26 October 2005

A Review of Legal and Technical Initiatives of the European Union Affecting Business Strategies and Human Resource Policies, Resulting from Direct Contacts with Decision-Makers within the EU and Regular Analysis of Key Developments in Europe.

EC Proposes New Pan-European Requirements for Occupational Pension Rights

The The European Commission (EC) has drafted a new legislative proposal aiming to improve the acquisition, the preservation, and transferability of occupational pension rights for employees changing employer or country of residence. The proposal also covers stricter information requirements for plan sponsors or pension providers. EU Member States can exempt from the scope of the directive unfunded schemes such as "pay-as-you-go schemes, support relief funds and book reserves" under specific conditions. To be effective, the EC proposal must be endorsed by the European Parliament and by all 25 EU Member States. The current deadline proposed for national implementation is July 2008. EU Member States may be granted, upon request, an extension of the compliance period of five more years. From a company perspective, if adopted in the current format, the directive will increase the cost and administrative burden of occupational pensions, especially for defined benefit (DB) schemes and in those countries where local laws and practices may make the acquisition and transfer of occupational pension rights more difficult.

The EC initiative originates from the assumption that certain national rules governing occupational pension schemes have a negative impact on pension benefits for employees moving to another job or country. Thus, such national rules are seen as an obstacle to employee occupational and geographic mobility. In its new proposal, the EC intends to remove these obstacles by establishing pan-European principles designed to improve the acquisition and retention of complementary pension rights for outgoing workers. In particular, the EC proposes to enhance occupational pensions rights in the four following areas:

• Conditions for acquisition: Age 21 is the ceiling that can be set by national law for starting to acquire pension rights. This will have an impact mainly in Belgium and Germany where the legal age limit is much higher (age 25 in Belgium and age 30 in Germany in the case of employer-financed schemes). The waiting period during which the employee cannot yet become a member of the pension scheme cannot exceed one year. Longer waiting period are currently allowed by national laws in Luxembourg (up to ten years) and Spain (up to two years). The qualifying period—the minimum time of membership necessary—to build up supplementary pension rights cannot exceed two years. In any case, all contributions made by the employee should be reimbursed or transferred in full.
• Preservation of "dormant" rights: The acquired rights left within the supplementary scheme under the former employer should be preserved in a way that would not penalise outgoing workers. EU Member States are allowed to set a threshold below which the acquired benefit rights are not kept but transferred or paid in a lump sum to the beneficiary.
• Transferability: In general, the outgoing employee will have the choice of maintaining his or her rights within the scheme of the former employer, or transfering rights already acquired to a new scheme. The choice will have to be communicated by the employee within 18 months after the termination of the employment contract. This right would not apply in the case of capital payments made for benefits below a given threshold fixed by the Member States. The EC proposal also fixes the "qualitative" conditions under which the transfer of acquired rights and the administrative cost linked to the transfer should be calculated, with a view to avoid any penalisation for the outgoing employee.
• Information disclosure: There is a general right guaranteed to the employee for obtaining the information necessary to assess how a termination of employment will affect his or her supplementary pension rights. In particular, upon request of the employee, the person responsible for managing the pension scheme should communicate in writing: 1) the conditions governing the acquisition of pension rights and the impact of these conditions when employment is terminated; 2) the pension benefits envisaged when employment is terminated; and 3) the conditions governing the preservation of dormant rights and the transfer of acquired rights. Deferred beneficiaries have a right to information on dormant rights and on all relevant changes to the rules governing the pension scheme.

These requirements are considered by the EC to be a minimum standard, implying that more favourable conditions for the employees, both those already in place or to be introduced, are allowed. The proposed directive covers all different forms of pension schemes based on an employment relationship, but it excludes explicitly from its scope the social security pension schemes, generally covered under another EC regulation already well established since the 1970s (Regulation n°1408/71). The so called AGIRC/ARRCO regimes operating in France are also excluded from the scope of the proposed directive.

The scope and conditions contained in the proposal are likely to evolve during the decision-making process that will last at the minimum one more year, requiring the unanimous approval of the Member States and the endorsement of the majority of the European Parliament.

For more information please contact Leonardo Sforza.