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«European Commission Research Directorate-General Executive Summary n°RTD/DirC/C4/2009/026879 Executive Summary This report covers the main results ...»

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Feasibility Study for a

EU Pension Fund for Researchers

European Commission

Research Directorate-General

Executive Summary


Executive Summary

This report covers the main results of the "Feasibility study of a pan-European pension fund for EU

researchers", carried out by Hewitt Associates on behalf of the European Commission - Research

Directorate-General- over the period June 2009 – April 2010.

Within this project, Hewitt Associates has examined the legal, technical and financial terms and requirements that should be considered for setting up a viable pan-European framework for occupational pension arrangements that could match the needs of researchers in the European Economic Area.

We conclude that there is demand for a cross-border pension fund for EEA based researchers, and

that it is now possible to establish such an arrangement. This project has shown that:

■ The opportunity to establish cross-border arrangements is considered relevant and valuable by a large majority of surveyed organisations;

■ European organisations consider that occupational pension benefits will become more important in the near future;

■ Multinational companies are already establishing EU cross-border pension funds;

■ Financial service providers are entering the market and are establishing new products;

■ It is preferable to use the legal framework provided by the European Directive on the Institution for Occupational Retirement Provision (IORP);

■ There appear to be no insurmountable barriers to implementation, although it will be difficult to include public sector researchers from a number of countries unless national authorities authorise additional contributions to the new fund or allow the possibility to opt-out from the current national system;

■ To improve the cost-effectiveness of the fund, it would be preferable to have benefits and reporting structures that are standardised within each country.

The results of the study should help to raise the awareness of a wide range of stakeholders about possible practical solutions covering supplementary pension rights which overcome one of the barriers to the mobility of researchers. The study may also encourage the establishment of targeted panEuropean pension arrangements that could benefit researchers, and more generally employees at large. Ultimately these developments will be instrumental in making the European Research Area more open, competitive and attractive.

The study shows that there is wide support by employers in favour of a cross-border pension fund for EEA based researchers, and that it is now possible to establish such a single arrangement covering researchers in a majority of EEA countries. In some countries, especially for researchers with a public sector contract, there are local restrictions and specific conditions that effectively limit cross-border affiliation to a non-domestic pension fund.

From a market perspective, on the demand side, multinational organisations are already establishing EU cross-border pension funds.

The willingness of a larger number of organisations to follow such a path is likely to increase in conjunction with the more generalised availability of accurate and user-friendly information on local statutory requirements underpinning employment contracts, labour law and social security conditions.

The increasing co-operation among national authorities, the availability of new frameworks and tools for the exchange of information and best practices among these authorities will have a positive impact on the predictability and user-friendliness of administrative procedures necessary to operate such funds. Meanwhile on the supply-side, activities being undertaken by financial service providers and pension advisors towards the provision of pension related services and of new products that respond to cross-border client needs are growing steadily. Although offers on the market are limited in scope at present, its gradual acceleration should take place over the coming years.

In terms of cost-effectiveness of pension fund set-up and administration, the standardisation of benefits and reporting structures within each participating country is strongly recommended.

The wide diversity of pension regimes and of potential sponsor undertakings requires the design of a thorough system of project management and governance throughout the whole process of implementation. For this purpose an ad hoc task-force involving representatives of the promoting organisations could be set up.

In addition to the benefit structure, on the basis of the number, diversity and scope of sponsor undertakings interested in setting up a common cross-border framework for occupational pensions, the promoting organisations should consider whether to set-up a cross-border pension fund or use a cross-border product developed and delivered by a financial services provider or a consortium of such providers responding to agreed and well defined specific terms of reference. The strategic implementation path chosen by the promoting organisations and the founding sponsors will determine the depth into which to consider issues such as such as location, vehicle, administration and investment policies.

The study has focused on the following areas of investigation, namely:

Best market practice already in place or under development;

■ Employers’ practices and willingness to establish pan-European pension arrangements;

■ Possible systems of governance in line with the EU directive on IORP (Directive 2003/41/EC);

■ Benchmark analysis and considerations for geographic location of a pan-European IORP;

■ Cost structure and estimate of financial implication for pension arrangements;

■ National labour law, social security and tax conditions applicable to employees;

■ Impact assessment of pension benefits rights for researchers moving across countries; and ■ Possible follow-up actions.

In particular the following results emerged from the study.

1. Employers Practices and Interest for Pan-European Pension The most important HR challenge indicated by participating organisations is to attract and retain key employees. 76% of employers believe that complementary pension benefits to R&D staff will be more important in the future to retain and attract key employees. The employer survey shows most employers perceive a potential EU cross-border pension arrangement to be relevant and valuable.

The key drivers for such arrangements are: policy consistency, better managing employee mobility and meeting employee expectations.

Actual participation rates in new arrangements will be influenced where researchers are members of existing domestic retirement benefit arrangements. The survey showed that 42% of organisations currently operate complementary pension funds. The proportion is higher and reaches 55% when considering only the private sector.

