European Business Organization Law Review 2: 401-426

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© 2001 TM.CASSER PRESS

Occupational Pensions - a Matter of European Concern Claudia Bittner* 1.

Introduction

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2. 2.1 2.2 2.3 2.4

Free movement of workers The scope of protection Problems regarding supplementary pensions EC legislative acts Directive 98/49/EC on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community. Objective Particular provisions and their impact in Germany Continuation of contributions to supplementary pension schemes . . . . Exemption from any obligation to make contributions Preservation of pension rights Cross-border payments Information to scheme members Evaluation

405 405 406 407

2.4.1 2.4.2 2.4.2.1 2.4.2.2 2.4.2.3 2.4.2.4 2.4.2.5 2.4.2.6 3 3.1 3.2 3.3 3.4

408 409 410 410 410 411 412 412 413

3.4.2.1 3.4.2.2 3.4.2.3 3.4.2.4 3.4.2.5

The freedom to provide services 413 The scope of protection 413 Problems regarding supplementary pensions 414 EC legislative acts 415 The proposed Directive on institutions for occupational retirement provision (IORP) 416 Objectives 416 Scope and impact on the German system of occupational pension schemes 417 Definition of "Institution for Occupational Retirement Provision" . . . . 417 Definition of "retirement benefits" and "pension scheme" 418 Coverage of bio-metric risks no defining element of an IORP 419 The German institutions covered by the directive 420 Evaluation 424

4.

Final remarks

3.4.1 3.4.2

425

Dr. iur. (Freiburg), LL.M. (Harvard), Priv.-Doz., University of Freiburg; currently University of Heidelberg.

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Abstract As old age security has become a major concern, supplementary pensions are an issue of great political interest, debated heavily at the national level within the EU Member States as well as at the supra-national level of the European Union. Increasing labour mobility has made supplementary pension systems, suited for transnational work, a subject of European social policy. The European capital market and the Euro promise access to capital for all pension schemes operating on the basis of accumulating and investing capital, thus directing the economic development of pensions towards capital-based systems. This article deals with the European legislation on supplementary pensions in the context of both their "social dimension" and their "economic dimension". The "Safeguard" Directive 98/49/EC is aimed at eliminating obstacles to labour mobility resulting from the specific legal design of national systems of supplementary pensions and diversity in Member States. In contrast, the proposal for a Directive on Institutions for Occupational Retirement Provision (IORP) is aimed at liberalising cross-border investment and management services of IORPs, and to prepare the liberalisation of capital investment, by setting a common standard for supervisory systems, funding requirements and investment rules. Both Directives are analysed in the wider context of the European legislation on supplementary pensions, also assessing, in particular, their likely impact on the German system of retirement provision.

1.

INTRODUCTION

Old age security has become a major concern in all western civilisations due mainly to demographic changes, constantly high unemployment levels, and changes in the patterns of work. Social security pensions, the first pillar of old age security, have traditionally been financed on a pay-as-you-go basis. However, financing these pensions has become increasingly difficult, making people realise the growing importance of the second and third pillars, i.e., supplementary or occupational pensions, savings, life insurance policies, and other forms of personal provision for old age.1

It is an open question whether the latest social reform in Germany, i.e. the Altersvermogensgesetz [Law on Old-Age Capital], BGBI. I, 1310 of 29 June 2001, providing for a voluntary capital funded private pension financed by the employee himself, should be regarded as a fourth pillar added to the traditional system. Alternatively, the second pillar - occupational pensions - will be further eroded when employers decide to co-finance the new system rather than to invest in an occupational pension system at enterprise or group level.

