must  be  Justified  by 

the  general  good  and  thus  enable  the  competent  authorities  of  the  Member 

States to exercise a control  on  institutions for  retirement  provision which 

is proportional  to the prudential  objectives  they may  legitimately pursue. 

Consequently,  on  the  one  hand  this  proposal  for  a  directive  lays  down 

limits on  the  type of  restrictions that  may be  imposed  by Member  States on 

prudential  grounds,  where  such  restrictions  would  be  inconsistent  with 

treaty  principles.  On  the  other  hand  it  proposes  a  number  of  prudential 

investment  principles  which  should  be  followed  by  all  institutions  for 

retirement  provision.  Although  this  does  not  prevent  Member  States  from 

applying  other,  possibly  more  detailed,  investment  rules  consistent  with 

these  principles,  it provides  a standard  against  which  any  such  rules may 

be assessed. 

In  determining  its  proposals  concerning  the  prudential  investment  of 

assets,  the Commission  has  taken account  of  the proposals already  made  for 

insurance companies, particularly  in  the  area  of  life  assurance,  and 

-  8  -

and  in  certain  cases  an  identical  text  is proposed.  This  is  particularly 

the  case  for  the  limits  on  the  type  of  restrictions  that  may  be  imposed, 

such  as  those  concerning  localisation  or  investment 

in  particular 

categories  of  asset.  However  the  proposal  also  allows  for  differences 

between  institutions  for  retirement  provision  and  insurance  companies  both 

in the  nature  of  their  liabilities  and  in the  extent  of  harmonisation  that 

I s  required.  In  particular,  as  the  current  proposal  does  not  cover  the 

objective  of  cross-border  membership, 

it  does  not  require  mutual 

recognition  of  the  supervisory  systems  in  different  Member  States,  it  is 

therefore  appropriate  that  the  harmonisation  proposed  for  prudential 

investment  rules  is not  as extensive  as  is the case  in  life assurance. 

The  proposal  aims  to  facilitate  the  exercise  of  freedoms  for  institutions 

for  retirement  provision  in  respect  of  the  investment  of  their  assets  and 

their  choice  of  investment  manager.  There  will  of  course  be  no  obligation 

to  use  these  greater  freedoms.  The  proposal  in  no  way  changes  the 

procedures  for  taking  decisions  on  investments  or  investment  management 

within  institutions  for  retirement  provision,  in particular  it does  not  in 

any  way  alter  the  extent  or  the  nature  of  any  arrangements  for 

participation  in decision-making  by  representatives of  the members. 

In  summary,  the  essential  value  of  the  proposal  lies  in  providing  greater 

precision  as  to  the  application  of  fundamental  treaty  principles  to 

institutions  for  retirement  provision.  By  providing  a  framework  for  the 

application  of  prudential  investment  rules  the  proposal  will  make  it 

significantly  easier  to  assess  whether  individual  rules  in  Member  States 

are  consistent  with  the  treaty  freedoms.  Similarly  for  the  application  of 

freedom  of  services  provided  to  institutions  for  retirement  provision,  the 

proposal  provides  greater  legal  precision  but  does  not  introduce  any 

fundamentally  new  principles. 

- 9 -

II. COMMENTARY  QN  THE  ARTICLES 

Article 1 - Définitions 

This Article contains definitions of  certain  terms used  In the proposal  for 

a directive,  the aim being  to clarify  their  meaning  and  hence contribute  to 

a better  understanding of  the Directive. 

The  definitions  of  'Institution  for  retirement  provision'  and  'Retirement 

Benefits'  are  drawn  widely,  the  intention  being  to  bring  within  the  scope 

of  the  directive  a  wide  variety  of  different  types  of  institution,  which 

however  have  in common  that  they  hold  assets  for  the  purpose  of  providing 

retirement  or  other  social  benefits  In  the  context  of  an  occupational  or 

employment  link.  Statutory  social  security  funds  as  defined  in  regulation 

1408/71  are specifically excluded  from  the scope. 