The main reasons to provide occupational pension benefits beyond regulatory requirements indicated by survey participants are related to the need of being in line with market practices and attracting talent. In the majority of cases (53%) existing pension fund provisions are designed to cover all employees; while in 10% of cases these arrangements cover only senior R&D staff.

Where employers provide the same retirement benefits to all employees irrespective of their function, there may be some resistance for providing "special" benefits for researchers only. In addition, some researchers are in mandatory pension arrangements where, unless there is a change in national provisions, it is not possible to choose to participate in a cross border pension arrangement instead.

2. Market Practices Cross-border retirement solutions can be established as IORPs and regulated under the EU Pension Directive, or otherwise using the 3rd Life Directive or simply grouping local retirement products.

We have concluded that the IORP framework would be preferable for the following reasons:

■ There is more established market practice under this route (almost 80 registered cross-border IORPs), and expectations indicate it will continue;

■ Financial service providers are developing new products in this area;

■ There is the opportunity for full portability when researchers move cross-border;

■ Tax equality and unlawful discriminatory national practices have been explicitly addressed by the European Commission and by the European Court of Justice and, accordingly, are leading to changes in legislation and practices.

3. Governance The establishment of a best in class governance framework and the implementation and monitoring of related principles are the preconditions for efficient, reliable and sustainable private pension arrangements. This is even more important in the context of this project, given the diversity of nature, scope and location of potential sponsor organisations, and the different employment histories, statuses and locations of potential pension beneficiaries.

On the basis of the governance principles stated in the IORP EC Directive and best country specific practices of pension fund governance, the study reviewed the key possible options and examined the terms and conditions for a governance structure that can match the needs of both sponsor organisations and beneficiaries.

The analysis of possible options for a reliable, transparent and best in class governance structure is

mainly a function of:

■ The type of legal contractual vehicle that will be chosen to collect contributions/premiums and deliver benefits;

■ The level of independence in terms of legal capacity that the sponsoring employers will wish to attribute to the chosen vehicle; and ■ The location, in the case of a pension fund.

Two possible options of governance structure, which are function of the applicable legal framework in two different jurisdictions, have been presented in the study. The first is applicable in a common law context having the institution of the “trust” at the centre of the system of governance.

The second is applicable in a specific mainland European jurisdiction that relies on an ad hoc and autonomous legal framework designed to respond to the objectives and operations of pension funds, potentially irrespective of the status of affiliated members (employees and self-employed), of the nature of sponsor undertakings, of the scope, terms and conditions of pensions plan design.

Nevertheless the basic governance principles and the main tasks and goal of an IORP remain the same, ultimately to serve as a secure source of retirement income for its beneficiaries by administering and managing pension schemes rules in compliance with their fiduciary and biometric obligations.

4. Location and Vehicle Considerations about location and choice of vehicle depend on whether the promoting organisation decides to set up a new cross-border IORP, or use a cross-border product developed by a financial services provider. By assuming that a new cross-border vehicle would be created, the analysis of different locations compared and contrasted ten retirement vehicles in six different EEA locations in terms of scope of benefits, governance, financing and a number of other characteristics. We concluded that the most attractive locations/vehicles are primarily in Belgium (OFP) that has adopted an ad hoc new vehicle, but also in Ireland (via a trust based arrangement), or in Luxembourg (SEPCAV -for DC plan only- and ASSEP).

All three countries have been positioning themselves as locations of choice.

5. Benefit Structure In terms of benefit structure, a preference emerged for a defined contribution plan, potentially with some form of investment guarantee options where this is required or desirable. We fully support this

direction given that:

■ Most new retirement arrangements in the EEA are now defined contribution in nature and hence market competitive and attractive to employers; and ■ Employers typically prefer arrangements which avoid the need for cross-subsidies between themselves and other employers; defined contribution arrangements typically meet this need if any investment guarantees are implicit within the investment funds offered.

The host country analysis shows that it should be possible to provide a defined contribution type benefit from a cross-border pension fund for researchers. It will be necessary to establish different country sections to ensure compliance with the different specific social and labour law requirements of various EEA member states.

These differ in several ways including:

■ Permitted contribution structure (flat rate, age-related);

■ Maximum legally permitted contribution amounts;

■ Maximum tax-effective contributions;

■ Ability of members to make additional voluntary contributions to the same pension fund;

■ The range of investment options required (for example the need for any investment guarantees) and the right for individual members to determine how their contributions are invested;

■ Flexibility in benefit payment form – pension and or lump sum;

■ Indexation requirements;

■ Eligibility conditions;

■ Minimum/maximum retirement age;

■ Provision of additional risk benefits;

■ Language and information requirements; or ■ Member representation.

In terms of the overall design, it is possible to design a common overall structure which has the ability to meet all requirements, and then make those parts available or mandatory on a country specific basis to comply with the social and labour law requirements.

Contribution levels will need to differ by country taking into account existing levels of local social security and other mandatory retirement arrangements.

There needs to be an appropriate balance between flexibility and administrative efficiency. Each country should have a common benefit design to facilitate cost-effective administration. However, even within the common country design, there can be some variability (such as contribution level) as far as this variability is supported automatically in the administration system.

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