Explanatory Memorandum to COM(2000)507 - Activities of institutions for occupational retirement provision - Main contents
Please note
This page contains a limited version of this dossier in the EU Monitor.
| dossier | COM(2000)507 - Activities of institutions for occupational retirement provision. |
|---|---|
| source | COM(2000)507  |
| date | 11-10-2000 |
Such funds play a major role in promoting social cohesion in many Member States and in financing Europe's economy. In view of the ageing of the Union's population, it is vital to ensure that they can operate with maximum security and efficiency.
The security of pensions is of prime importance: the rights of future pensioners must be protected by strict prudential standards. However, attention must also be paid to the cost of pensions. If pension benefits are too expensive given low returns or excessive administrative constraints, everyone will lose out. The competitiveness of firms will be affected, it will be more difficult for the pension schemes to break even and pensioners might end up receiving smaller benefits.
Consequently, this proposal for a Directive on institutions for occupational retirement provision is designed to strike the best possible balance between security and affordability.
Contents
- 1. General comments
- 1.1. The need for a Community legal framework covering institutions for occupational retirement provision
- 1.2. The objectives of the proposal
- 1.3. The approach taken
- 2. Description of articles
- Article 3 - Application to institutions operating social security schemes
- Article 4 - Optional application to institutions covered by Directive 79/267/EEC
- Article 5 - Small pension schemes and statutory schemes
- Article 6 - Definitions
- Article 7 - Activities of the institutions
- Article 8 - Separation between the sponsoring undertaking and the institution
- Article 9 - Conditions of operation
- Article 10 - Annual accounts and annual report
- Article 11 - Information to be given to the members and beneficiaries of the scheme
- Article 12 - Disclosure of investment policy
- Article 13 - Information to be provided to the competent authority
- Article 14 - Powers of intervention of the competent authority
- Article 16 - Funding of technical provisions
- Article 17 - Regulatory own funds
- Article 18 - Investment rules
- Article 19 - Management and custody
- Article 20 - Cross-border activities
1.1. The need for a Community legal framework covering institutions for occupational retirement provision
(a) Institutions for occupational retirement provision and their social and economic importance
There are three main categories of pension schemes in the Member States: social security schemes, individual schemes, which generally take the form of contracts or products taken out with life-assurance companies, and occupational schemes. The general organisation and financing of these schemes is the responsibility of the Member States.
Occupational schemes generally involve employer and employees paying into a savings scheme, out of which retirement benefits will be paid to these same employees. Such schemes may be set up within the company itself or may use the services of a separate financial institution (e.g. pension fund, 'Pensionskassen' or investment fund) which receives the contributions, invests them and pays out the retirement benefits.
Such institutions, which will here be referred to as 'institutions for occupational retirement provision' (IORPs), play a major role in retirement and social protection systems in a number of Member States. It is estimated that close on 25% of the Union's active population is covered by an occupational pension scheme. The proportion can be higher than 80% in some countries, such as the Netherlands or Denmark, while relatively low in others. The share of occupational pensions in total pensions is around 10%.
The value of the assets held by these institutions exceeds EUR 2 000 billion, i.e. it is equivalent to about 25% of the Union's GDP (a little more than 45% for the assets of insurance companies). They thus play, along with the other financial institutions, a key role in financing Europe's economy and in the operation of the Union's capital markets.
IORPs are also characterised by the very long-term nature of their activities, both in terms of commitment of the sponsoring undertaking and in terms of investment. They invest for several decades and, since contributions paid to an IORP can in general not be withdrawn before the age of retirement, they ought to have a very good idea of what their cash requirements will be. This allows them, if they consider it appropriate in the light of the nature and duration of the liabilities, to invest significantly in relatively non-liquid assets such as shares, including those issued by small businesses, or even unlisted securities. IORPs can thus contribute to risk capital development in accordance with the guidelines set out in the Risk Capital Action Plan i, which was endorsed by the Cardiff European Council. With a view to improving the diversification of their investment portfolios, they can also invest substantially in foreign securities. 75% of the assets of UK pension funds in 1998, for example, were in shares. A third of these shares were foreign.
