Spotlight on cross-border pensions

Giovanni Legorano: What is the main impact of European provisions on the Belgian pension system?

Jung Lichtenberger: It would surely be the Institutions for Occupational Retirement Provisions (IORP) directive, adopted in 2003, which was transposed into Belgian law. With this they created a specific pension vehicle – the Organisme de Financement de Pension/Organisme voor de Financiering van Pensioenen (OFP) – which reflects the requirements of the IORP directive.

This vehicle is able to attract sponsorships from employers outside of Belgium. I think it has been used on occasions, but in Europe cross-border cases of pension funds centralised in a country remain relatively low.

The IORP directive lays down the basic conditions for cross-border business. The directive enables a foreign employer in one country to set up a pension fund in Belgium or for Belgian employers to go to a different European country and set up a pension fund over there.

In other words, it is aimed at enabling a European internal market for pension funds. 

These provisions are coupled with “prudential regulations” which touch, for example, on funding requirements and on investment regulations. 

The prudential rules are based on the “minimum harmonisation and mutual recognition principles”, which means there are some high level common principles which should apply but there is a lot of freedom for member states in the way they actually implement them. 

Because of this, there could be the case that one member state has a more lenient application of these regulations than another one. 

If employers looking to set up a cross-border pension were to look for a location that suits their needs in regulatory terms then we would not necessarily be very cheerful about this. Regulatory arbitrage is not in the best interest of pension scheme members and beneficiaries. 

Giovanni Legorano: Could we get to a point in which the Commission will need to take action to avoid regulatory arbitrage?

Jung Lichtenberger: For the moment, the answer would probably be no. The directive we have is minimal in its current version and we ensure that these minimum requirements are met. We have to acknowledge though that the regulation systems in the different member states are diverse in the way they protect pension fund members. 

We have in the past years considered the question of whether we should get to full harmonisation of the rules for pension funds. 

We did a consultation on this and we have not taken a decision on the way forward yet. More harmonisation is not excluded for the future, but so far we have not seen a massive inflow into a specific country because of the possibility to arbitrage. 

While for the moment, funds are still predominantly looking for local solutions, the question is whether in going forward benefits can be obtained in a larger European market in terms of scale and scope economies, lower transaction cost, risk diversification and innovation. Some 76 cases of cross-border pension funds in total have been identified so far across Europe, which is not a lot. It’s only a beginning. The reason is that the pension systems are extremely diverse. 

Giovanni Legorano: What are the main trends in defined benefit and defined contributions plans in Belgium?

Jung Lichtenberger: In Belgium, like in many other countries, there is awareness that the trend of transition from DB to DC is somewhat unavoidable, but at the same time there is not necessarily a movement towards pure DC. DC plans often offer a minimum guarantee, at least a 0% return guarantee, which means at least the capital contributed is guaranteed.

If DC is the way to the future, an interesting debate is how we are going to control fluctuations. Are we going to use guarantees as in Belgium and other member states or are we going to use lifecycling? Lifecycling does not remove volatility, but it certainly helps to reduce it.

Giovanni Legorano: How are Belgian pension funds incorporating socially responsible investments?

Jung Lichtenberger: We have not got into this theme at European level so far. Pension funds in some countries are required by the local regulator to include in their annual report information about how their investments are aligned with SRI criteria, but the regulator would not question them on this issue. I think this is a topic which will become more important in the future. However, I do not think we are there yet, as far as Europe is concerned.

Giovanni Legorano: What is being discussed in Belgium about accounting standards?

Jung Lichtenberger: The vast majority of people that I talk to, including in Belgium, want to keep the corridor prescribed by IAS 19. [IAS 19 specifies that if the accumulated unrecognised actuarial gains and losses exceed 10% of the greater of the defined benefit obligation or the fair value of plan assets, a portion of that net gain or loss is required to be recognised immediately as income or expense. The portion recognised is the excess divided by the expected average remaining working lives of the participating employees. Actuarial gains and losses that do not breach the 10% limits described above (the ‘corridor’) need not be recognised – although the entity may choose to do so.] This limits the volatility in the income statement of the sponsor company. 

The corridor limits the fluctuations that these values would unavoidably have, since they are influenced by market values. It caps the fluctuations. Many people in the pension industry, including in Belgium, are quite keen in keeping the corridor which is not what I think the IASB plans to do.

Yet, the proposal for revision of the standard which the IASB intends to publish at the end of the year will most likely remove the corridor.

The Commission is just one of the stakeholders in the process and the IASB will ultimately take the decision. Once the IASB takes a decision, the Commission, together with Member States and the European Parliament, will then decide whether or not to endorse it as European law. Normally we endorse it as it is because global convergence is on our interest. However, the endorsement process is such that we will have to consider the new standard on its merits.

Jung Lichtenberger is an official in the “Insurance and Pensions” Unit of Directorate General Internal Market and Services of the European Commission in Brussels. He heads the team that deals with European pension fund issues and in particular with the Directive on Institutions for Occupational Retirement Provision (IORP Directive). His area of competence also comprises life assurance regulation, Solvency II and accounting. Before joining the European Commission in 2007, he worked for more than seven years at the European Central Bank in Frankfurt in the area of financial market analysis and monetary policy. He studied economics, finance and statistics in the UK and obtained a Master of Business Administration (MBA) in France.