(March 4, 2014) — Regulations demanding defined benefit pension plans must be “fully funded at all times” if they operate in more than one EU Member State could soon be abandoned, according to Towers Watson.
The result of removing this onerous requirement would be to make it far easier for employers to engage in cross-border pension provision, something the European Commission and regulator EIOPA has been calling for.
Paul Kelly, a senior consultant at Towers Watson, said that once cross-border plans were no longer subject to tougher funding rules than single-country plans, employers would look at the issue afresh.
“For most employers, the cost of patching-up deficits quickly makes cross-border defined benefit plans a non-starter, though some leading multinationals have established such plans in order to close local arrangements or to consolidate assets and liabilities,” he said.
“This [development] should also end the situation where employers have to switch off pension plan membership for employees seconded overseas to prevent the cross-border funding rules from kicking in.”
The Commission’s proposal for a revised EU Pensions Directive, which is likely to be published within the next two months, could also include other changes designed to make it easier for defined contribution plans to operate across borders.
Kelly noted there was pent-up demand among its multinational employer client for cross-border pensions to become a reality. And any loosening of the burdensome funding rules could also be good news for the UK.
“For many multinationals, the substantial UK plans they already sponsor could be a natural starting place when constructing an EU-wide plan, making the UK a potential hub for pan-European pensions,” he said.
“However, different locations will best suit the circumstances of different international firms: even under the present regime, clients we advise have established cross-border plans based in many EU jurisdictions—including Belgium, Luxembourg, Ireland, and the UK.”
Another potential impact would be to diffuse worries over what would happen to UK pension funds, should Scotland vote for independence.
Many had feared that an independent Scotland would turn many defined benefit plans into cross-border plans, and bring the “fully funded at all times” rule into play, forcing employers to pay off deficits much more quickly.
However, Kelly noted that the “fully funded at all times” rule was still likely to apply in March 2016—the proposed date for Scottish separation from the UK in the event of a “yes” vote.
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