Set 182015
 

Portability of pension rights is a major issue in EU Social-Policy: the increasing mobility of the workforce has made the issue of transferring pension rights nationally and across borders extremely relevant for many employees and in the recent past this topic has been discussed at length. Occupation pension rights can be theoretically transferred in the form of assets, vested rights or cash equivalent, but practically the latter is what is actually transferred.

Although the proposal for a Directive on improving the portability of pension rights (2005) included the right of the member to transfer his occupational pension rights to the scheme of another employer, the adopted Directive 2014/50/EU contains no provisions on transferability. It however states that Member States should endeavour to improve it, particularly when introducing new pension schemes. Up to now, Member States have been actively considering measures to foster transferability of vested pension rights and further efforts will follow the transposition of the Directive, whose deadline is 21 May 2018.

Finally, the European Commission asked EIOPA to provide inputs and advices on this topic. On the 2nd of July 2015 the Authority published a Report on “Good Practice on individual transfers of occupational pension rights” with the aim of identifying the main impediments and finding measures to overcome them as well as promoting transparency on national legal rules and market practices.

This is an overall picture of the current market situation

–       Different transfer regimes adopted in the Member States reflect various levels of importance given to the occupational pensions (coverage and amount of retirement benefits) and diverse labour markets (job turnover, dismissal law – transfers are more relevant if members change jobs more often).

–       Where transfers are permissible, in the majority of Member States there are legislative rules for the calculation of transferred values. Usually the same rules apply for both domestic and cross-border transfers. In case of transfers between Defined Contribution plans (plans where the amounts to be paid as retirement benefits are determined though a formula based on employees earning/years of service), the transfer value typically represents the cash value of the member’s holdings in the scheme; while for transfers where at least one of the schemes involved has a Defined Benefit plan (plan where the sponsor has the only duty to pay a specific contribution to the plan on the employee behalf, usually expressed as a percentage of his salary), certain actuarial assumptions are followed to establish the monetary equivalent of the vested rights.

–       Differences among tax regimes and tax treatment of transfers/capital pay-out are one of the major impediments, especially for cross-border transfers. Although transfers are usually not subject to tax, for cross border transfers there might be issues of double taxation due to the substantial differences between Member States’ tax treatment (TEE/EET/ETT approach). To address this problem, double taxation agreements exist in a number of Member States, primarily in the EEA countries.

EIOPA did not provide any advice on whether a transfer may be preferable to the simple preservation of dormant rights: any choice should consider all relevant specificities of the case, such as the personal circumstances of the pension rights holder, the nature of the transferring and receiving schemes, the applicable national laws. The Authority identified the following list of Good Practices, which have to be interpreted as principles to be followed rather than legally binding rules: some of them may not be readily applicable in certain Member States because of the nature of the individual legal framework.

1.     Good Practice 1: Voluntary transfer agreements

Voluntary agreements can improve transfers especially if the statutory regulation is vague or does not exist at all: relevant stakeholders (pension institutions, social partners etc.) should agree on a common regime for transfers in line with the statutory framework (supervisory law, data protection, tax law, antitrust law etc.).

2.     Good Practice 2: Objective criteria for reasons to suspend a transfer

To safeguard the interest of the scheme member and its right to transfer, any reasons foreseen in the transfer regime to suspend a transfer should be clearly formulated in advance and accompanied by objective criteria indicating when these are met. Such reasons could be the financial sustainability of the schemes involved and/or other negative impacts for the remaining scheme members. In fact, when transfer amounts are high or concentrated in a short period of time and not sufficient assets are transferred to cover the associated rights (due to different actuarial methods used by schemes involved), the receiving scheme can become underfunded and may not be able to pay benefits to remaining scheme members.

3.     Good Practice 3: Equal treatment of domestic and cross-border transfers

Cross-border transfers should not be subject to stricter regulations/requirements than domestic transfers are. Generally Member States set the same requirements, in line with the “single market philosophy”.

