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In this Watson Wyatt Update:
On 11 September 2007, in the case of Lindorfer v. the Council of the European Union, the European Court of Justice held that using gender-dependant actuarial factors to determine the purchase of a number of (notional) service years on a value transfer amounted to a prohibited distinction based on gender. This case concerned an Austrian woman who, following her appointment as an official with the Council of the European Union, asked for a value transfer of the Austrian pension rights she had accrued up to that point into the pension plan for EU officials. Because the purchase of the number of years of service was determined on the basis of gender-dependent factors, she obtained fewer service years than a man of the same age would have obtained. The Court regarded this as a prohibited distinction based on gender, as specified in Article 141 of the EU Treaty.
This is an odd verdict from the Court of Justice. So far as we are aware at Watson Wyatt, no Directives are being prepared at the European level which prescribe the use of gender-neutral factors for additional pensions. It therefore seems as if the Court of Justice is imposing stricter rules in the Lindorfer verdict as regards pension plans within the EU institutions than those which apply to pension plans in EU Member States. It might be inferred from the remarks by the Advocate-General in this case that the verdict only applies to the specific pension plan for EU officials, and also only to periods in the past. In fact, the verdict appears to show that the EU pension plan has now been converted to gender-neutral factors. Watson Wyatt will, of course, continue to follow these developments.
For more information contact: Martin van ‘t Zet
The duties of a pension fund director have required increasing levels of knowledge and experience in recent years. The board is responsible for everything the pension fund does or fails to do. To discharge his/her responsibilities effectively, a member of the board must take part in the board’s decision-making processes. A director must therefore have sufficient expertise to be able to consider matters properly when decisions are being taken. Expertise is also required to allow directors to discuss matters fully with bodies such as certifying authorities, supervisory agencies and consultants.
Pensions Act
The Pensions Act prescribes that directors of a
pension fund must have an adequate level of
expertise and experience for them to run
the pension fund properly. Also, the
Principles for Pension Fund Governance
state that the board must ensure that
the requirements for expertise and experience,
as prescribed by statutes and regulations, are fulfilled.
The board must also adopt a procedure for the periodical evaluation of the functioning of the board as a whole and of each of its members individually.
Pension umbrella organisation report
In December 2007, the OPF (Stichting voor Ondernemingspensioenfondsen) [Association of Company Pension Funds] and the VB (Vereniging van Bedrijfstakpensioenfondsen) [Association of Industry-wide Pension Funds] published a report1 which provided a more detailed specification of the principles outlined above. The objective of the report was to provide guidelines to allow the desired expertise levels for board members to be set. The report accordingly includes requirements (target conditions) to be met by directors after one or more years serving as the director of a pension fund. The report also contains standards for members of a Members’ Council and a representative body.
Expertise test
Watson Wyatt has developed an expertise test to assist in testing expertise levels. Applying this test can provide an understanding of the knowledge levels of individual directors and also of the board as a whole. The test can be used as a ‘baseline measure’, and its aim is to establish the levels of knowledge, on the test date, of either individual directors or the board as a whole. The results of the test allow for an objective discussion about expertise within the board. This might then establish what the required level of knowledge within the board ought to be. If it is discovered that the levels of knowledge are inadequate, Watson Wyatt can arrange for customised training.
For more information contact: Mirella Verhaaf
The European Directive on Pension Institutions (2003/41/EC) has made it possible for pension institutions to manage pension plans for employers established in a different Member State, a situation for which present-day Dutch pension funds do not adequately provide. The rules on delimitation of duties, for example, require that a foreign company be included in the group for which the pension fund is working. This is accordingly an obstacle to free market operation.
The General Pension Institution (API) has been introduced to make the Netherlands more attractive as a base for pension institutions. The arrival of the API signifies a new pension provider on the market, which can benefit from the possibilities offered by the Directive and which is not restricted by the territorial limitations of the Dutch Pensions Act. The API allows pension commitments made in various countries to be managed from a single country in Europe. The immediate advantage is that there is only one supervisory regime. This makes it easier to manage the pension plans for multinational businesses.
Principles of the framework memorandum
Ministers Donner and Bos sketched out the main features of the API in a framework memorandum of 21 December 2007. We will now explore the key features of the API.
I. Prohibition of ring-fencing
The Pensions Act states that if a pension fund manages several pension plans, then the plans form a single financial entity. This prohibition of ring-fencing is an obstacle if a pension fund wants to manage the pension plans for several employers. The memorandum confirms that the ring-fencing prohibition does not apply to the API. The main significance of this is that there need be no cross-subsidy between pension plans. Compartmentalising the different plans means that a shortfall in coverage for one plan will have no adverse impact on the financial position of the other plans. This means that it will be more attractive for foreign employers to locate their pension plans in the Netherlands. It also avoids the situation where, if API were to go bankrupt, any ring-fenced pension assets would be used to pay off API’s creditors.
II. Legal format/supervisory regime
The framework memorandum does not indicate any specific requirements for the legal format of an API. It is only important that the institution be legally separated from the contributing business. This accordingly excludes legal formats under which the owners are jointly and severally liable for the debts of the API. Requirements will also be imposed on the quality of the directors, as is currently the case for both insurers and pension funds.
As regards the application of the supervisory regime, the memorandum appears to cancel out any simple implementation and thus the popularity of an API. Depending on the nature of the pension commitments, the plans managed within an API may fall under the supervision of the FTK (Financieel toetsingskader – Financial Assessment Framework) or the Financial Supervision Act. The result is that a single API may be subject to two different supervisory regimes, which might reduce the popularity of an API in the Netherlands.
The requirements imposed by either the FTK or the Financial Supervision Act go further than the Directive on Pension Institutions. The government accordingly seems not to be responding to the call for increased flexibility. This does not benefit our competitive position in relation to other European countries. These countries (e.g. Belgium) are already implementing the Directive. There is, however, a question as to how far this will remain possible with the possible arrival of Solvency II.
III. Fiscal aspects
The framework memorandum bypasses the question of the fiscal aspects of API. This is all the more surprising because the fiscal environment often determines the choice of the country of establishment. In this context, speedy clarification is required on Corporation Tax and Dividend Tax, and whether or not the VAT exemption will apply. As regards the latter element, the discussion that has recently flared up concerning the VAT exemption for asset management services is of interest to pension funds. Contrary to the coverage on this in the Financiële Dagblad newspaper, the Minister of Finance announced in her press release of 30 January 2008 that it may still take some time before a decision is reached on whether or not the VAT exemption will apply.
Conclusion
The API appears to offer many possibilities, principally for smaller funds which are denied the option of graduating to the Industrial Pension Fund. What is striking, however, is that the memorandum leaves many important questions unanswered, particularly as regards fiscal matters. The main reason for this is that the matter is only being looked at from the Dutch perspective and not from within the European context. In addition, the legislative bill is not likely to be submitted until the end of 2008. There is a danger here that the Netherlands will miss the boat, particularly because Ireland, Belgium and Luxembourg have all set about this issue very energetically, with each of them now having set up their own 'European Pension Institution'.
For more information contact: Pauline Bakker
1Promotion of expertise in pension funds
If you have any questions or remarks concerning this issue of the Watson Wyatt Update, please let us know.
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