Institutions for occupational retirement provision thus play a major role in national social protection systems, in the financing of the Union's economy and in the integration of its capital markets. There is good reason to think that, in the decades to come, they will remain at the centre of economic and social change in the Union. Demographic developments (extension of life expectancy and fall in birth rates) are prompting the growth of pension savings. The latter can help to reduce public expenditure while also guaranteeing a high level of retirement benefits and thus the preservation of the European social model. IORPs are investing more in shares, considered more advantageous in the long term. In doing so, they contribute to the increase of the stock market capitalisation of the Member States, which is still about half that of the United States. Lastly, it may be desired by sponsoring undertakings and beneficiaries that IORPs provide pension services across Europe.
These developments mean that an appropriate Community framework must be set in place.
(b) The absence of a Community framework and the negative consequences of this gap
The European Union now has detailed prudential rules for credit institutions, insurance companies and undertakings for collective investment in transferable securities (UCITS). These rules provide security for consumers and investors. A proposal for a Directive relating to the freedom of management and investment of funds held by institutions for retirement provision i had to be withdrawn by the Commission in 1994 since no satisfactory agreement could be found in the Council. To date, the activities of IORPs have not been subject to any specific Community rules. This gap has several negative consequences.
- Investment. There is no agreement within the Community on how IORPs can use the single market and the euro to optimise their investments in financial markets. The rules to which they must adhere vary greatly from one Member State to another. The possibility cannot be ruled out that some of these rules go beyond what is necessary to ensure the IORPs' prudential soundness. If so, this could hinder the application of the principle of the free movement of capital and damage the IORPs' returns. Between 1984 and 1998, average annual real return on investments by IORPs was around 6% in the Member States with strict quantitative investment rules and more than 10% in Member States with rules that give managers more freedom. Lower returns mean lower pay-outs or higher contributions. The indirect cost of labour rises, as does the cost of financing retirement systems. Investment policy in the field of supplementary pensions depends on the pension product and the contractual obligation of the pension provider. By limiting opportunities for diversification of assets, rules that are too restrictive might also complicate risk management and reduce the security of investment portfolios. Excessive restrictions on shares, which are usually less volatile than government bonds in the long term given their link to economic and productivity growth, can have a negative impact in this regard. It is therefore vital that an agreement be reached on investment rules that are suited to the more extensive and more liquid capital market that is the result of economic and monetary union.
- Allocation of savings. IORPs have a key role to play in the integration, efficiency and liquidity of these markets. As very long-term investors, they are ideally placed to assist the financing of private initiatives. While the security and profitability of investment portfolios is a priority objective, a Community framework can also ensure that the IORPs participate in the efficient allocation of savings in the Union.
- Managing and custody of assets. IORPs may find themselves obliged to use only the services of custodians or asset managers established in the same Member State as themselves. However, if IORPs are to be given the means of improving their investment policy, they must be able to choose their managers freely. Investment in a given sector or region may require the services or advice of a specialised manager, who may not necessarily be based in the same Member State as the IORP. Furthermore, if competition between managers and between custodians were increased, this might help to cut management costs and make management more efficient. There ought to be specific community rules giving IORPs the right to use the services of managers duly authorised under the investment services Directive, the Directive on credit institutions and the third life-assurance Directive i. This right should be extended to management companies in accordance with a proposal for a Directive on UCITS i currently being discussed by Council and Parliament.
- Cross-border activities. In the absence of proper coordination at Community level, IORPs are the only major financial institutions unable to provide their services in a Member State other than their own on the same conditions as banks, insurance companies and investment firms. It has been calculated that, for a pan-European company, the cost of setting up separate occupational systems in each Member State is about EUR 40 million per year. Allowing IORPs to manage schemes for companies established in another Member State would result in economies of scale of several types: more efficient investment policies as a result of asset pooling, simplification of administration and compliance with the prudential and reporting rules of a single supervisory authority. Furthermore, labour mobility would become easier: workers could more easily take up a job in another Member State if they could remain members of the same IORP, as is foreseen, for posted workers under the terms of Title II of Regulation (EEC) No 1408/71, in Directive 98/49/EC on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community; multinationals would come up against fewer obstacles to moving their employees from one Member State to another.
