Portability of Supplementary Pension Rights in Europe: A

Breakthrough?

IGOR GUARDIANCICH

i g u @ s a m . s d u . d k

ht tp: / /www.mwpweb .eu / IgorGuard ianc ich/

ISEG

WELFARE SYSTEMS IN THE CONTEXT OF THE EU:

A REFORM OF THE PENSION SYSTEM

THE WELFARE STATE IN PORTUGAL IN THE AGE OF AUSTERITY

LISBON, 9-10 MAY 2014

1

Why is portability important for labour mobility?

2

Holzmann and Koettl (2010: 2) individuate 3 reasons: economics

individual labor mobility decisions should not be influenced by the lack of portability of social benefits for which acquired rights have been established;

social policy social rights are key to life-cycle planning and social risk management;

human rights nationals and migrants have the right to social protection according to

national legislation and international conventions and these rights should to a large extent be portable across countries and professions.

EU’s main concern is that lack of portability limits the freedom of movement of the 31M mobile workers (in 2010)

12M intra-EU migrants & 19M extra-EU migrants

hinders the prospects of re-employment of the 11% of unemployed of 2013

Portability of supplementary pensions in the EU

3

2 processes shape the formation of the EU portability regime:

1. Multi-pillarization of pension schemes, leading to a public-private mix in pension provision.

2. 40 years of European economic integration leading to the erosion of national sovereignty over the welfare state.

The two trends create a functional demand for portability, but they so far clashed with the principle of subsidiarity.

Hence, the European Commission recognized (Green and White Papers of 2010 and 2012) that the free movement of workers is not assured.

Gaps in portability4

1) Acquisition excessively long waiting and vesting periods

2) Preservation insufficient indexation

3) Transfer technical difficulties taxation issues

Acquisition5

Pre-entry waiting periods

- periods of employment after which an employee becomes entitled to a pension benefit- up to 2 years to qualified plans in ES, up to 10 years in LU

- min age for joining a scheme or acquiring pension rights (vesting age)- restrictions to BE, DE and NL are still often 25 or above

Post-entry vesting periods

- apply to members of a scheme, but have to contribute to the scheme before establishing vested rights - CMEs use it as a employee-retention device

- in 2007, 15% of DB schemes required ≥5 years; 32% ≥2 years- all employer-sponsored schemes in DE apply 5-year vesting periods, similar to some

schemes in AT, DK, LU

- IE and UK allow 2-years vesting periods that are seldom applied

Preservation6

Given the lack of transferability of capital, mobile workers often leave these rights in the scheme of origin.

Dormant rights

- not always protected against inflation;

- salary rises are not reflected in future benefits;

both possibly leading to insufficient entitlements and, even, to the deterioration of their real value in time.

In 99% of DC schemes, dormant rights participate in the returns with the mass of other contributions.

In 25% of DB and hybrid schemes this is not the case: BE, DE, ES and IT grant the worst conditions.

Transfer7

Technical difficulties- in unfunded schemes transfers generate unexpected cash

flows, meaning that they become partly funded with high admin costs;

- the object of the transfer can be pension rights or assets- they coincide in DC schemes;- they can differ greatly in DB and hybrid schemes leading to actuarial and

technical complications.

Taxation issues unequal taxation regulations, leading to double or non-

taxation; discriminatory taxation practices, with respect to the

payment of premia, to the taxation of dividends and interest and to VAT on outsourced services.

The EU and pensions8

Coordination rules9

Regulations 883/2004 and 987/2009, which modernize the outdated Regulations 1408/71 and 574/72.

Principles: equal treatment, aggregation, prevention of overlapping benefits, exportability.

Coordination (for old-age pensions) works relatively well: statutory schemes are adapting to it since the 1970s.

The exclusion of non-statutory schemes creates 2 problems:

i) 99% of supplementary schemes are not covered;

ii) the dichotomy statutory versus non-statutory leads to application problems of separate legal instruments.

Safeguard and prudential rules10

Directive 98/49/EC improves the legal position of the insured in supplementary pension

schemes, especially of posted workers; vested rights are preserved and pension rights are paid upon

retirement in another Member State; it does not deal with waiting or vesting periods, and does not

contain any aggregation rules.

Directive 2003/41/EC establishes the freedom for authorized IORPs to provide cross-

border services in the EU; it de facto solves portability issues for members moving within the

IORP.

Portability: drafts and failures11

Draft Portability Directive in 2005 acquisition - obligation to reimburse or transfer the contributions of outgoing

workers, requirement of a two-year vesting period, a waiting period of one year and a minimum age of no more than 21 years of age;

preservation - ample leeway due to heterogeneity of pension funds (sole exception low-value dormant rights);

transferability - right to transfer acquired rights to another scheme or similar financial institution (unfunded schemes exempted), no penalization of workers, calculation left to Member States;

tax issues - excluded from the proposal.

Revised Draft in 2007 removed all provision on capital transfers; limited the scope; redefined

acquisition of rights; notwithstanding, the Council did not reach a common position, and the principal

bone of contention remained the conditions governing vesting criteria.

Portability 2013: a breakthrough?12

New legal base Article 46 TFEU on the free movement of workers, which prescribes an OLP (after

consulting the ESC) based on QMV, a major difference with Article 42 EC, which required unanimity in the Council

now Article 48 TFEU is also based on QMV, but it still relies on an ‘emergency break’ measure for each Member State

Restricted scope excludes unfunded schemes (to please DE, LU)

PAYG schemes, book reserves, closed plans, insolvency schemes, etc.

no retroactivity (to please DE) only to periods of employment after implementation

only cross-border movements (to please IE, NL, UK) no shifts in employment within individual Member States

Commission’s quid-pro-quo Elimination of Solvency II from IORP II, in exchange for the Portability Directive

Acquisition and preservation13

Combined waiting plus vesting period of up to 3 years and minimum vesting age of 21.

Reimbursement rules in DB and hybrid schemes, contributions are reimbursed in accordance with

national law, collective agreements or contracts; in DC schemes the outgoing worker is entitled either to the investment value or

to the sum of her contributions.

Preservation is addressed by individual Member States and only low-value vested rights may be excluded (and reimbursed) it has to conform to national law and practice rather than to actuarial rules; it has to take into consideration the type of fund (as administrative costs may be

substantial); it has to guarantee fair adjustment, rather than fair treatment.