Article  Z - Scope 

This article  builds on  the definitions  in Article  1 to define  the  scope of 

the  proposal  for  a  directive.  This  scope  is  wider  than  would  be 

appropriate  for  a  directive  covering  the  objective  of  cross-border 

membership  and 

in  particular 

includes 

institutions  which  operate 

essentially  on  a  pay-as-you-go  basis  with  compulsory  membership  and 

limited  reserves.  The  proposal  does  not  in any  way  call  into question  the 

compulsory  membership  of  these  institutions,  nor  is there  any  Intention  to 

do so  in any  future  proposals. 

Paragraph  2  makes  clear  that  the  proposal  is  not  intended  to  apply  to 

financial  institutions  which  are  already  covered  by  other  directives  in 

related  areas.  This  is  necessary  in  view  of  the  close  relationships  and 

the  overlaps  In  type  of  activity  between  different  types  of  financial 

institutions. 

-  10 -

Article  3 -  Investment  management  and  Custody  services 

The  effective  exercise  of  the  right  of  free  provision  of  services,  in  this 

case  the  service  of  investment  management,  requires  not  only  that  the 

providers  of  a  service  are  free  to  offer  their  services  throughout  the 

Community,  but  also  that  the  demanders  of  a  service  are  free  to  select  a 

provider  who  is not  established  in their  own  Member  State. 

Whilst  other  Community  legislation,  or  proposed  legislation,  deals  with  the 

authorisation  and  the  activity  of  the  providers  of  the  service  of 

investment  management,  paragraph  1  of  this  article  aims  to  ensure  the 

freedom  of  institutions  for  retirement  provision  as  demanders  of  this 

service  to  choose  freely  from  amongst  those  authorised  to  provide  it. 

Paragraph  3  does  the  same  for  the  service  of  acting  as  a  custodian  or 

depositary  for  the  assets  of  such  institutions.  Whilst  the  provisions  of 

these  paragraphs  should  help  to  clarify  the  position  in  these  respects, 

such  freedoms  are  in  principle  already  available  by  direct  application  of 

the  Treaty. 

Paragraph  2  deals  with  the  situation  where  an  institution  for  retirement 

provision  manages 

its  own  investments,  or  those  of  an  associated 

institution  within  a group  of  undertakings. 

Although  not  all  Member  States  allow  this  possibility,  it  is necessary  that 

where  it  is allowed,  such  freedom  should  not  discriminate,  particularly  in 

cases  where  it  has  been  necessary  for  an  undertaking,  or  a  group  of 

undertakings  to  set  up  separate  institutions  to  cover  employees  in 

different  Member  States.  It  should  be  possible  for  such  institutions  to 

operate  for  the  purposes  of  the  choice  of  investment  manager  in  the  same 

way  as  they  would  have  been  able  to,  if  there  had  beer,  a  single 

institution,  and  in particular  to manage  their  own  investments. 

The  use  of  one  institution  for  retirement  provision  as  investment  manager 

for  a  separate  institution  associated  with  the  same  group  of  undertakings 

does  not  however  imply  any  pooling  of  the  assets  of  such  institutions,  nor 

any  difference  In the  treatment  of  such  institutions  for  taxation  purposes. 

Separate  identification  of  the  assets  of  each  institution  is  in  practice 

-  11 

likely  to  be  necessary  for  several  purposes,  including  for  instance  the 

need  to  respect  the  rights  of  members  to  participate  in  the  management  of 

the  institutions. 

Article 4 -  Investment  of  assets 

This  article  lays down  a number  of  principles  for  the prudent  investment  of 

assets  of  institutions  for  retirement  provision.  It  also  restricts  the 

possibilities  for  Member  States  to  apply  rules  which  would  limit  this 

freedom.  This  applies  in particular  to minimum  investment  requirements  in 

certain  asset  categories,  to  rules  on  localisation  of  assets  and  on 

currency  matching,  which  could  otherwise  have  the  effect  of  limiting  the 

possibilities  for  cross-border  investment.  In  this  respect  the  proposed 

rules  are  consistent  with  those  that  have  been  proposed  for  insurance 

compan i es. 