- Growth of the IORPs. Promoting occupational retirement savings can help to balance the financing of pension systems and put state schemes on a sounder financial footing. This decision is for the Member States to take and requires in particular that appropriate tax incentives be set in place. The existence of a legal framework containing European prudential standards and allowing cross-border management of occupational schemes would however be more conducive to the growth of IORPs than are the partitioning of markets and the regulatory patchwork that prevail today.
(c) The results of the consultation process launched by the Commission and the Financial Services Action Plan
The European Parliament, Economic and Social Committee and the financial services sector have been pressing for several years for the establishment of a European framework for IORPs. This is quite clear from the consultation process and the proposals made by the Commission in a Green Paper i in 1997 and a Communication i in 1999. On 13 April 2000, the European Parliament adopted a Resolution i which welcomes the Commission's intention to propose a Directive on supplementary pensions.
Several Member States also expressed their support, in their responses to the 1997 Green Paper, for the adoption of a directive. Furthermore, the Member States, at the Cologne European Council in June 1999, endorsed the Financial Services Action Plan i proposed by the Commission in May 1999. One of the strategic objectives of this Plan consists in establishing a genuine single market for wholesale financial transactions. The adoption of legislative provisions on investments by IORPs is presented in the Plan as a prerequisite to attaining this objective.
The proposed Directive lays down prudential rules designed to ensure that occupational pension transactions attain a high level of security and efficiency. These rules also allow mutual recognition of the supervisory systems of the Member States, a prerequisite for cross-border management of occupational schemes.
(a) Secure and efficient investment
The proposed Directive stresses a qualitative approach to investment rules. Investment portfolio management should preferably comply with principles (security, quality, liquidity, return, diversification) and not uniform quantitative requirements. In this way, each IORP can apply the principles listed according to the nature and duration of its liabilities. This will guarantee security and efficiency. In Member States which take this approach, the returns on investments by IORPs are usually higher than those in Member States with a more quantitative approach.
Discussions so far have tended to indicate that some Member States would nevertheless prefer to continue to apply certain quantitative rules to IORPs established on their territory. This is essentially because supervisory methods used in those Member States are closely linked to the application of quantitative rules. The proposed Directive takes their wishes into account. However, it does propose that three types of investment should not be restricted excessively: shares, securities denominated in a non-matching currency, and risk capital. Where IORPs have very long term liabilities and face relatively low liquidity risks, they should be given the possibility to invest significantly in securities that are not very liquid and are denominated in a different currency from that in which the liability is denominated.
(b) Free choice of asset managers and custodians
As indicated above, IORPs should be guaranteed the right to use the services of any duly authorised manager or custodian within the Union.
(c) Level playing-field between all service providers
Life-assurance companies operate on the market for occupational pensions via group contracts. Such companies are regulated at Community level by the life-assurance Directives. Prudential rules for other IORPs should therefore be determined in such a way as not to introduce distortions of competition. The establishment of a real prudential framework should in general avoid such distortions. In addition, where the services of IORPs resemble those offered in group contracts - for example, where the IORP offers a financial guarantee - similar rules to those set out in the life-assurance Directives are suggested for own capital requirements. If a Member State considers that greater consistency must be implemented in the prudential treatment of IORPs and life-assurance companies, it should be able to apply certain prudential provisions of this Directive to the occupational pension business of life-assurance companies. This option is given to Member States.
(d) Cross-border activities
By harmonising certain basic prudential rules, establishing mutual recognition of national prudential systems and proposing a system of notification and cooperation between competent authorities, this Directive removes all prudential barriers to cross-border management of IORP pension schemes. If cross-border activities is to become a reality, a certain degree of tax coordination between Member States will also be necessary. It should in particular be possible for companies and employees to obtain tax relief on contributions that are paid into a IORP established in another Member State. In other words, contributions to domestic IORP's and to IORP's established in other Member States should be treated with neutrality. This aspect is not dealt with here but will be the subject of a separate proposal by the Commission.
