Legally and politically important
Not cleared from scrutiny; further information requested; drawn to the attention of the Work and Pensions Committee
Proposal for a Regulation amending Regulation (EC) No 883/2004 on the coordination of social security systems and Regulation (EC) No 987/2009 laying down the procedure for implementing Regulation (EC) No 883/2004
Article 48 TFEU; QMV, ordinary legislative procedure
Work and Pensions
(38400), 15642/16 + ADDs 1–8, COM(16) 815
8.1Each EU Member State is free to determine the features of its own social security system, including which benefits are provided, the conditions for eligibility, how these benefits are calculated and what contributions should be paid. However, national systems must take into account the right of EU citizens and their families to move freely and reside in any EU country.
8.2To facilitate the free movement of persons, the EU has adopted legislation (specifically Regulation 883/2004 and Regulation 987/2009) for the coordination of social security systems in cross-border cases. The purpose of these Regulations is to determine which country is responsible for the calculation and payment of a range of benefits for mobile EU citizens.72 Typically, the Member State of employment will be responsible for the provision of social security, although special rules may apply to posted workers, cross-border workers and people who are not economically active.
8.3The coordination rules are based on the principle of equal treatment: if an EU national moves to a different Member State to take up employment and becomes subject to that country’s social security system, they have the same access, rights and obligations as the nationals of that country. Conversely, if EU nationals move to another Member State without taking up employment and paying social security contributions, their home country normally remains responsible for payment of social security. This is the case, for example, for many UK pensioners who have retired to southern Europe: the UK Government continues to pay for their state pension and healthcare costs.
8.4The European Commission has now published a proposal for a Regulation to amend certain elements of the existing coordination rules in four areas in particular (see “Background” for more information). It proposes to:
8.5The proposal also contains other amendments relating to posted workers and procedures for repayment of incorrectly paid benefits, as well as technical changes relating to derived rights to sickness benefits, the reimbursement of costs for medical examination, the calculation of the annual average costs in the field of sickness benefits and the introduction of measures to facilitate identification of fraud or error in the application of the Regulations.73
8.6Overall, we consider that the Commission’s proposals create a closer link between the Member State where social security contributions are made, and the Member State responsible for the payment of any benefits. The codification of the “right of residence” test in respect of benefit claims by economically inactive EU citizens is particularly welcome, reflecting the Government’s interpretation of EU law which was upheld by the Court of Justice (see paragraph 8.18 for more information). This will help to ensure that only those EU nationals with a genuine link to the UK will be able to claim benefits when they are not paying National Insurance contributions.
8.7However, we are disappointed that the Explanatory Memorandum submitted by the Minister of State for Employment (Damian Hinds) on 4 January 2017 contains virtually no assessment of the impact the proposals might have in the UK. The Minister also failed to provide any assessment of the impact of Brexit on this area of intra-EU cooperation.
8.8Once the Treaties and secondary EU legislation cease to apply to the UK, the Government would in principle be free to stop paying benefits to EU nationals. In parallel, social security entitlements for UK nationals in Europe would also be affected. If the Government wishes to maintain some level of coordination with the EU, simple “repatriation” of the Regulations 883/2004 and 997/2009 onto the UK statute book as part of the Great Repeal Bill will not be sufficient. The coordination of social security necessarily involves cross-border cooperation, and the Government cannot unilaterally require the EU to continue observing the substance of the legislation with respect to British nationals after the UK has left the EU.
8.9An end to the current system of cross-border coordination might pose particularly acute problems for the approximately 190,000 UK pensioners resident elsewhere in the EU.74 As economically inactive mobile citizens, most of them rely on Regulation 883/2004 which requires the UK Government to provide them with the UK State Pension, and to reimburse their local healthcare systems for the cost of their medical care. If the provisions of that Regulation no longer apply and no replacement arrangement is agreed, the Government would not be obliged to reimburse those healthcare costs, nor to uprate pensions.75 In such a scenario, those affected would presumably have to purchase private health insurance in their EU country of residence, or—if they were unwilling or financially unable to do so—return to the UK.
8.10In our view, the Prime Minister has rightly called for an early agreement, as part of the Article 50 process, on the rights of UK and EU nationals who have already made use of their right to free movement. If the amended version of Regulation 883/2004 could potentially form the basis for a future bilateral UK-EU agreement on the coordination of social security, the Government should participate fully in the negotiations to ensure the final legislation is aligned with the UK’s priorities.