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Providing a legal framework to guarantee security in old age is, at first glance, a national task. Viewed more closely it must, however, be a European concern as well. This is partly due to labour mobility in the European Union. Employees should not put their old age security at risk when moving from one system to another. Also, the need to finance social security systems and supplementary pension schemes makes it necessary to look for solutions at a European rather than at a purely national level. The European capital market and the Euro promise a much wider range of choice and access to capital for all pension schemes that operate on the basis of accumulating and investing capital. From a European perspective, supplementary pensions are, on the one hand, a matter of social policy. The Community may take measures based on Article 137 EC in some fields of social policy as listed in Paragraphs 1 and 3,2 and on Article 40 EC to ensure that the laws of Member States governing supplementary pensions satisfy the requirements of freedom of movement of workers. On the other hand, supplementary pensions are a corollary of the freedom to provide services and the free movement of capital in the Common Market. Therefore, one commonly speaks of the "social dimension" and the "economic dimension" of supplementary pensions.1 Starting with the Social Action Programme of 29 November 1989,4 the Commission began to tackle the social as well as the economic problems of supplementary pensions. Because of their complexity and their controversial nature the two aspects were subsequently separated and pursued in different projects, Directorate General (DG) V addressing the social issues and DG XV addressing the economic issues. This article, in part 2, deals with one aspect of the social dimension: the obstacles to labour mobility due to the specific legal design of national systems of supplementary pensions, and the diversity of these systems in the Member States. The article is not concerned with other questions of social issues, such as

voluntary or compulsory supplementary pensions, or the quality of legal

2

According to Art. 137 (6) EC the Community has, however, no competence to enact legislation on compulsory supplementary pensions as this would be a direct regulation of "pay" within the meaning of this paragraph. Hailbronner, "Die soziale Dimension der EG", Europdische Zeitschriftfur Wirtschaftsrecht [EuZW] [1991] 171; Buchner, "Das deutsche Arbeits- und Sozilarecht unter dem EinfluB der Europaischen Gemeinschaft", Vierteljahresschriftfiir Sozialrecht [VSSR] [1992] 2; Strohmeier, "Die soziale Dimension des Binnenmarktes", Der Betrieb [DB] [1992] 38; Kuhn, Die soziale Dimension der Europaischen Gemeinschaft (Berlin: Duncker und Humblot 1995); Arl, Sozialpolitik nach Maastricht (Frankfurt: Lang 1997) at p. 23. ' COM (89) 568 final, Council Doc No 9978/89 = Bundesrats-Drucksache 717/89.

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protection for beneficiaries, e.g. where the employer is insolvent.5 After a short overview of some typical problems regarding the freedom of movement of workers, a closer look at the contents of the "Safeguard" Directive 98/49/EC and its likely impact on German law shall be taken. Part 3 of the article deals with the economic dimension of supplementary pensions. Once again I shall give a brief account of problems regarding the freedom to provide services and the realisation of the Common Market in the field of supplementary pensions. Subsequently, the Proposal for a Directive on the activities of institutions for occupational retirement provision6 will more closely scrutinised. Examples will be taken predominantly from the German system of retirement provision. The reader unfamiliar with the German system of supplementary pensions should note the following characteristics: supplementary pensions are, with few exceptions,7 voluntary. The employer is, in principle, free to choose whether to offer pension benefits. However, if he chooses to do so he is legally bound and cannot retract from his commitment. The employer may choose among five legally-accepted ways of organising and financing supplementary pensions.8 Various factors, such as the size of the firm, the number of employees, the financial situation, tax treatment, etc., determine which model of old age financing is economically attractive for a given firm. The employers have predominantly used book-reserve schemes and a direct commitment on the part of the employer (Direktzusagef as forms of organising and funding supplementary pensions. The employer may also choose to pay premiums on a group-insurance contract with an independent insurance company (Direktversicherung). Alternatively, he may pay premiums to a Pensionskasse, i.e. an assurance company restricted to and organised by the employer solely for funding supplementary pensions at enterprise or group

