Select Committee on European Scrutiny Second Report


COM(00) 507

Draft Directive on the activities of institutions for occupational retirement provisions.

Legal base: Articles 47(2), 55 and 95(1) EC; co-decision, qualified majority voting
Document originated: 11 October 2000
Forwarded to the Council: 13 November 2000
Deposited in Parliament: 16 November 2000
Department: HM Treasury
Basis of consideration: EM of 11 December 2000
Previous Committee Report: None; but see (18307) 9787/97: HC 155-iv (1997-98), paragraph 27 (29 October 1997); (20174) 8450/99: HC 34-xxiii (1998-99), paragraph 12 (23 June 1999); (20175) 8329/99: HC 34-xxiii (1998-99), paragraph 1 (23 June 1999)
To be discussed in Council: No date known
Committee's assessment: Politically important
Committee's decision: Not cleared; further information requested


  5.1  In 1997, the Commission published a Green Paper on ways of improving the functioning of occupational pensions in the single market. We reported on that document on 29 October 1997.[17] On 23 June 1999, we reported on a Commission Communication setting out its conclusions from the Green Paper consultations and making recommendations for further action.[18] The Action Plan for implementing the framework for financial markets, on which we also reported on 23 June 1999, included a proposal concerning occupational pension schemes.[19]

The document

  5.2  The Commission has now published a proposal for a Directive which would put in place for the first time at Community level a framework for the prudential regulation of institutions for occupational retirement provision (IORP) — broadly, occupational pension schemes operating on a funded basis, which are outside the scope of social security systems. In her Explanatory Memorandum of 11 December 2000, the Economic Secretary to the Treasury (Miss Melanie Johnson) says that:

"The Directive is intended to improve the operation of the single market for supplementary pensions and protect the interests of scheme members and beneficiaries by:

"—  putting in place a framework of prudential rules covering, for example, a requirement for IORPs to be run by persons of good repute and disclose information to scheme members and beneficiaries;

"—  introducing qualitative rules on the investment of pension scheme assets to deliver secure and efficient investment (although Member States may continue to apply certain quantitative investment rules to IORPs established in their territory);

"—  removing barriers to IORPs using the services of any duly authorised asset manager or custodian within the EU;

"—  giving Member States the option to apply certain prudential provisions of the proposed Directive to the occupational pension business of life assurance companies to ensure a level playing field between providers of similar products;

"—  allowing for the mutual recognition of prudential regimes to facilitate the cross-border membership of pension schemes".

  5.3  The Minister also says that:

"The Directive would also require IORPs to have sufficient and appropriate financial assets to cover liabilities (referred to as technical provisions in the proposal) calculated using recognised actuarial methods. In the event of cross-border activity, the technical provisions must be fully funded at all times.

"Member States may choose not to apply the Directive to pension schemes to which fewer than 100 persons are members and beneficiaries.

"Member States may also not apply certain provisions to IORPs where occupational retirement provision is made under statute and which is guaranteed by a public authority".

The Government's view

  5.4  The Minister says that:

"The Lisbon European Council highlighted the need to eliminate barriers to pension scheme investment and introduce a regulatory climate conducive to investment. The emphasis in the proposal on a framework of qualitative prudential rules is therefore welcome.

"The Government is disappointed that Member States may continue to apply quantitative investment rules (other than a 5 per cent limit on self investment in the sponsoring company) to IORPs established in their territory. This may result in sub-optimal investment returns (without any increase in security for members and beneficiaries) and potentially limit the capacity to finance the private sector. But occupational pension schemes in the UK will be free to continue to pursue a prudent investment strategy which best meets the needs of scheme members and beneficiaries.

"The investment policy of some funded public sector pension schemes in the UK is governed by statute. In some cases, application of investment rules in the proposed directive would require a rebalancing of existing portfolios.

"The Government welcomes the emphasis on the disclosure of information to scheme members and beneficiaries, but the detail of the requirements will require careful consideration. The Government will also wish to consider whether the requirement to provide certain information to the competent authority is proportionate.

"The Government is currently consulting on the Minimum Funding Requirement applied to most defined benefit occupational pension schemes in the UK. The Government will wish to reflect on the provisions on funding in the directive in the light of responses to the consultation.

"The Government supports in principle the mutual recognition of prudential regimes as an important step towards cross border membership of pension schemes, reducing costs for business and facilitating labour mobility. The Government will, however, wish to consider carefully the practical operation of the relevant provision and the interaction with the social and labour law requirements of the Member State where the sponsoring company is established.

"The Government will wish to consider the scope of the proposal to ensure that it does not unnecessarily distort competition between essentially similar products".


  5.5  As we noted in our report on this subject on 23 June 1999, completing the internal market in respect of occupational pension schemes is an issue of substantial economic and social importance for the Community, from which the UK industry in particular may stand to gain. We note that the Minister has reservations about some aspects of the detail of the proposal, but these do not seem to be of a fundamental kind.

  5.6  We note from the Commission's document that the co-ordination of prudential supervision is one of the necessary conditions for allowing an institution for occupational retirement provision to manage schemes on a cross-border basis. It says that "a greater degree of tax co-ordination is also essential", though adding that this matter is not dealt with in this proposal. We ask the Minister to tell us whether the Government considers that effective completion of the single market for occupational pensions will also require action to increase tax co-ordination, and, if so, whether that affects the approach the Government is taking to this proposal.

  5.7   In the area of public sector pensions, the Government has questioned the competence of the Community to legislate for third-country nationals. We ask the Minister to confirm that this proposal raises no question of that kind.

  5.8  Pending the Minister's reply to our questions we do not clear this document.

17  (18307) 9787/97; see headnote to this paragraph. Back

18  (20174) 8450/99; see headnote to this paragraph. Back

19  (20175) 8329/99; see headnote to this paragraph. Back

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