However  this  proposal  draws  a distinction  between  those  institutions  whose 

liabilities  are  fixed  in  monetary  terms  and  those  whose  liabilities  are 

instead  determined  by  some  other  factor  such  as  future  salary  levels.  In 

the  latter  case  the  principles  of  currency  matching  do  not  apply  in  the 

same  way  and  currency  diversification  may  be  a  more  important  element  of 

prudent  investment  management.  It  Is  therefore  appropriate  for  matching 

requirements  to be  less  restrictive. 

Paragraph  5 of  this  article makes  clear  that  Member  States  are  free  to  lay 

down  more  detailed  rules  for  the  investment  of  the  assets  of  institutions 

established within  their  territory.  These more  detailed  rules must  however 

not  contravene  the principles  laid  down  in this  article. 

There  is at  this  stage  no need  for  more  detailed  rules  to be  harmonised  at 

Community  level  as,  in  the  absence  of  any  proposals  for  cross-border 

-  12 -

membership,  this  proposal  does  not  require  mutual  recognition  of  the 

supervisory  systems  in different  Member  States. 

Articles 5-7 -  Implementation of  the Directive 

These articles contain  the final  provisions. 

-  13 -

Proposal  for a 

COUNCIL DIRECTIVE 

relating  to the freedom of management  and  investment  of  funds 

held by  institutions for  retirement  provision 

THE COUNCIL OF THE EUROPEAN  COMMUNITIES, 

Having  regard  to  the  Treaty  establishing  the  European  Economic  Community, 

and  in particular Articles 57(2) and 66 thereof, 

Having regard  to the proposal  from the Commission, 

In cooperation with  the European Parliament, 

Having  regard  to the opinion of  the Economic and Social  Committee, 

Whereas  institutions  for  retirement  provision  are  institutions sui  generis 

which  are  amongst  the  largest  and  most  important  financial  institutions 

within  the Community  and often  represent  an alternative means of  providing 

the  same  benefits  as  are  provided  by  other  competing  financial 

inst itut ions; 

Whereas  the  provision  of  supplementary  retirement  benefits  through 

institutions  for  retirement  provision  is  a  matter  of  considerable 

importance  for social  policy within  the Community  and  forms one part of  the 

overall  structure  of  retirement  provision,  the  components  of  which  vary 

considerably  between  Member  States, particularly  as  regards  the  level  and 

the  form  of  statutory  social  security  retirement  benefits;  whereas  there 

is  no  intention  to  alter  at Community  level  the  balance which  has been 

-  14 -

arrived  at  in  individual  Member  States  in  this  respect;  whereas  the 

provision  of  supplementary  retirement  benefits  can  facilitate  the  effective 

provision  of  a  satisfactory  level  of  overall  retirement  income;  whereas 

the  protection  of  rights  to  retirement  benefits  is  therefore  a  matter  of 

proper  concern  and great  importance  for  the Member  States; 

Whereas  the  provisions  of  this  Directive  apply  equally  to  many  different 

types  of  institution  for  retirement  provision  including  institutions  which 

operate  on  a  fully  funded  basis,  but  also  some  institutions  operating 

essentially  on  a pay-as-you-go  basis with  compulsory  membership  and  limited 

reserves  on  the  basis of  generational  transfers;  whereas  such  institutions 

are different  in many other  respects; whereas  the characteristics which  are 

necessary  for  their  stability must  be  taken  into account; 

Whereas  freedom  of  services  extends  to  the  provision  of  investment 

management  services  and  custody  services  to  institutions  for  retirement 

provision;  whereas  a  situation  where  such  institutions  are  restricted  to 

the  use  of  investment  managers  or  custodians  established  in  a  particular 