For the protection in the event of the employer's insolvency see Art. 6 of Directive 80/987/EEC and Bittner, Europdisches und Internationales Betriebsrentenrecht [European law and conflict of laws on supplementary pensions] (Tubingen: Mohr Siebeck 2000) at pp. 37-38. 6 COM (2000) 507 final of 11 October 2000. Note that the Commission issued a second document, the "Proposal for a Directive on the coordination of laws, regulations and administrative provisions relating to institutions for occupational retirement provision [COM (2000) 507 provisional]" on the very same date, 11 October 2000. The numbering of articles in the provisional document differs largely from that of the final document. The main exception is supplementary pensions on the basis of collective agreements declared generally binding. See Bittner, supra n. 5, pp. 229 et seq. 8 Durchfiihrungswege as listed in §§ 1 (2), lb (2) - (4) BetrAVG [Law on Occupational Pensions]. This system of internal financing is unusual or even legally not accepted in other Member States, Austria and Luxembourg excluded.

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level. He may also use a "pension fund" (Pensionsfonds),10 i.e. an institution within the supervisory framework for assurances but with more freedom regarding its investments as compared to a Pensionskasse. Finally, he may make payments to an Unterstiitzungskasse, i.e. a legal entity founded by but legally separate from the employer and not subject to the supervisory framework of insurance law. The level of legal protection for the employee under labour law is the same regardless of which model of financing the employer chooses.

2.

FREE MOVEMENT OF WORKERS

2.1

The scope of protection

Free movement of workers is one of the fundamental rights in the EC Treaty. Employees may move freely within the Community to seek employment and enter an employment relationship. Employees moving between Member States of their own initiative are, of course, making use of their freedom of movement. It is controversial, however, whether the movement of workers, assigned by their employers to other Member States, is protected under their right to free movement, or whether their protection is only a reflection of the employer's freedom to provide services." There is no compelling reason to assume that, if the employer makes use of his freedom to provide services, the assigned employee, working on the employer's project in another Member State, cannot at the same time be considered as availing himself of his freedom of movement.12 Pensioners are not workers within the meaning of Articles 39 et seq. EC. They do not have a right to free movement deriving from European primary law unless such a right is provided by secondary legislation.13 To understand the meaning of the right to free movement it is useful to draw a distinction between free movement as an absolute concept and as a relative

10

Pensionsfonds as defined in § 112 (1) VAG (Law on the Supervision of Insurance) are a newly accepted form of financing supplementary pensions, see Altersvermogensgesetz [Law on Old-Age Capital], BGBI. I, 1310 of 29 June 2001. " For the latter opinion C-113/89 Rush Portuguesa, [1990] ECR 1-1417 para. 16; C-43/93 Vander Elst, [1994] ECR 1-3803. See Bittner, supra n. 5, pp. 114-115, with additional references. " See Regulation (EEC) 1251 /70 of 29.6.1970, OJ [ 1970] L 142/24 on the right of workers to remain in the territory of a Member State after having been employed in that state; Directive 90/365/EEC of 28.6.1990, OJ [1990] L 180/28 on the right of residence for employees and self-employed persons who have ceased their occupational activity.

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one. In an absolute sense, freedom of movement is at stake whenever the laws of a Member State restrict cross-border mobility. A provision of national law binding an employee to a certain employer for a given period of time would have the effect of impeding both his cross-border mobility and his mobility within his Member State of nationality. Therefore, it would not be compatible with freedom of movement as an absolute concept of European law unless there were a justification that made the restriction of cross-border mobility necessary as well as proportional to achieve a given national general interest. In a relative sense, a legal rule of the national law of a Member State violates European law if cross-border mobility is restricted more severely than mobility within that Member State. In this relative sense freedom of movement is a corollary of the principle of non-discrimination. A restriction cannot be justified by a national general interest. 2.2

Problems regarding supplementary pensions

Supplementary pensions affect the freedom of movement for a number of reasons.14 Some of those will be pointed out here. As soon as labour mobility leads to a loss of accrued pension rights, the freedom of movement, as an absolute guarantee, is affected. If cross-border mobility leads to a loss greater than that caused by moving within a Member State, freedom of movement in its relative sense is affected. A major problem with regard to posted workers arises if it is impossible or difficult under the applicable national law15 to maintain membership in a pension scheme during the employee's assignment to another Member State. Where the worker is planned to return to his employment of origin, free movement as an absolute guarantee is at stake if it is impossible or difficult to provide him with the same pension rights obtaining if he had not moved. However, if it is impossible or difficult to provide him with the same pension rights that would have applied had he only moved within the same Member State, this is a matter of freedom of movement in its relative sense. The problem of continued membership in a pension scheme arises regardless of whether the posted employee enters an additional employment relationship with an employer at the place of his assignment or maintains an exclusive employment relationship with the employer who transferred him abroad.