8.11Given the above, we retain this document under scrutiny and draw it to the attention of the Work and Pensions Committee. We ask the Minister to submit a supplementary Explanatory Memorandum as soon as possible setting out in more detail the Government’s position on the various elements of the proposed Regulation, and their expected impact on the UK.
8.12We also ask the Minister to clarify how the Government will seek to secure a new arrangement with the EU or individual Member States on coordination of social security to replace, in whole or in part, the substance of the existing Regulations when the UK ceases to be a Member State. The Minister’s answer should indicate how the Government is planning to support both those British nationals resident in the EU who are currently entitled to receive UK social security, and those EU nationals resident here who currently benefit from Regulation 883/2004.
Proposal for a Regulation amending Regulation (EC) No 883/2004 on the coordination of social security systems and regulation (EC) No 987/2009 laying down the procedure for implementing Regulation (EC) No 883/2004: (38400), 15642/16 + ADDs 1–8, COM(16) 815.
8.13Each EU Member State is free to determine the features of its own social security system, including which benefits are provided, the conditions for eligibility, how these benefits are calculated and what contributions should be paid, and for all social security branches, such as old age, unemployment and family benefits. However, national social security systems must take into account the right of EU citizens and their families to move freely and reside in any EU country.
8.14To facilitate the free movement of persons, the EU adopted legislation as far back as 1958 to govern the coordination of social security systems between Member States.76 The current legislation (Regulation 883/2004, referred to as the Basic Regulation) and 987/2009 (the Implementing Regulation) entered into force in May 2010. Their purpose is to determine which country is responsible for the calculation and payment of a range of social security benefits for mobile EU citizens. The rules aim to ensure that the different national approaches respect the principle of equality of treatment and that EU citizens who move from one Member State to another do not lose their social security rights.
8.15The Basic and Implementing Regulations lay down common rules to protect workers’ social security entitlements when moving within the EU.77 They are based on four main principles:
8.16The coordination rules apply to sickness benefits; maternity and equivalent paternity benefits; invalidity benefits; old-age benefits; survivors’ benefits; benefits in respect of accidents at work and occupational diseases; death grants; unemployment benefits; pre-retirement benefits; and family benefits. The rights under the Regulations apply not only to EU citizens, but also to members of their families and to their survivors.
8.17The rules on social security coordination also apply to mobile EU citizens and their immediate families if they are not economically active, in principle giving them a right to access the social security system of their host Member State.
8.18However, in a series of recent judgements,79 the European Court of Justice has held that this right to equal treatment is subject to compliance with conditions relating to residence in Directive 2004/38 (the so-called Free Movement Directive). As a result, Member States may refuse to grant non-contributory cash benefits to mobile citizens who are economically inactive, and who do not have a legal right of residence under the Free Movement Directive. Economically inactive citizens have such a right of residence only when they have means of subsistence and comprehensive health insurance. The Commission’s proposal for a Regulation aims to codify this case law.
8.19From 1 January 2011, all EU Member States except the UK and Denmark have extended the scope of the 2004 Regulation to nationals of non-EU countries legally resident or employed in their territory.80 However, this only applies where a third-country national has links to more than one EU Member State; it does not provide for coordination between a Member State’s system of social security and that of a non-EU country.
8.20As part of its 2016 Work Programme, the European Commission committed to a “Labour Mobility Package”, including the revision of the Regulations on the coordination of social security. It has now proposed amendments to the Basic and Implementing Regulation to take into account the recent case law of the European Court of Justice on the rights of economically inactive EU nationals (see paragraphs 8.19–8.20 above), and to clarify the provisions on access to unemployment, family benefits and long-term care benefits.
8.21The Commission proposes to amend article 4 of Regulation 883/2004 on equal treatment, to clarify in which cases Member State can restrict access to social benefits claimed by economically inactive EU citizens resident in their territory. The proposed amendments would codify recent case law of the European Court of Justice, in which it held that Member States are entitled to make access to non-contributory cash benefits for economically inactive EU citizens subject to a legal right of residence under the Free Movement Directive. To qualify, an EU national needs to be able to support themselves financially and have comprehensive health insurance.
8.22The Commission estimates that the population of economically inactive mobile EU citizens is 3.7 million. It also says that 80% of them derive either residence rights or entitlements to social security through economically active family members with whom they reside. As such, they will continue to be entitled to equal treatment irrespective of the proposed changes to the Regulation.
