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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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Flexibility in contribution design will also be important where certain groups of researchers are covered under existing local pension arrangements and either choose or are required to remain in these arrangements. In these cases, it may be desirable to offer researchers the opportunity to contribute to the cross-border pension fund to enable them to make additional retirement saving where this is possible.

A common theme emerging from our analysis is that legislation may need to be addressed in some countries where it appears impossible to provide researchers with access to a different pension arrangement that other employees working within the same organisation or sector of economic activity.

6. Investment The cross-border pension fund will need to offer a range of investment funds to support the defined contribution structure and be capable of meeting local investment requirements in terms of the required currencies and guarantees. These will be made available to each country section depending on local requirements, and should be offered in as consistent a manner as possible.

For those countries requiring all members to invest contributions in the same investment fund, it will be necessary to develop a suitable common investment strategy. There are a variety of approaches possible ranging in complexity and cost.

Some countries require a minimum investment guarantee. We recommend that such guarantees should be provided directly through the investment options rather than as a guarantee from the sponsoring entity. This will result in a lower expected investment return as the guarantees have a cost. However, it is considerably administratively simpler and takes account of the need to avoid cross-subsidies between sponsoring entities.

Some countries permit members to choose how to invest their contributions on an individual basis.

For these countries, it will be necessary to offer a reasonable choice of investment options and decide on an appropriate default strategy. Members who do not wish to be invested into the default strategy should be able to elect to move existing holdings, future contributions or both.

Further thought should also be given to appropriate member education so they appreciate the potential impact of different investment choices.

Once the design of the cross-border framework has been finalised, it will be necessary to decide the most appropriate balance of segregated and pooled investment approaches.

Finally, the investment approach will need to be multi-currency notably to reduce currency risk exposure and to reflect the different currencies in operation within the EEA.

7. Administration and Cost The optimal delivery model for administration will need to be structured in a tiered approach.

Members should have access through an on-line portal where information is provided, where they are able to make standard selections. The next level is a member service centre which covers queries which are not resolved in the on-line system, and the final tier is the system and administrators who deal with complex queries and have interfaces with employers, investment administrators, accounting and pensioner payroll.

We believe that this approach will conform (broadly, accepting that different potential providers might draw or express the model differently) with modern technological design and be capable of accommodating the complexities of operating a pension fund covering a variety of jurisdictions throughout the EEA. We also believe that integrating the functionality in this way will be likely to keep the cost of running the fund to a reasonable level.

The costs of administering a pension fund are influenced by a number of different factors. These factors include the number of members, the number of participating employers, the volume of cash flows in and out of the plan, the number of plan and member "events", the complexity of compliance with local Host state social, labour and tax legislation, the design of the benefits and the degree of standardisation within country sections.

The cost of administration is usually met by a fixed charge per member, an asset management charge (AMC) expressed as a % of assets under management, or a combination of both; different providers have different models. A key difference between a member-based charge and the AMC approach is who meets the cost. Generally speaking, fees associated with a delivery model as set out above are usually met by the sponsoring employer(s). By contrast, the AMC will have the effect of reducing the rate of return on the investment fund(s) and so the members' accounts: in other words the members bear the costs.

Irrespective of the charging basis, the degree of standardisation will have a key impact on the overall cost of administration. The model we have developed allows for a certain amount of variability is available at the individual member level through the self-service functionality including member choice of investment fund and choice of level of contribution. However, other features which individual employers might like to choose on an individual basis should be standardised to reduce overall administration expenses. These include features such as customised reporting to members, different range of investment funds on offer, different additional benefits and a number of others such as frequency of paying contributions. Even if particular employers are willing to pay for additional features, this functionality increases the cost for all employers.

8. Impact Assessment of Pension Benefits Rights for Researchers Moving Across Countries A modeller was prepared to estimate the expected replacement income from Social Security and statutory programmes for researchers with an international career in the six countries programmed.

These countries are: France, Germany, Italy, Poland, Spain and the UK.

The expected replacement income was expressed in percentage of the career average revalued earnings. The difference with career average earnings is that the earnings of past years are revalued in accordance with inflation.

The prepared estimates demonstrate varying levels of replacement incomes and needs for supplementary benefits. The outcome of the calculations is closely related to the level of salaries used.

To ensure coherent results, salary variations when moving from one country to another or from public to private sector needed to be checked and be within certain limits. The salary scales developed are built around average salaries on the basis of the results provided in the context of another EC study focusing on salary scales by country and by job status (public/private sector). The levels of salaries in the Research Directorate's 2007 study are relatively low. These salaries are in some cases below the maximum salaries applied by some Social Security systems.

This explains why on average high replacement incomes are obtained. If the salaries of reference had been 20 percent higher, the replacement incomes obtained would reduce materially as salaries valued would start exceeding the applied salary ceilings.

At a subsequent stage the study determined the pension contributions needed from the supplementary plan to ensure an adequate aggregate replacement income.