Member  State  is  incompatible  with  the  principle  of  freedom  of  services; 

whereas  the  requirements  for  authorisation  and  mutual  recognition  of  the 

providers  of  such  services  are  set  out  under  the  legislation  applicable  to 

these providers; 

Whereas  institutions  for  retirement  provision  represent  major  accumulations 

of  capital  within  the  Community;  whereas  the  provisions  of  Council 
Directive  88/361/EEC1  (capital  movements)  have  a  clear  impact  on  such 

institutions  but  are  without  prejudice  to  the  right  of  Member  States  to 

take  all  requisite  measures  to  prevent  infringements  of  their  laws  and 

regulations,  inter  alia,  in  the  field  of  prudential  supervision  of 

financial  institutions;  whereas  it  is  therefore  necessary  to define  in 

1 

OJ  No L  178, 8.7.1988,  p. 5. 

-  15  -

more  detail  the  prudential  investment  rules  which  are  consistent  with  the 

free movement  of  capital  and  the  freedom  of  services;  whereas  the  adoption 

of  common  prudential  investment  principles will  facilitate  the  exercise  of 

the  freedom  of  establishment  for  institutions  for  retirement  provision; 

Whereas  the  protection  of  members'  rights  requires  that  the  assets  of 

institutions  for  retirement  provision  be  invested  in  a  prudent  manner; 

whereas  capital  movements  within  the Community  must  not  lead  to a situation 

where  an  increased  level  of  risk  could  endanger  those  rights;  whereas  the 

assets  of  institutions  for  retirement  provision  must  therefore  be  invested 

with  the  care,  skill,  prudence  and  diligence,  under  the  circumstances  then 

prevailing,  that  a  prudent  man  acting  in a  like capacity  and  familiar  with 

such matters, would  use  in the conduct  of  an enterprise  of  a  like  character 

and  with  like  aims-,  whereas  those  responsible  for  the  investment  of  the 

assets  of  an  institution  for  retirement  provision,  such  as  the  directors 

or  trustees  of  such  an  institution,  and  their  delegates,  such  as  external 

or  internal  managers  and  advisers,  must  act  together  in  the  sole  interest 

of  plan  participants  and  beneficiaries;  whereas  no  investment  should  be 

made  for  the  particular  interest  of  any  such  directors  or  trustees  or  of 

their  delegates,  nor  should  any  investment  be  made  to  pursue  solely  the 

interests of  the undertaking  or  undertakings  which  sponsor  the  institution; 

whereas  the  investment  of  the  assets  of  an  institution  for  retirement 

provision  should  follow  the  principles  of  sufficient  diversification, 

quality,  liquidity  and  restraint  on 

investment 

in  the  sponsoring 

undertaking  or  undertakings;  whereas  the  investment  of  such  assets  must  be 

considered  and  Judged  within  the  context  of  the  overall  portfolio  and  the 

performance  objectives and  risk  tolerance  of  the  institution and  not  within 

the context  of  each  investment  taken  in  isolation; 

Whereas  supplementary  retirement  provision  is  often  organised  on  an 

occupational  basis  either  for  a  particular  sector  or  associated  with 

particular  undertakings;  whereas  as  a  result  of  progress  towards  the 

s ingle  market  such  undertakings  are  often  organised  on  a basis  which 

-  16 -

crosses  national  borders  and  wish  to  organise  retirement  provision  on  a 

consistent  basis;  whereas  direct  and  indirect  barriers  still  exist  to  the 

free  provision  of  cross-border  services  by  institutions  for  retirement 

provision;  whereas  in  this  respect  there  are  also  requests  from  consumer 

representatives  to  take  the  Community  dimension  Into  account  in  the 

development  of  supplementary  retirement  benefits;  whereas  this  dimension 

could,  subject  to  certain  conditions,  contribute  to  the  transnational 

mobility of workers; whereas  further  work  needs  to be done on  this subject, 

taking  into  account  the  differences  between  the  types  of  institution  for 

retirement  provision  and  not  calling  into  question  the  functioning  of 

institutions with  compulsory  membership, 

HAS ADOPTED  THIS DIRECTIVE: 

Article 1 

1.  This  Directive  shall  apply  to  institutions  for  retirement  provision  in 

order  to  ensure  certain  freedoms  concerning  the  management  and 

investment  of  their  assets. 