8.23The Minister, in his Explanatory Memorandum of 4 January 2017, does not provide a comprehensive assessment of this aspect of the proposal. This is surprising, given that prima facie the new Regulation vindicates the Government’s own interpretation of EU law, which it successfully defended before the Court of Justice in case C-308/14.81 The Minister writes merely that the proposed amendment is a “useful clarification”. There is no indication of whether the Government believes the amendment as drafted would fully address its concerns about access to non-contributory benefits for unemployed EU nationals.
8.24The Commission proposal aims to establish a specific regime for the coordination of long-term care benefits (currently categorised as a “sickness benefit”). It has proposed a separate chapter for their coordination in the Basic Regulation, by including a definition and providing for a list of those benefits as available in each Member State. In total around 80,000 mobile citizens are estimated to be entitled to long-term care benefits, at an annual cost of €793 million (£676 million). According to the Commission, this is 0.4% of the total EU expenditure on long-term care benefits.
8.25The Minister has not provided an assessment of this element of the proposal in his Explanatory Memorandum. He writes that the proposed changes “may impact on what benefits currently are or are not covered by the coordination rules”, because there could be a “grey area” with regard to the definition of a “benefit in kind”.
8.26Under the current coordination rules, the Member State whose national legislation on unemployment benefit is applicable is determined by the principle that the worker is affiliated to the social security system of the Member State of their last employment. Special rules exist for frontier workers82 and for a number of other special categories of workers (such as air crew, sea farers and posted civil servants). In addition, a person who becomes unemployed after a short period in one Member State can rely on social security contributions made in another Member State to meet the entitlement conditions in the former.
8.27The Commission’s proposal would change the rules on unemployment benefit in a number of ways. The aim of the proposed changes is to create a closer link between the provision of social security and the Member State where the citizen was last insured.
8.28For frontier workers, it proposes that the Member State of residence will be responsible for providing social security for the first 12 months of cross-border employment. After 12 months, frontier workers will be treated as if they were resident in the country where they are employed. This will abolish the current system whereby the Member State of residence pays and is then reimbursed by the Member State of employment.
8.29For all other workers, the Member State of last employment would only become responsible for unemployment benefit after a worker has paid into its national insurance system for at least three months. Until then, the Member State where they were previously employed remains responsible. The proposal would also remove the ability of an unemployed worker to count social security contributions made in a different Member State towards their unemployment benefit entitlement unless they have been employed in their current Member State for at least three months.83
8.30Lastly, under the terms of the Commission proposal, where someone qualifies for unemployment benefit, they would be able to export that benefit for six months (up from the current three) if they look for work in a different Member State.
8.31The Minister’s Explanatory Memorandum does not provide any indication of the Government’s views on this element of the proposed Regulation, or how it may affect the UK public purse.
8.32The current Regulations provide that mobile EU citizens can claim “family benefits” (which are broadly defined as benefits in kind or in cash intended to meet family expenses). The proposal contains new provisions for the coordination of family benefits which replace lost income during child-raising periods beyond statutory maternity or paternity pay. It carves out these child-raising allowances from the broader category of “family benefits”, and makes the right to receive such an allowance applicable only to qualifying EU citizens, and not to those who derive their rights from being the relative of an EU citizen.
8.33Although it is not made clear in the Minister’s Explanatory Memorandum, the Commission’s impact assessment states that the type of benefit that will be covered by this new category does not exist in six Member States, including the UK.84 We would be grateful for an explicit confirmation from the Minister on this point.
8.34The proposal also aims to strengthen the rules on social security coordination for posted workers in order to prevent potentially unfair practices or abuse. In addition, the proposed Regulation includes a number of technical amendments relating to derived rights to sickness benefits, the reimbursement of costs for medical examination, the calculation of the annual average costs in the field of sickness benefits and the introduction of measures to facilitate identification of fraud or error in the application of the Regulations.
8.35Finally, the proposal seeks to align the provisions on the recovery of unduly paid social security benefits with the equivalent procedures in the 2010 Directive on mutual assistance for the recovery of claims relating to taxes, duties and other measures.85 The aim is to provide for a uniform instrument to be used for enforcement measures, as well as standard procedures for requesting mutual assistance and notification of instruments and decisions relating to a claim.
8.36The Minister’s Explanatory Memorandum does not touch on these aspects of the proposal other than to summarise them, and to say that the changes to the rules on social security debts will enable Member States to “prevent and tackle fraud and abuse more effectively”.
8.37The current rules on the coordination of social security at EU-level are the product of long and complex negotiations stretching back to the earliest days of the European Economic Community. Their impact on the lives of individual citizens is profound, as they provide a measure of legal and financial clarity about their rights and obligations if they move between Member States.