The adequate replacement income, payable at age 65, was defined as 70 percent of the career average revalued earnings. The calculations assumed the provided future pension would be indexed with inflation.

The other assumptions for the calculations were as follows:

■ Salary increase of 0.5 percent points in excess of inflation;

■ Investment returns obtained on the supplementary contributions are 2 percent in excess of inflation; and ■ A full career of 40 years.

The conclusion of the calculation shows that for a salary in excess of the maximum amount covered by Social Security a contribution of 18 percent would be required.

The contributions needed on the salary up to the maximum amount applied vary from one situation to another depending on the generosity of the underlying Social Security system.

For example, in the case of Germany the proposed contributions amount to 7% of salary up to this ceiling (2010: 66.000€) and 18% of the salary in excess of this ceiling.

In the case of Italy the proposed contributions amount to 2% of salary up to this ceiling (2010:

92.400€) and 18% of the salary in excess of this ceiling.

In the case of UK, the proposed contributions amount to 0% of salary up to this ceiling (2010: 5.600€) and 18% of the salary in excess of this ceiling.

If the careers of researchers are expected to be shorter than 40 years, then the contributions required would increase proportionately.

9. Follow-up and Implementation The practical implementation of the feasibility study will depend on the willingness of stakeholders concerned to operate cross-border pension arrangements for researchers. In the context of a common framework involving multiple employers, challenges arise because of the diversity in status and scope of potential sponsors that employ researchers in the EEA.

A group of employers interested in setting up such arrangements will need to decide whether to establish a cross-border IORP themselves, 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. In addition, such a group could set up an intermediate body that represents the interest of the sponsoring undertakings and with the mission of defining and setting up pension arrangements in accordance with the mandate given by the sponsors. The European Commission could enable this open co-operation process among potential sponsor undertakings via the establishment of a dedicated task-force on occupational pension for researchers.

Meanwhile, provided that there is enough support from stakeholders - including a critical mass of potential sponsor undertakings and national authorities, a more immediate practical follow-up could be ensured by the European Commission by supporting, through a call for proposals one or more


■ Promoted by sponsors undertakings and aiming to establish cross-border IORP that covers researchers in Europe; or ■ Promoted by pan-European service providers that fulfil minimum terms and conditions considered suitable for both employers and researchers.

Both approaches, which are neither without alternative nor do they exclude each other, would have the advantage to encourage cooperation and mobilise potential stakeholders and financial service providers towards the practical implementation of pension arrangements that improve pension benefits for researchers and are cost-effective for the employers.

They will require a well articulated and dedicated system of governance with specific funding, expertise and market knowledge to be available up-front for setting up and coordinating all the various aspects -from inception to daily management- and ensure every function operates in a smooth and coordinated manner.

When working with a single financial service provider, or a consortium, in some capacity, generally there are fewer direct implementation issues as the provider or providers would coordinate the majority of the implementation process. In this approach financial service providers (singly or as a consortium) would be called to develop an offer for the delivery of a full bundled common product for researchers leading to maximum geographical coverage and shared development costs.

If a fully bundled solution is adopted by the group of sponsor undertakings, these will need to define strict and transparent terms of reference with the potential providers. Typically administration is financed through internal charges on the investments. At first glance, this can appear "cheap".

However the "price" is reduced investment performance and lower retirement benefit amounts for members. As such, it will be necessary to ensure full transparency in the charges applied in a fully bundled solution.

The most significant potential hurdle to widespread implementation is existing local coverage of researchers in second pillar occupational pension arrangements, and those in public sector pension arrangements. Membership in these arrangements can be mandatory in some cases, or even where there is flexibility in terms of membership, we believe a significant number of researchers are likely to choose to remain in domestic retirement arrangements, notably when they offer already a replacement rate of benefits at retirement that is considered satisfactory without additional costs or investment.

Membership in the cross-border pension fund can be maximised by ensuring the contribution design is as flexible as possible to permit smaller "top-up" contributions, and by considering whether any specific countries could be asked to review their eligibility requirements.

A further part of the implementation process will be the pace of geographical coverage. On one extreme, the cross-border fund could involve most EEA member states immediately. However, this may be less practical in terms of establishing efficient administration procedures. We would recommend focusing on a core of countries to be covered initially, and then build out and add further countries in a step-wise manner.

Other implementation issues will be to build in the facility for the cross-border fund to be able to receive assets in respect of past service pension rights where this is possible and tax-efficient. This will greatly increase the operating size of assets under management and improve the charging basis the fund will be able to negotiate. In addition, the fund should consider how to provide annuity benefits where these are required under local social and labour law. In particular whether these should be paid directly from the pension fund, or whether they should be provided by a financial service provider.

Finally, due consideration must be given to how researchers and their employers are informed about the cross-border pension fund and their opportunity to join such an arrangement. In this respect, the European Commission and European and national associations could play a critical role by deploying an information and communication campaign that target researchers and their employers with a view to raise their awareness on the benefits of occupational pension.

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