Pensions back on the EU agenda


The morning after the night before (the much publicised Farage/Clegg debate on Europe), the European Commission published a proposal for a new Occupational Pension Funds Directive with somewhat less fanfare.

Long awaited, the draft builds on the original 2003 Directive (which laid the groundwork for the introduction of changes such as scheme specific funding), with a view to bringing occupational pensions into the more transparent era of good governance that is emerging from the ashes of the global financial crisis.   As such, key aims of the new Directive are to introduce clearer and more consistent member communications across EU Member States, as well as measures to support the EU Commission’s roadmap to meet the long-term financing needs of the European economy.


In this Alert:

Key points

  • The proposal for a new European Directive for occupational pension schemes focuses on governance, transparency and facilitating cross-border activity.
  • With an eye to improving the long-term financing of the European economy, the Commission anticipates that its proposal will better enable pension schemes to invest in assets with a long-term economic profile.
  • Provisions relating to solvency and capital requirements are not part of the present proposals, although they are expected to make a comeback later in the year.
  • It is anticipated that Member States will be required to implement the Directive into national law by 31 December 2016.


As with much of the new legislation relating to the financial sector, one of the main drivers for the Commission’s proposals on pensions is the 2008 financial crisis and the need to deal with the perceived lack of governance and transparency.  Set against the backdrop of individuals in some Member States seeing their pensions reduced, scheme members increasingly bearing the financial risk through greater use of DC, and an ever ageing population, it is unsurprising that the draft Directive aims to ensure the security and adequacy of members’ benefits in retirement.

The Commission is also keen to encourage greater take-up of cross-border pensions, by making it easier for schemes to comply with the social and labour law provisions of other Member States, and introducing a procedure for transferring pension schemes (in whole or in part) between Member States.


The Commission’s proposals are underpinned by four main objectives:

  • Ensuring the soundness of occupational pensions and better protecting pension scheme members and beneficiaries
  • Better information for pension scheme members and beneficiaries
  • Removing obstacles for cross-border provision of services so that occupational pension funds and employers can fully reap the benefits of the single market
  • Encouraging occupational pension funds to invest long-term in growth, environment and employment enhancing economic activities.

Improving governance

Of particular interest to occupational pension scheme trustees in the UK are the proposals to ensure that those effectively running workplace pension schemes, or who have “key functions” in respect of them, are fit and proper for the role.  It is suggested that such individuals will have “professional qualifications, knowledge and experience which are adequate to enable sound and prudent management” of the scheme and that they “are of good repute and integrity”.

At this stage, it is unclear exactly what level of qualification is envisaged, for example, whether complying with existing trustee knowledge and understanding requirements and obtaining a certificate of completion of TPR‘s trustee toolkit will suffice.

Other governance measures on the table include:

  • additional requirements on key functions, including risk management, internal audit and, where relevant, actuarial function
  • a requirement for schemes to have a remuneration policy
  • self-assessment of the risk management system, to help schemes become more aware of their commitments to scheme members and to enable them to make better informed decisions about investing in long-term assets
  • a requirement for DC schemes to appoint a custodian, responsible for the safe-keeping and oversight of the scheme’s assets, with a view to reducing operational risk
  • enhanced powers for national regulators.

Member communications

The Commission is also proposing the introduction of a mandatory, standardised, annual communication for occupational pension scheme members across the EU, to provide them with clear and simple information about their individual pension entitlement.  The draft Directive sets out what information needs to be included in the new pension benefit statement, with the aim of helping members understand whether they:

  • are saving enough to maintain their standard of living after retirement
  • have got their approach to investing about right.

Facilitating cross-border activity

The Commission has acknowledged the current complexities for schemes operating cross-border, in particular the need for a scheme in one Member State (referred to as the “home” Member State) to manage members whose relationship with the scheme’s sponsoring employer is subject to the social and labour law of another Member State (the “host” state).

To remove the anomalies of a system which can result in more stringent requirements for cross-border schemes compared with their local counterparts, for example in terms of prudential regulation or investment rules, the Commission is proposing to clarify the procedure for schemes wishing to offer their services in other Member States and the respective roles of the home and host Member States.  It is also proposing to introduce a procedure for transferring pension schemes (in whole or part), to a scheme in another Member State.

Rather disappointingly, the rumoured removal of the requirement for cross-border schemes to be fully funded at all times has not materialised.

Investment restrictions and long-term growth

Current restrictions on long-term investments are to be removed, unless they can be justified on prudential grounds.  For example, Member States will not be able to restrict schemes from investing in long-term instruments that are not traded on regulated markets, nor investment in non-listed assets that finance low carbon and climate resilient infrastructure projects.

It is envisaged that this move will facilitate investment by pension funds in assets with a long-term economic profile, therefore enabling them to play a greater role in supporting growth in the real economy.

Solvency and capital requirements

The most controversial elements of the original proposals for reform were taken off the table in 2013 in the wake of considerable opposition from around the EU.  However, more work is being done behind the schemes on the “Holistic Balance Sheet” (a measure for valuing pension schemes which would require liabilities to be balanced by a mixture of assets, contingent assets, sponsor support and possible access to compensation schemes), and the need for schemes to maintain a risk-based funding buffer.  We expect to see further consultations on these measures in autumn 2014.

Next steps

The draft Directive is significantly longer that the 2003 version and, although the UK is ahead of the game in some areas, for example, with in terms of the pension industry’s recent focus on governance in DC schemes, we can expect a number of changes as a result.

Ultimately, the UK (along with all EU Member States) looks likely to be required to bring the Directive into national law by 31 December 2016.