2.  This  Directive  shall  not  apply  to  financial  institutions  which  are 

covered  by 

CounciI  Direct ive 

89/646/EEC1 

Directive 

Direct ive 

(3rd Life Assurance  Directive) 

(3rd Non-Life  Insurance  Directive) 

Council  Directive 

85/611/EEC2 

Directive 

(Investment  Services  Directive) 

1 

2 

OJ  No L 386, 30.12.1989, p.  1. 

OJ  No L 375, 31.12.1985, p. 3. 

-  17 -

Article  2 

For  the purpose of  this Directive 

(a) "institution  for  retirement  provision"  means  an  institution  which  is 

established  separately  from  any  sponsoring  undertaking  for  the  purpose 

of  financing  retirement  benefits  to  a  group  of  persons  defined  by  an 

occupational  or  professional  or  similar  relationship.  Institutions, 

other  than  competent  institutions  within  the  meaning  of  Council 
Regulation  No  1408/711,  which  provide  retirement  benefits  prescribed 

by  or  provided  for  in  social  security  legislation  are  regarded  as 

institutions  for  retirement  provision  within  this  definition. 

(b) "retirement  benefits"  means  benefits  in  the  form  of  pensions,  whether 

for  life-time  or  a  temporary  period,  or  in  the  form  of  lump  sums  paid 

on  death,  disability,  cessation  of  employment  or  when  a  defined 

retirement  age  is  reached,  or  support  payments  in  case  of  sickness  or 

indigence  when  they  are  supplementary  to  the  abovementioned  benefits. 

Benefits  which  replace  social  security  benefits  as  defined  above  are 

regarded  as retirement  benefits within  this  definition. 

(c) "sponsoring undertaking" means  any  undertaking  or  other  body  which  pays 

contributions  into an  institution  for  retirement  provision. 

Article  3 

1.  Member  States  which  permit  the  external  management  of  the  investments 

of  certain  forms  of  institution  for  retirement  provision,  shall  not 

restrict  the  freedom  of  such  institutions  to  choose  an  investment 

manager,  for  parts or  the whole  of  their  assets, who  is established  in 

another  Member  State  and  duly  authorised  for  this  activity,  according 

to Directive 

(3rd  Life Assurance  Directive),  Directive 

(Investments  Services Directive) or  Directive  89/646/EEC. 

1 

CJ  No L  149, 5.7.1971,  p. 2. 

- 18 

2.  Member  States  shall  allow  institutions  for  retirement  provision  of 

which  the  sponsoring  undertakings  belong  to a  group  of  undertakings  to 

organise  the management  of  their  investments  on  a group  basis,  through 

one  of  these  institutions.  This  shall  not  affect  the  right  of  Member 

States  to  provide  that  institutions  for  retirement  provision  shall  be 

managed  by  a separate  legal  entity. 

3.  Member  States which  permit  or  require  that  the assets of  an  institution 

for  retirement  provision  are  held  by  a custodian  shall  not  restrict  the 

freedom of  such  institutions  to choose  a custodian  to hold  parts or  the 

whole  of  their  assets,  who  is established  in  another  Member  State  and 

duly  authorised  according  to  Directive  89/646/EEC  or  Directive 

(Investment  Services  Directive), or  is accepted  as a depositary  for  the 

purposes of  Directive  85/611/EEC. 

