(July 25, 2013) — Cross-border pensions have long been the ugly duckling of the retirement provision family, but a new report has suggested a push for defined contribution (DC) multinational pensions could see them turn them into a swan.
The European Insurance and Occupational Pensions Authority (EIOPA) annual report into cross-border Institutions for Occupational Retirement Provisions (IORPs) found there had been a net decrease in the number of arrangements in the past 12 months.
One of the four schemes to be discounted was because it had been previously inaccurately described as a new cross-border IORP when in fact it was an existing one which had expanded its operations into a new member state, the other three were discontinued.
But two new cross-border pensions were set up in the past 12 months, and both of them were DC. This took the net total of cross-border pensions to 82, two less than the 84 recorded in 2012.
Traditionally, this type of pension has been largely ignored by multinational corporations, as they were dogged by the requirement for defined benefit (DB) ones to be fully funded within two years.
Ian Neale, information scientist at pensions technical specialists Aries, told aiCIO the overall fall in cross-border arrangements wasn’t a surprise, as most employers were “never really that keen on them”.
“When the cross-border legislation came out, any scheme sponsor that had members outside of their country were incentivised to move them out of the scheme or to bring them back to the host country,” he said.
“The statutory funding objective, which had to be met inside two years, was hugely onerous. It was generally interpreted that the scheme would have to be fully funded at a buyout basis at all times, which is ludicrous.”
Simon Tyler, a partner at law firm Pinsent Masons, confirmed Neale’s view that employers had conventionally been avoided cross-border IORPs because of the funding difficulties.
“But with DC, there’s no funding requirements, so the problems with cross-border schemes don’t arise so much,” he added.
The two new DC cross-border arrivals were from Luxembourg and Ireland, with the host countries being Greece and the UK respectively. So is this the start of a new trend for DC multinational pensions? Possibly.
Northern Trust’s head of asset pooling Aaron Overy told aiCIO his firm had hosted two DC forums for multinational blue chip companies in the past 12 months and were planning a third in October, driven by a desire from companies to learn what their pan-European DC options were.
“They are thinking that this is of interest,” Overy said. “They’re also keen to know about bringing their DB knowledge and their relationships with investment managers and service providers to their DC offerings. And they’re thinking about the illiquidity premiums they have on the DB funds, which they want to give to their DC plans.”
And it’s not just the London, Dublin, and Luxembourg-based companies who’re keen to find out more-the Netherlands’ burgeoning DC market is intriguing them too.
“In the Dutch market, there are now around 10 PPI providers (premium pensions institutions, the Dutch vehicle for providing DC benefits) which are not being used on a cross-border basis yet, but they are looking at it,” Overy continued.
“It’s taking a bit more time, but people are thinking much more deeply about DC than before.”
There is a warning for employers considering a multinational DC arrangement however. When asked what the complications were for implementing such an arrangement, Stephen Beattie, associate at law firm Allen & Overy replied: “In one word: tax.
“Each member state has different efficiencies and tax laws, so it’s very difficult to put in place the lowest common denominator that would get the best tax efficiencies across multiple countries,” he added.
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