8.38National governments have strongly defended their competence to structure their own social security systems, and to determine eligibility conditions and restrictions. On the whole, the proposals put forward by the Commission do not interfere with that Member State competence, and we do not consider that the proposal raises any concerns regarding subsidiarity. We welcome in particular the proposed codification of the “right of residence” test, which means that only those EU nationals with a genuine link to the UK will be able to claim benefits when they are not paying National Insurance contributions.
8.39However, we are hampered in our scrutiny by the fact that the Minister’s Explanatory Memorandum provides little to no substantive assessment of any of the elements of the Commission’s proposal. The Minister provides no indication of the impact the proposed Regulation might have on the structure or overall costs of the benefits system, or how EU nationals in the UK (and UK nationals in the EU) might be affected.
8.40Moreover, even though the Government appears to broadly support the proposed changes, it is far from clear that other Member States agree. The Commission’s Explanatory Memorandum states that there was “no general consensus on the changes needed” as regards restriction of benefits for economically inactive persons. Equally, national governments had “divergent views” on amending the rules relating to the aggregation and export of unemployment benefit. There is therefore a strong likelihood that negotiations on this proposal will be protracted and demanding. It is in any case unlikely the new Regulation will enter into effect before the UK’s intended exit from the EU.
8.41In his Explanatory Memorandum of 4 January, the Minister of State for Employment (Mr Damian Hinds) omits the Government’s usual formula on continuing to “negotiate, implement and apply EU legislation” until the conclusion of the UK’s negotiations to exit the EU. However, for reasons we set out below, we consider that it would be prudent for the Government to approach the negotiations as if the amended rules will apply to the UK.
8.42The UK’s exit from the EU will, in principle, withdraw its benefits system from the EU-wide coordination of social security in cross-border cases. UK nationals employed or resident in the EU could become “third country nationals”, subject to national legislation on access to social security without recourse to the provisions of Regulation 883/2004. Similarly, EU citizens in the UK could lose their access to UK benefits, especially if they are not making National Insurance contributions.
8.43An end to the current system of cross-border coordination might pose particularly acute problems for UK pensioners resident in the EU, who the Government estimates to number approximately 190,000.86 As economically inactive mobile citizens, most of them rely on Regulation 883/2004 which requires the UK Government to provide them with the UK State Pension, and to reimburse their local healthcare systems for the cost of their medical care.
8.44If the provisions of that Regulation no longer apply at the point of Brexit and no replacement arrangement is agreed, the Government would not be obliged to reimburse those healthcare costs. Similarly, while the Government would still pay EU-based pensioners their UK State Pension, it could decide to stop passing on the annual increase.87 In such a scenario, British citizens affected would face living on a lower income while they remained resident in the EU. They would presumably also have to purchase private health insurance in their EU country of residence. For those who were unwilling to pay or lacked the resources to do so, an end to the cross-border coordination of social security might therefore require a permanent return to the UK.
8.45If the Government wishes to maintain some level of coordination with the EU on the provision of social security, simple ‘repatriation’ of the EU Regulations onto the UK statute book as part of the Great Repeal Bill will not be enough. It is clear that the Government cannot unilaterally require the EU and its Member States to continue observing the substance of the legislation with respect to British nationals after the UK has left the EU.
8.46The Prime Minister has rightly called for an early agreement as part of the Article 50 process to provide clarity on the rights of those who have already made use of their right to free movement. Regulation 883/2004 (as amended) could, should the Government so wish, be incorporated into such an agreement subject to any modifications that were acceptable to both the UK and EU.88 As such, we consider that it would be prudent for the Government to participate fully in the negotiations on this proposal to ensure the final legislation is aligned with the UK’s priorities.
8.47In his Explanatory Memorandum of 4 January 2017, the Minister of State for Employment (Damian Hinds) wrote:
“The full policy implications will only become clearer when the proposals have been developed further through the negotiations. In general terms however, some of the proposals codifying recent CJEU case law on access to benefits are considered to be useful clarifications which create more legal certainty and support the UK position of requiring a person to have a right to reside in the United Kingdom in order to access certain benefits as upheld by the CJEU in C-308/14 Commission v United Kingdom.
“Where the procedures are revised for the recovery of social security debts by aligning them with the equivalent procedures for recovering tax debts, Member States will be able to prevent and tackle fraud and abuse more effectively. The changes will provide for a uniform instrument to be issued for enforcement measures taken to recover both tax and social security debts and provide standard procedures for requesting mutual assistance.