Furthermore, the Directive stipulates that cross-border management must comply with social and labour legislation in the country of the company within which the scheme is established. Schemes must be run in conformity with national provisions, regardless of where the IORP is located.
(e) Protection of beneficiaries
Cross-border activities require a certain level of prudential harmonisation. Before allowing an IORP established in another Member State to manage pension schemes on its territory, each Member State must ensure that the IORP in question is regulated and supervised in such a way that the rights of beneficiaries are given appropriate protection. This proposal therefore includes a set of basic prudential rules (competence and good repute of managers, conditions for access to the activity, information provided to members and beneficiaries, regulatory own funds, investment rules), together with rules on IORP liabilities including technical provisions.
Generally speaking, affording the best protection to future pensioners is the Commission's primary objective. Contributions paid to an IORP are a form of deferred salary. The rights acquired by the payment of these contributions determine the standard of living of those concerned. Protecting these rights is thus at the very heart of the wider objective of strengthening the European social model.
(f) The single market for financial services
Coordinating investment and management rules applicable to IORPs is one of the components of the Financial Services Action Plan. With a major gap in current Community legislation on financial services filled, a decisive step will have been taken in the direction of a single market for financial services capable of fully promoting growth and employment.
(g) The single market for supplementary pensions
The adoption of this Directive would also be a step towards allowing supplementary pension provision to be organised at the level of the Single Market. Investors would have access to a wider choice of service providers and workers could move around without running the risk of losing part of their pension rights. This would contribute to economic and social progress, but will require greater coordination of the tax, social and labour legislation of the Member States.
(a) Avoiding any interference in the organisation of pension systems in the Member States
The general organisation of pension schemes, the choice of financing mechanisms and the precise arrangements for the operation of IORPs fall within the competence of the Member States as long as Treaty rules are respected. This prerogative is not compromised by the current proposal.
(b) Ensuring consistency with Community financial services legislation
The approach taken in preparing this proposal was institution-based, in accordance with the approach taken in all other Community legislation adopted in the financial services field. Such an approach is also suited to the cross-border activity mechanisms that, it is hoped, will be set in place. None the less, the prudential rules are inseparable from the benefits promised by the IORPs (defined benefits or contributions, possible cover of biometric risks). The proposed Directive therefore includes, where necessary, rules that are differentiated according to the type of scheme.
(c) Establishing a coherent scope
The Directive covers all IORPs which operate on a funded basis and are outside the social security systems. This ensures that, in a field where disparities between countries are very wide by comparison with other financial activities, the scope of the Directive is relatively coherent.
Briefly, any institution that receives contributions and invests them with the sole purpose of paying out retirement benefits is considered to be an IORP. It is vital that the assets held by IORPs cannot be used for any purpose other than the payment of capital or an annuity at retirement age. In other words, the rights acquired cannot be 'surrendered' before the age of retirement, otherwise the scheme does not constitute a pension scheme but a savings product.
The Directive does not stipulate that benefits must be paid out in the form of an annuity or that precise biometric risks need to be covered by the institution. When discussing the Communication on supplementary pensions, the Parliament focused a great deal on this specific issue and finally came to the conclusion that longevity risks needed to be insured.
From the point of view of the Commission, it is desirable that the precise arrangements for the payment of benefits, which are often dependent on national tax, labour and social law, be decided inside the Member States. Moreover, prudential standards need to be established which apply to all occupational pension products. Companies and investors would gain nothing from certain products (in this case defined contribution schemes which provide only for the payment of capital without covering biometrical risks) being excluded from all European legislation. Therefore, all types of IORP schemes are covered in this Directive, even if the Commission considers that cover for longevity risks in particular is an important aspect of the fight against poverty and insecurity among elderly people.
