European Committee Adopts Report on Proposed Occupational Pensions Directive

Washington, DC, July 3, 2001 - The European Parliament's Economic and Monetary Affairs Committee (EMAC) adopted a report on June 21 concerning the European Commission's proposal for a directive on occupational pensions. EMAC's report, which is based on a draft report issued by EMAC's rapporteur, proposes 97 amendments to the original proposal by the Commission. Parliament is expected to vote on the proposed amendments in plenary session this week. Separately, on June 28, 2001, individual Members of Parliament (MEPs) also tabled amendments to the proposal.

European Commission Proposal
The Commission's proposed directive would cover institutions that operate on a funded basis for the sole purpose of providing retirement benefits (IORPs). The directive would impose certain conditions for the operations of IORPs, investment rules for IORPs, and rules permitting the cross-border management of occupational pension schemes.

Biometric Risk
Unlike the Commission's proposed directive, EMAC's report proposes to require IORPs to offer participants coverage for biometric risks (risks of longevity, disability, and premature death). To emphasize the importance of providing for longevity in occupational pension schemes, EMAC proposes to define "retirement benefits" as benefits whose purpose is lifelong financial provision and that usually takes the form of payments for a lifetime. EMAC also would include an amendment that would make it clear that member states may apply preferential tax treatment to occupational retirement schemes that cover biometric risks.

Investment Rules
EMAC would revise the Commission's proposal to regulate plan investments under a general prudence standard but allow member states to continue to impose some quantitative investment restrictions on IORPs established within their jurisdiction. EMAC proposes to require member states to phase out quantitative investment limits within five years; the rapporteur had proposed a 10-year phase out period. EMAC also proposes that the Commission issue a report reviewing the progress of the member state authorities in supervising the prudence person standard three years after the directive enters into force in order to determine whether the phase-out period could be reduced further.

Cross-Border Activities
EMAC proposes amendments to provisions that address cross-border activities of IORPs. First, EMAC proposes to permit member states to exclude from the scope of the directive institutions with fewer than 50 participants or beneficiaries, rather than those with fewer than 100 participants or beneficiaries as proposed by the Commission. Moreover, regardless of whether such small institutions are excluded from the scope of the directive, the EMAC amendment would require member states to allow these small institutions to engage asset managers or custodians that are established in another member state.

Second, EMAC proposes to amend slightly the rules regarding liability coverage for IORPs that are engaged in cross-border activities. EMAC's amendments, however, do not go as far as the rapporteur's draft report in eliminating the stricter rules for IORPs conducting cross-border activities. The rapporteur's draft amendment that would have deleted the Commission's requirement that the "technical provisions" of IORPs be fully funded when they engage in cross-border activity was not adopted by EMAC. Under EMAC's amendments, IORPs engaged in cross-border activities must comply with the rules regarding technical provisions that are applicable in their home member states.

Treatment of Service Providers
The EMAC report proposes to provide insurance companies with the choice of setting up a separate legal entity that would be subject to all provisions of the directive or of managing the pension business by establishing a separate "clearing agency" that would be subject to the provisions of the directive governing supervision and investment.

The EMAC report also proposes to eliminate a provision in the directive that would allow member states to make the conditions of operation of an IORP subject to other requirements for the interests of participants and beneficiaries.

Taxation of Pension Schemes
The EMAC report recognizes that unified principles for taxation to prevent tax evasion or double taxation of contributions and benefits are necessary for the creation of a single European market for occupational pensions. EMAC encourages member states to adopt a deferred taxation (Exempt, Exempt, Tax) system - Exempt contributions, Exempt investment income and capital gains, and Taxed benefits.

Other Amendments
EMAC also proposes several other changes to the Commission's occupational pensions directive and directs the Commission to submit additional legislative and other proposals for developing and completing occupational retirement provisions in Europe.

EMAC's report emphasizes that the occupational pension directive is based on home country rule and proposes several amendments clarifying that IORPs would be regulated by the member states in which the IORPs are established. For example, EMAC would grant to home member states the right to supervise compliance with labor and social law requirements of host member states.

EMAC also would require that member states set up by January 2003 a committee consisting of the supervisory authorities of all member states that would exchange information about the relevant labor and social provisions and the characteristics of retirement pension schemes in member states. EMAC would require each competent authority to produce an annual report, which would include information about its investigations, including the names of IORPs that it has investigated. EMAC also would require supervisory authorities to agree on uniform standards for calculating the costs related to investments.

EMAC focuses on transferability of pensions by proposing several amendments to ensure that pensions can be transferred to different schemes. Moreover, to accommodate member states in which retirement institutions are required to delegate certain activities (such as investment management) to other entities, EMAC proposes an amendment that would authorize expressly member states to entrust the management of IORPs to other financial institutions, such as investment companies.