“The creation of a separate chapter for long-term care benefits may impact on what benefits currently are or are not covered by the coordination rules. A potential grey area exists with regard to the extent to which the term ‘benefit in kind’ might be defined. Officials will play a full part in these discussions as negotiations on the future form and content of the Labour Mobility Package advance.”
8.48The Minister also notes that the Commission’s chosen legal base is Article 48 TFEU, which concerns the free movement of workers. The elements of the proposal which concern economically inactive people are considered by the Commission to be “incidental”, but the Minister explains that the “significance of the secondary purpose will be considered further during negotiation of the proposal”.
None, but see in respect of the Basic Regulation 883/2004: (19764), 5133/99, COM(98) 779—Third Report HC 42-iii (2003–04) chapter 12 (17 December 2003); Thirty-seventh Report HC 63-xxxvii (2003–04) chapter 4 (12 November 2003); Fourth Report HC 23-iv (1999–2000) chapter 2 (15 December 1999); and Eighteenth Report HC 34-xviii (1998–99) chapter 2 (5 May 1999).
In respect of the Implementing Regulation 987/2009, see: (27262), 5896/06, COM(06) 16—First Report HC 19-i (2008–09) chapter 15 (10 December 2008); Twenty-fifth Report HC 34-xxv (2005–06) chapter 4 (19 April 2006); and Twentieth Report HC 34-xx (2005–06) chapter 11 (1 March 2006).
72 The coordination rules apply to sickness benefits; maternity and equivalent paternity benefits; invalidity benefits; old-age benefits; survivors’ benefits; benefits in respect of accidents at work and occupational diseases; death grants; unemployment benefits; pre-retirement benefits; and family benefits.
73 The previous Prime Minister, as part of his renegotiation of the UK’s EU membership, had secured a political commitment to an additional amendment to Regulation 883/2004. This would have allowed the Government to index child benefit payments in respect of children resident in other Member States. That commitment lapsed when the UK electorate voted to leave the EU, and it has not been included in this proposal. See for more information Annex V of the European Council conclusions of 18–19 February 2016.
74 Public Accounts Committee, oral evidence: “NHS treatment for overseas patients“ (21 November 2016), Q48.
75 The State Pension for people who retired before 6 April 2016 is increased each year, with the increase calculated in relation to the average percentage growth in wages in Great Britain, the consumer prices index, or 2.5%, whichever is highest. At present, that increase is also passed on to UK pensioners resident in the EEA and Switzerland by virtue of Regulation 883/2004. The UK has bilateral social security agreements with a number of other countries which confers the same benefit.
77 Since 2012, the provisions of the Regulations have also applied to the free movement of persons between the EU and the four EFTA countries (Iceland, Norway, Switzerland and Liechtenstein).
78 The UK ‘exports’ cash benefits for the statutory minimum three month period.
79 See for more information the judgements in cases C-140/12 (Brey), C-333/13 (Dano) and C-308/14 (Commission v United Kingdom).
80 Regulation (EU) No 1231/2010. Ireland has exercised its opt-in (see recital 17).
82 A frontier worker is defined in Regulation 883/2004 as someone who pursues “an activity as an employed or self-employed person in a Member State and who resides in another Member State to which he/she returns as a rule daily or at least once a week”.
83 For example, a worker who had previously made National Insurance contributions in the UK, takes up employment in France but loses their job. Under the proposed new rules, they would only be able to count their National Insurance contributions towards their French unemployment benefit entitlement if they had paid into the French system for at least three months. If they have not, the UK would remain responsible for the payment of unemployment benefit.
84 Commission Staff Working Document SWD(2016) 460, part 6 of 6, Annex XXV.
86 Public Accounts Committee, oral evidence: “NHS treatment for overseas patients“ (21 November 2016), Q48.
87 The State Pension for people who retired before 6 April 2016 is increased each year, with the increase calculated in relation to the average percentage growth in wages in Great Britain, the consumer prices index, or 2.5%, whichever is highest. At present, that increase is also passed on to UK pensioners resident in the EEA and Switzerland by virtue of Regulation 883/2004. The UK has bilateral social security agreements with a number of other countries which confers the same benefit.
88 For example, Switzerland has concluded a bilateral agreement with the EU which effectively applies Regulations 883/2004 and 997/2009 to Swiss nationals in the EU and EU nationals in Switzerland.
10 February 2017