EUROPEAN IGP ASSOCIATE INSURERS DIRECTIVE 200341EC ON THE

EUROPEAN IGP ASSOCIATE INSURERS DIRECTIVE 2003/41/EC ON THE ACTIVITIES AND SUPERVISION OF INSTITUTIONS FOR OCCUPATIONAL RETIREMENT PROVISION THE EU PENSIONS DIRECTIVE AND ITS PROGRESS ANNE MAHER Chief Executive The Pensions Board 8 March 2004 Düsseldorf

PRESENTATION WILL COVER ª Background ª Contents of Pensions Directive ª Implementation Process ª Other related EU Activities ª Leading to Pan European Pensions? 2

BACKGROUND ª Started with speech by Sir Leon Brittan, (then Vice-President of EU Commission) in 1990 announcing “A Single Market for Pensions” ª EU activity during 1990 s included Ø Proposal for Pensions Directive Ø Pensions Communication both of which failed. ª From 1997 – 2000 Ø Green Paper Ø Various Communications Ø Working Documents issued as part of consultation process. ª Proposal for a Directive on the Activities of Institutions for Occupational Retirement Provision published 11 October 2000 3

EU PENSIONS DIRECTIVE General ª Came into force on 23 September 2003 ª EU Member states have 2 years to implement i. e. must implement by 23 September 2005 ª Key aims Ø ensure protection for pension plan members Ø liberalise investment environment for pension plans in EU Ø remove barriers to cross-border pension plans ª Differentiates between national pension plans and cross-border plans ª Provides legal framework for Pan-European pension plans 4

EU PENSIONS DIRECTIVE Requirements to be met in National Legislation Article 1 - 5 (Scope) Directive must be applied to institutions for occupational retirement pensions (IORPS) Article 6 - 8 (Activity) IORPS must ªlimit activities to retirement benefit related operations and activities arising therefrom ªbe a separate legal entity Article 9 - 12 (Conditions) IORPS must ªbe recognised by local supervisory authority ªbe run by persons of good repute and have professionally qualified management ªhave proper rules ªhave technical provisions certified by an actuary or other similar specialist ªhave regular financing for any guarantees ªprovide appropriate information to members including annual accounts, annual reports and statements of investment policy principles ªfor cross-border activity have prior authorisation from competent authorities of home member state 5

EU PENSIONS DIRECTIVE Requirements to be met in National Legislation (continued) Article 13 - 14 (Competent Authorities) Information must be provided to competent authorities who must have powers of intervention Article 15 - 17 (Technical Provisions and Funding) There must be ªprudent calculation of technical provisions and adequate funding for pension liabilities ªfor cross-border activity there must be full funding at all times ªwhere IORPS is providing biometric risk cover or guarantees they are subject to same solvency requirements as life assurance companies Article 18 (Investment) Investment of assets must be ªin accordance with ‘prudent person rule’ ªin line with nature and duration of pension liabilities ªdiversified ªsubject to limits on self-investment Member states may only apply limited quantitative investment restrictions (up to 70% in stock and 30% in foreign currencies must be allowed) For cross border activity host member states may impose investment restrictions to IORPS in home member states provided same or stricter rules apply in host member state 6

EU PENSIONS DIRECTIVE Requirements to be met in National Legislation (continued) Article 19 (Management and Custody) IORPS must be allowed to appoint investment managers or custodians in another member state Article 20 (Cross-border Activity) A sponsoring undertaking in one member state (host state) may set up an IORP in another member state (home state). In such cases ªsupervision is by home state ªprudential rules of home state apply ªsocial and labour law of host state applies Article 21 (Co-operation) Member states and Commission must co-operate to apply Directive and create conditions for cross-border membership Article 22 – 24 (Implementation) Member states must implement into national legislation before 23 September 2005 7

EU PENSIONS DIRECTIVE Areas where Member States need to decide approach ª Application to pension business of insurance companies covered by Life Directives ª Possible exclusion of pension schemes with less than 100 members (de minimis rule) ª Designation of competent authorities for different provisions ª Any requirement for additional national investment provisions to be required for national employees in an IORPS located in another Member State ª Whether to maintain/introduce quantitative investment rules 8

EU PENSIONS DIRECTIVE Regulatory conditions needed for Pan European Pensions ª Separate legal entity ª Meet information to members, funding, diversification and security of assets, freedom of investment requirements of Directive ª Recognition by home country supervisor ª Special conditions Ø Ø Ø authorisation of fund in home country fully funded at all times prudential rules: home country of fund social and labour laws: host country of beneficiaries information requirements: host country of beneficiaries ª Each state may prescribe additional investment constraints relating to its “section” provided such constraints not greater than those imposed on local schemes in that state ª In practice may require ring fencing of each section’s assets 9

IMPLEMENTATION PROCESS ª Establishment of 2 EU Committees Ø European Insurance and Occupational Pensions Committee (EIOPC) consists of Finance Dept officials / policy level Ø Committee of European Insurance and Occupational Pensions Supervisors (CEIOPS) consists of supervisors/technical level ª Progress of Member States Ø Issues are time frame, consultation process, making of decisions, amending of legislation Ø All member states at different stages and most targeting implementation in 2005 Ø Must be done by 23 September 2005 ª Issues Ø Cross Border Activities likely to be biggest issue 10

OTHER RELATED EU ACTIVITIES ª Tax Co-Ordination Ø European Court of Justice Cases Ø EU Communication of 19 April 2001 Ø Current moves to enforce ª European Federation for Retirement Provision Model for Pan-European Pensions ª Joint EU Commission/Council Report on Adequate and Sustainable Pensions ª Equality Directives… 11

PAN-EUROPEAN PENSIONS? What is in it for Employers? ª Governance/Control Ø Manager preferred providers Ø Greater risk control/ALM Ø Smaller number of plans ª Cost Savings Ø Ø Ø Influence investment strategy Fund managers pooling Tax efficiency Offset DB assets/surplus Service provider economies Centralised administration ª Corporate Change/Culture Ø M&A activity Ø One company, one culture? 12

PAN-EUROPEAN PENSIONS? What might Member States offer? ª Funds Management ª Funds Administration ª Legal ª Accounting ª Actuarial ª Investment Consulting ª Benefits Administration 13

PAN-EUROPEAN PENSIONS? What is on offer already ª Ireland’s Common Contractual Fund (CCF) ª Luxembourg’s Fund Communs de Placement (FCP) ª CCF and FCP enable multinationals to pool investments in a tax-efficient manner ª Features of CCF Ø Contractual Structure • Unilateral establishment by manager • Custodian assumes fiduciary obligations Ø Ø Ø Common Ownership of assets = “Tenancy in Common” No separate Legal Personality Limitation of liability of Investors Established under EU UCITs directive Regulated by IFSRA 14

IN CONCLUSION The Pensions Directive ª is a first step ª which is likely to trigger pension changes ª and it is a time of opportunities 15