4.     Good Practice 4: Timeframes for in- and out-transfers

Transferring scheme should allow for a sufficiently long period to request an out-transfer and any limit should start when there is an actual possibility to transfer. Scheme members should be allowed to request an in-transfer of their supplementary pension rights at any time during their membership in the new scheme/pension institution. Too strong limitations usually lead to scheme members detriment

5.     Good Practice 5: Content of information to scheme member

To make an active decision whether to transfer, scheme members should be informed about all the relevant aspects: transfer value, transfer options, procedures, timeframes, impact of the transfer on benefits, tax implications and other specific risk coverages, especially the ones which may be lost as a result of the transfer. Reductions and costs associated with a transfer should be clearly stated as well to give a full picture of the returns on the pension products. Information should be correct, understandable, not misleading and disclosed based on a “layering approach” (key questions should be answered in the first layer, further questions in the deeper ones) as, from the latest insights of behavioural economics, people have limited time and motivation to be involved in retirement planning.

6.     Good Practice 6: Automatic delivery of information

To prevent members to miss the deadlines to transfer their rights, they should be automatically provided with the relevant information upon the termination of the employment relationships.

7.     Good Practice 7: Online tool/portal to gather pension information

Scheme members should be provided with an access to an online tool/portal where relevant and maybe additional information concerning their transfers are recorded. EIOPA may explore further this GP as part of a wider project, looking at communication channels and tools used to convey pension information.

8.     Good Practice 8: Access to advice

Not all scheme members are sufficiently financially literate to understand and assess information and may benefit from personalised advices (implications of transferring, comparison of benefits). Schemes should inform scheme members about the possibility and/or need to get specific advice.

9.     Good Practices 9: Charges, if any, to reflect the actual work necessary

In cases where the scheme member is charged for the transfer, the charges should reflect the actual work necessary to carry out the transfer. This does not preclude lump sum charges as long as they reflect actual costs. The large differences among Member States in the amount charged are in fact related to the complexity of the transfer rather than to the transferred amount.

10.  Good Practice 10: Direct communication between the schemes on transfer execution

Regarding the transfer execution, where possible, schemes should communicate directly with each other instead of via the member; the member should communicate only with one of the two schemes. If it wasn’t like that, there would be a disincentive effect on members seeking to transfer their pension rights and there would also be an increase in the costs associated with transferring, with an indirect effect on their affordability.

11.  Good Practice 11: Reasonable timescales for the execution of transfers

The time taken to complete transfers can be regarded as an impediment to their efficient and effective processing. Timescales should be defined and reasonable compared to the work involved in completing a transfer; they should be appropriate for the process and tasks required without unnecessary delays.

12.  Good Practice 12: Identification of receiving scheme especially for cross border transfers

There should be a mechanism (e.g. a register) or other practices (e.g. questionnaires, checklists of criteria) to help the transferring scheme to identify with legal certainty whether the receiving scheme meets the necessary criteria to be eligible to receive a transfer, especially for cross-border transfers. In fact, although the check is straightforward for most of the domestic transfers, it can be difficult for cross-border cases, because registers of pension institutions tend to be in local foreign language and may not contain sufficient details.

13.  Good Practice 13: Safeguarding the right to transfer over right to capital pay-out

Looking at the current market practice, it seems that a capital pay-out may even figure as an impediment to transfer (besides of being an alternative to transfer): following the 2014/50/EU Directive, this practice shall cease to exist.

The scheme members’ rights to transfer should be prioritized over the right of the scheme to (unilateral) capital pay-out. In case of the pay-out of small pension pots the interests of the pension institution regarding a cost efficient administration and the interest of the member to build up a pension has to be balanced. If members bear the costs and charges for the transfer/capital pay outs, their interests should prevail. In an automatic transfer regime, members should have the right to reject the transfer.

EIOPA did not included in the list the so called “pot follows member” approach: an automatic transfer of small pension entitlements which are disadvantageous to be kept by the scheme member’s perspective.

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