The few IORPs which operate on a pay-as-you-go basis are not covered by the proposed Directive. This does not pose any problems given the main policy objectives of the proposal. The efficiency of financial investments and the use of managers from other Member States are not issues for these institutions, which use contributions to finance pay-outs directly. Member States or competent institutions cope with mismatches between contributions and benefits through additional contributions or tax revenues.
Firms which establish book reserves in order to provide retirement benefits to their employees are also not covered by this Directive. The use of book reserves, which is permitted in a limited number of Member States only, leaves firms completely free to decide how to use the assets covering their liabilities. Guaranteeing freedom of investment and management by means of a Directive therefore does not seem necessary here. Moreover, a guarantee or insolvency insurance fund generally replaces any prudential rules.
Lastly, consultations so far have shown that neither IORPs operating on a pay-as-you-go basis nor firms which establish book reserves wish to benefit from cross-border activities, at least by using these types of schemes.
(d) Taking account of national diversity while ensuring a high level of protection
IORPs operate very differently from one Member State to another. In some Member States, they resemble life-assurance companies. In others, they are more like investment funds. The Directive proposed takes account of these differences, which are often linked to tax and social security legislation in the Member States. It cannot seek to harmonise in detail the conditions under which IORPs operate.
Their diversity also necessarily restricts the degree of prudential harmonisation that can be attained by this initial proposal for a Directive. However, an extremely rigorous approach has been adopted for the most crucial prudential aspects (financing liabilities, diversification of assets, information to be provided to the supervisory authorities, members and beneficiaries). This should enable the fundamental objective of a high level of protection for the rights of present and future pensioners to be attained and to permit mutual recognition.
Article 2 - Scope
- This proposal is concerned with institutions operating occupational pension schemes. These are private schemes, usually seen as supplementing statutory social security schemes. It is essential to preserve a clear distinction between statutory social security and private/supplementary schemes. This proposal is therefore not concerned with social security schemes which are covered by the term 'legislation' as defined by Article 1 of Regulation (EEC) No 1408/71 or in respect of which a Member State has made a declaration under that Article.
- Life-insurance companies, Undertakings for Collective Investment in Transferable Securities (UCITS), credit institutions and institutions covered by the Investment Service Directive already benefit from a Single Market framework. It does not seem to be necessary to include them in this new Directive, even though they might be capable of providing occupational pension services.
- In Germany, institutions known as 'Unterstützungskassen' are one of the practicable forms of financing occupational pensions. Unterstützungskassen are support funds and similar to IORPs in that the accumulation of assets is external. The difference between these funds and IORPs is that no legal right to benefits of a certain amount is established for members. For tax reasons Unterstützungskassen are generally underfunded. The employer can redeem the assets at any time and not necessarily meet its obligation for payments. A statutory insolvency insurance is compulsory in order to protect the interests of the members adequately. Thus Unterstützungskassen are not subject to any prudential supervision. Given these characteristics, such funds cannot be compared to IORPs in other Member States covered by this Directive and are therefore excluded.
- Firms which establish book reserves in order to provide retirement benefits to their employees are also not covered by this Directive. The use of book reserves, which is permitted in a limited number of Member States only, leaves firms completely free to decide how to use the assets covering their liabilities. Guaranteeing freedom of investment and management by means of a directive therefore does not seem necessary here. Moreover, a guarantee or insolvency insurance fund generally replaces any prudential rules.
- The few IORPs which operate on a pay-as-you-go basis are also not covered by the proposed Directive. The efficiency of financial investments and the use of managers from other Member States are not issues for these institutions, which use contributions to finance pay-outs directly. Member States or competent institutions cope with mismatches between contributions and benefits through additional contributions or tax revenues.
In at least one Member State, IORPs have to operate two types of schemes: voluntary employment related pension schemes (considered as supplementing social security) and compulsory employment related pension schemes (considered as social security). It is proposed to include these institutions for the voluntary/supplementary part of their activity.