Article  4 

1.  Member  States  shall  require  institutions  for  retirement  provision 

established  within  their  territory  to  invest  all  assets  held  to  cover 

expected  future  retirement  benefit  payments  in  accordance  with  the 

fol lowing  pr inciples: 

(a) the  assets  shall  be  invested  in a manner  appropriate  to  the  nature 

and  the  duration  of  the  corresponding  liabilities  and  the  level  of 

their  funding,  taking  account  of  the  requirements  of  security, 

quality,  liquidity  and  profitability  of  the  institution's  portfolio 

as a whole; 

(b) the  assets  shall  be  sufficiently  diversified  in  such  a  way  as  to 

avoid  major  accumulations of  risk  in the portfolio as a whole; 

(c)  investment  in  the  sponsoring  undertaking  or  undertakings  shall  be 

restricted  to a prudent  level. 

In  the  application  of  these  principles,  the  extent  of  any  insolvency 

insurance or  State guarantees must  be  taken  into  account. 

- 19 -

2.  Member  States  shall  not  require  institutions  for  retirement  provision 

to  invest  in  particular  categories  of  assets  or  to  localise  their 

assets  in a particular Member  State. 

3.  Member  States  shall  In  no  case  require  institutions  for  retirement 

provision  to hold more  than 80% of  their  assets  in matching currencies, 

after  taking  account  of  the effect  of  any  currency  hedging  instruments 

held  by  the  institution.  In  the  case  of  those  institutions  for 

retirement  provision  whose  liabilities  are  not  fixed  in  monetary 

terms,  but  are  for  instance  linked  to  future  salary  levels,  this 

percentage shall  be reduced  to 60%. 

Assets  denominated  in ECU shall  be  regarded  as matching  any particular 

currency  in the Community. 

4.  Member  States  shall  not  subject  the  investment  decisions  of  an 

institution  for  retirement  provision  or  its  investment  manager  to any 

kind of prior  approval  or systematic notification requirements. 

5.  Member  States  may  lay  down  more  detailed  rules  consistent  with 

paragraphs  1 to 4. 

Article 5 

1.  Member  States  shall  bring  into  force  the  laws,  regulations  and 

administrative  provisions  necessary  to  comply  with  this  Directive  not 

later  than  31  December  1992.  They  shall  forthwith  inform  the 

Commission  thereof. 

When  Member  States  adopt  these  provisions,  these  shall  contain  a 

reference  to  this  Directive  or  shall  be  accompanied  by  such  reference 

at  the  time  of  their  official  publication.  The  procedure  for  such 

reference shall  be adopted  by Member  States. 

-  21  -

-  20 -

2.  Member  States shall  communicate  to the Commission  the  texts of  the main 

laws,  regulations or  administrative  provisions  which  they  adopt  in  the 

field  covered  by  this Directive. 

Article  6 

This Directive  is addressed  to  the Member  States. 

Done  at Brussels, 

For  the Council 
The  President 

-  21 -

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  Council  Directive  on  the  coordination 

of  laws,  regulations  and  administrative  provisions 

relating  to  the  freedom  of  management  and  investment 

of  funds  held  by 

institutions  for  retirement 

provision. 

Reference Number  (Répertoire):  C0M(91) 

The proposal 

1.  Taking  account  of  the  principle  of  subsidiarity,  why  is  Community 

legislation necessary  In this area and what  are  its main aims? 

The main aims of  the directive  are as follows: 

1.  To  define  the  level  and  the  type  of  prudential  investment  rules 

which  are  consistent  with  the  freedom  of  services  and  the  free 

movement  of  capital  as  applied  to  institutions  for  retirement 

provision. 

2.  To remove obstacles  to the free provision of services by  investment 

managers  and  asset  custodians  by  removing  restrictions  on 

institutions  for  retirement  provision  freely  choosing  from  amongst 

the providers of such services. 

Since the main aims of  the directive  involve the removal  of barriers to 

cross-border  provision  of  services  and 

investment  of  assets, 

legislation  is necessary  at Community  level.  It  is recognised 

-  22 -

however  that  the  principle  of  subsidiarity  applied  to  the  area  of 

retirement  provision  requires  that  Member  States  should  retain  a  large 

measure  of  freedom  in  their  choice  of  systems  for  the  financing  of 

retirement benefits and  indeed  the  level of such benefits.  This freedom  is 

entirely  respected  in this proposal  for a directive. 

