The European Union could soon dismantle barriers to operating pension plans in more than one Member State, according to Towers Watson.

The firm expects an overhaul of the EU’s Pensions Directive to remove the onerous requirement that defined benefit pension plans must be ‘fully funded at all times’ if they operate in more than one EU Member State. A senior European Commission official has publicly identified this as an obstacle to cross-border pension provision, which it wants to encourage1. The Commission’s proposal for a revised Directive is likely to be published within the next two months.

Paul Kelly, a senior consultant at Towers Watson said: “For most employers, the cost of patching-up deficits quickly makes cross-border defined benefit plans a non-starter though some leading multinationals have established such plans in order to close local arrangements or to consolidate assets and liabilities. Once cross-border plans are no longer subject to tougher funding rules than single-country plans, employers can look at this afresh. This should also end the situation where employers have to switch off pension plan membership for employees seconded overseas to prevent the cross-border funding rules from kicking in.

The revised Directive might well include other changes that would make it easier for all types of pension plan, including defined contribution plans, to operate across borders. Towers Watson says that a more user-friendly regime could release pent-up demand from multinational employers for cross-border pensions.

Paul Kelly said: “For many multinationals, the substantial UK plans that they already sponsor could be a natural starting place when constructing an EU-wide plan, making the UK a potential hub for pan-European pensions. However, different locations will best suit the circumstances of different international firms: even under the present regime, clients we advise have established cross-border plans based in many EU jurisdictions – including Belgium, Luxembourg, Ireland and the UK.

Another helpful change in the revised Directive could be greater clarity over precisely what constitutes cross-border activity. That would benefit employers who want to avoid having to comply with cross-border rules as well as those seeking to operate such plans.”

Piggy Bank © The Economic VoiceThe ‘fully funded at all times’ requirement for cross-border defined benefit plans has come to the fore during the Scottish independence referendum campaign. The fear is that, if an independent Scotland is a member of the EU, this would turn many defined benefit plans into cross-border plans and bring the ‘fully funded at all times’ rule into play. Unless these plans were split, employers could then have to pay off deficits much more quickly.

Paul Kelly said: “Although its days are numbered, the ‘fully funded at all times’ rule is likely still to apply in March 2016, which is the proposed date for Scottish separation from the UK in the event of a ‘yes’ vote. There is nothing to stop the Commission from proposing the change very soon2, but it will take time to bring the new Directive into force.”

Any forthcoming Directive is only expected to change funding requirements for cross-border defined benefit plans, and not for single-country plans.

Paul Kelly said: “The Commission wanted to include a complete revamp of the funding framework in this version of the Directive. It backed down in the face of concerted opposition but has merely agreed to postpone action in this area. Employers can relax for now but should not presume that they have heard the last of this idea. The European Insurance and Occupational Pensions Authority continues to work on how to move this forward.”

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