As already mentioned as regards Article 2, it does not seem necessary to include life-insurance companies, Undertakings for Collective Investment in Transferable Securities (UCITS), credit institutions and institutions covered by the Investment Service Directive in this Directive. However, any inequality of treatment resulting from separate prudential frameworks must be avoided. The problem could arise in particular in the case of life-assurance companies, which have a strong presence on the occupational pension market (through group contracts) in some Member States. The establishment of a genuine prudential framework should in itself largely eliminate the risks of distortion of competition. The draft also provides that institutions that are similar in some respects to life-assurance companies (in that they give an interest-rate guarantee and/or cover biometric risks) will also be the subject of equivalent provisions for own funds (see in particular Article 17). In addition, the Directive gives the possibility to Member States to apply the prudential requirements of this Directive to the occupational pension business of life-assurance companies.
- A 'de minimis provision' is proposed, as an option for Member States, for IORPs managing small pension schemes. These institutions are likely to be not interested in any form of cross-border activity. Such a provision could facilitate supervision in Member States where tens of thousands of occupational pension schemes are in place.
- In some Member States, occupational retirement provision can be operated by institutions which are covered by a public authority with revenue raising powers. Such a cover is deemed to be sufficient for the protection of members and beneficiaries.
- This Directive is intended to apply to employment-related institutions for pension provision that operate on a funded basis. These are the last major financial institutions which are not covered by an EU regulatory framework allowing them to benefit from the Single Market. The notion of 'institution for occupational retirement provision' was chosen because it seems generic enough to cater for the diversity of institutions operating in the Union. The notion of 'pension funds', for instance, is not common to all Member States. Some of these institutions may also offer services not only to undertakings but also directly to employees or self-employed persons. The Directive is designed to cover such situations.
- The 'sponsoring undertaking' is usually characterised by the fact that it pays contributions into the institution for retirement provision. It can happen, however, that sponsoring undertakings are granted 'contribution holidays' because the returns on investment are sufficient to cover the costs. It can also happen that a specific benefit is fully financed by contributions paid by employees. It is understood that these exceptional circumstances do not impact on the validity of the definition.
The definition of 'retirement benefits' needs to be sufficiently wide in order to cover the various operations carried out by the institutions concerned
The protection of beneficiaries requires that the IORPs limit their activities to those that will be supervised under the future Directive.
In the absence of a guarantee or insolvency insurance, legal separation between the undertaking and the IORP is a key element affording beneficiaries protection. This separation in no way prevents the board of an institution of consisting of both the employer and the employees of the company.
The essential point for adequate protection of members and beneficiaries of a pension scheme is prudential supervision by a competent authority that can monitor the conditions of operations of IORPs on the basis of the following criteria: competence and good repute of managers, directors and all persons controlling the institution, existence of rules regarding the functioning of the scheme, proper calculation of technical provisions by an actuary or other specialist in this field on the basis of recognised actuarial methods, contractual commitment on the part of the sponsoring undertaking and sufficient information to be given to members on the conditions of operations of the pension scheme (contractual rights and obligations, risks embedded in the pension contract and distribution of the risks among the contracting parties). In case of cross border activity an IORP needs a prior authorisation granted by the competent authority of the home Member State.
The annual accounts and the annual report, approved in good and due form by the competent persons, shall constitute the basis for ongoing financial supervision of the IORP by competent authorities.
Proper information is a vital element for the protection of those who have already retired (beneficiaries) and those who will retire in future (members). However, the contents of information shall differ with respect to the recipient (member or beneficiary) and to the contractual conditions of the pension scheme concerned. On request the annual accounts and the annual report shall be made available to members and beneficiaries of the scheme.
It is proposed that IORPs disclose every three years, and in any case following a significant change in the investment policy, information on the principles underlying their investment policy with respect to the nature and duration of pension liabilities. This information shall also include a description of the risk measurement methods and risk management processes implemented. The statement of investment policy principles is addressed to the supervisory authorities who verify the coherence of actual investments with the principles spelt out. Such a document is one way of obliging managers to take a detached view of the asset-liability management processes and to put their overall investment strategy into perspective. On request this statement of investment policy principles shall be also be sent to members and beneficiaries of the scheme.
This Article ensures that the supervisory authorities are sufficiently equipped with information rights to perform their responsibilities properly and safeguard the interests of members and beneficiaries of the scheme.