The  Impact on business 

2.  Who wiIl  be affected  by the proposal? 

- which sectors of  business 

There will  be an  indirect effect on businesses  in all  sectors  in as far 

as  businesses  contribute  to  institutions  for  retirement  provision  set 

up for  the benefit of  their employees.  The  institutions themselves are 

not  businesses,  in the  normal  sense  of  the word,  although  they  may  in 

some aspects of  their activity, act  in a similar manner. 

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

sized  firms) 

All  sizes of businesses are potentially affected  in the  indirect  manner 

described  above.  However  there  is probably  a  proportionately  greater 

number of  large firms affected, as where businesses have a choice as to 

the  level  of  retirement  benefits  provided  and  the  method  of  their 

financing,  larger  firms  are  more  likely  to  choose  the  option  of 

establishing  a  an  institution  for  retirement  provision.  Smaller  firms 

on  the  other  hand  are  more  likely  to  choose  provision  through  life 

assurance contracts. 

-  are  there  particular  geographical  areas  of  the  Community  where  these 

businesses are found 

InstiiUtions for  retirement provision  as defined  in the proposal  for a 

directive are particularly concentrated  in the United  Kingdom 

-  23 -

and  the  Netherlands  and  to  a  lesser  extent  in  Ireland, at  least  in as far 

as  the  level  of  assets  is concerned.  The  level  of  assets  covered  in other 

Member  States  is much  lower,  although  the  absolute  amounts  can  still  be 

quite significant. 

3.  What will  businesses have to do to comply with  the proposal? 

Businesses  will  not  need  to  take  any  direct  action  to  comply  with  the 

proposal.  Action  will  be  necessary  only  by  national  legislators  and 

supervisory  authorities.  However  this  will  increase  the  freedom 

available  to  institutions  for  retirement  provision  and  they  may  then 

wish  to  take  advantage  of  this  increased  freedom.  In  as  far  as  the 

institutions  themselves  can  be  considered  as  businesses, or  in as  far 

as businesses  are  involved  in the administration of  such  institutions, 

they may  therefore be  indirectly  affected. 

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

- on  investment  and the creation of new businesses 

By  removing  restrictions  on  the  investment  of  the  assets  of 

institutions  for  retirement  provision,  the proposal  should  improve  the 

economic  efficiency  of  investment  and  channel  resources  towards  more 

productive  investment,  which  could  include  the  creation  of  new 

bus i nesses. 

- on  the competitive position of  businesses 

In  many  cases  retirement  plans  provide  defined  benefits,  with 

businesses  accepting  the commitment  to  finance  the balance of  the cost 

after  allowing  for  fixed  contributions by members.  Any  improvement  in 

the  economic  efficiency  of  the  investment  of  the  related  assets  could 

therefore  directly  reduce  the  cost  to  businesses  of  financing  this 

commitment  and  thus  improve  their  competitive position. 

-  24 -

5.  Does  the  proposal  contain  measures  to  take  account  of  the  specific 

situation  of  small  and  medium-sized  firms  (reduced  or  different 

requirements, etc.)? 

No such measures are considered  necessary  in view of  the nature of  the 

proposal, which  is such  as  to  reduce  restrictions on  institutions  for 

retirement provision, and hence  indirectly on businesses, of all  sizes. 

Consultation 

6.  List  the organizations which have been consulted about  the proposal  and 

outline their main views. 

European Federation  for Retirement  Provision  (EFRP) 

The  EFRP  supports  the proposal, particularly  as concerns  the  proposals 

for  freedom of cross-border  investment.  They  have also  indicated  their 

support  for common prudential  principles for  the  investment  of assets. 

ISSN 0254-1475 

COM(91) 301 final 

DOCUMENTS 

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