This Article ensures that the supervisory authorities are sufficiently equipped with powers of intervention to perform their responsibilities properly and safeguard the interests of members and beneficiaries of the scheme. The competent authorities may carry out on-site-inspections at the IORPs premises and, where appropriate, on outsourced functions
Article 15 - Technical provisions
In order to safeguard the interests of members and beneficiaries, institutions must establish technical provisions. In cases where the institutions operate schemes in which biometric risks are covered and/or where the institution bears the investment risk, the technical provisions must be calculated on a sufficiently prudent basis.
The calculation of technical provisions shall take place every year and shall be executed and certified by qualified actuaries according to recognised actuarial methods. This calculation of technical provisions may take place once every three years if the IORP provides the competent authority with a certification of adjustments for the intervening years.
The interest rate shall be chosen prudently according to national rules and the amount of technical provisions shall both reflect an actuarial value of accrued pension rights of members and must be sufficient for pensions and benefits already in payment to beneficiaries to continued to be paid.
In principle, the technical provisions must be fully covered by appropriate assets at all times. However, given the very long-term nature of investments by IORPs and the lower exposure to liquidity risks (stemming from the absence of any redemption possibility, unlike in the insurance field) Member States may permit IORPs, for a limited period, to depart from the full funding requirement. Any departure must be accompanied by a plan to re-establish full cover of the technical provisions.
In the event of cross-border activity the technical provisions must be fully funded at all times to protect the interests of members and beneficiaries of the scheme and in order to allow mutual recognition of the different supervisory regimes established in Member States.
In many cases, it is the sponsoring undertaking and not the IORP itself that either covers any biometric risk or guarantees certain benefits or investment performance. However, in some cases it is the IORP itself which provides such cover or guarantees and the sponsors obligations are generally exhausted by paying the necessary contributions. In these circumstances, the products offered are similar to those of life-insurance companies. The draft requires IORPs offering such products to hold the same additional own funds as life-assurance companies.
A qualitative approach to investment rules is proposed. This is because it is deemed preferable for the allocation of assets to be decided in the light of the liabilities entered into by each fund and not in the light of a single set of quantitative rules. As a general rule, asset allocation must be prudent. This requires, above all, a proper diversification in terms of issuers, types of securities, country/geographical zone, currency and industrial sector. In case of significant investments in the sponsoring undertaking, bankruptcy of that undertaking could have the double effect of depriving employees from their job and jeopardising their pension rights. Self-investment therefore needs to be strictly limited.
Supervisory methods differ a lot from one Member State to another. Therefore, Member States should be given some discretion on the precise investment rules that they wish to require from institutions established in their territories. Such an approach was already adopted in the insurance Directives (see, for instance, Article 22 i of Directive 92/96/EEC). IORPs are very long-term investors ideally placed to take advantage of the high returns and low volatility traditionally offered over the long term by shares. They need to link pension promises to the long term growth of the real economy. They also need to benefit from international diversification and undertake investments in currencies other than those in which their liabilities are denominated. Such investments should therefore not be restricted excessively.
As very long-term investors, IORPs can help improve the size and liquidity of EU risk capital markets. It is for the IORP itself to decide whether it wishes or not to invest in risk capital. It is therefore essential that the regulatory framework does not excessively restrict this form of investment.
Under this Article, IORPs are free to delegate the management and custodial services to institutions duly approved in another Member State. This article secures the application of the principle of free provision of services for credit institutions and asset managers.
The coordination of prudential supervision is one of the necessary conditions for allowing an IORP to manage schemes on a cross-border basis. A greater degree of tax coordination is also essential. This matter is not dealt with in this proposal. Article 20 simply lays down the principle of freedom of cross-border activities and proposes a mechanism for cooperation and notification between supervisory authorities. The Article also establishes that an IORP wishing to manage a scheme in another Member State will have to apply the relevant social and labour law requirements of the Member State where the sponsoring company is established. These requirements essentially relate to what retirement benefits need to be provided.