14 See Schneider, Les regimes complementaires de retraite en Europe: Libre circulation et participation [Supplementary pension schemes in Europe: Free movement and participation] (Bale: Helbing & Lichtenhahn 1994) pp. 53-86; Bittner, supra n. 5, pp. 53-60. 15 Which labour law applies is a question of conflict of laws that cannot be discussed here.

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Whereas posted employees maintain contact with their country of origin, other employees enter a new employment relationship terminating their previous one. Such cross-border changes of employers create different problems. One question concerns the circumstances under which the employee's accrued pension rights have to be preserved and are vested in the employee, after the first contract of employment has been terminated. Compared with many other Member States,16 German law still requires a fairly long period before accrued pensions rights are vested (unverfallbar). This is an absolute restriction, which applies regardless of whether the employee changes employers within the country or moves to another Member State." It has often been seen as an obstacle to free movement. However, the length of the period required to acquire vested pension rights does not in itself give a full picture of the obstacles to free movement. Under the German system, the social security pension is the main pillar of old age security. The benefits that it provides are comparatively substantial. Therefore, the second pillar is only supplementary. This is different in other Member States, e.g. the United Kingdom. The lower the level of social security the more necessary a supplementary pension becomes to secure the employee's standard of living. A long vesting period then becomes a problem. The vesting period may be valid under European law as long as the impediments to free movement due to loss of accrued pension rights are, as a matter of fact, only marginal.18 To the extent that a period of vesting can at all be validly justified under national law, German law considers as such a justification the employer's legally accepted aim of using pensions to hold on to qualified personnel. 2.3

EC legislative acts

Since 1989, the Commission has directed its attention to supplementary pensions and the possible obstacles that they pose to the free movement of workers. Its plans have first been presented to the public in the Action Programme of 29 November 1989 for implementing the Community Charter of

16

In some Member States - France, Spain and the Netherlands - there is immediate vesting; in the UK there is a 2 years vesting period; and in Ireland and Portugal - a 5 years vesting period calculated from the promise of a pension. In Germany the vesting period used to be between 3 years and 10 years. See Bittner, supra n. 5, pp. 126-127. The Altersvermogensgesetz [Law on Old-Age Capital], supra n. 1, has changed the vesting period to 5 years. 17 Preservation of rights is guaranteed in the exceptional cases of applicable collective agreements on supplementary pensions, when both the old and the new employer are covered, or the agreement is declared generally compulsory and, consequently, the employee is treated as if he were not changing employers. " Bittner, supra n. 5, pp. 126-133.

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the Fundamental Social Rights of Workers.19 Several working documents followed.20 A first draft proposal has not been adopted. Only in 1998 could the Commission present a proposal for a directive on freedom of movement which the Member States were ready to accept. On 29 June 1998 the Council adopted Directive 98/49/EC on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community. The Directive must be implemented in the Member States no later than 25 July 2001.2I With regard to supplementary pensions, this directive is only an initial step towards free movement. A Green Paper on Supplementary Pensions in the Single Market22 lists the remaining problems in its Chapter IV, and contains a series of concrete measures needed to enable more people to take advantage of their rights to free movement within the EU. Such measures include the transfer of accrued rights and the harmonisation of the time periods till vesting materialises. The Green Paper not only addresses the question of free movement but also provides an analysis of the economic and financial context of supplementary pensions and an examination of the role which investment funds could play in improving supplementary pension provision (Chapter II). Consequently, it reunites the considerations on social and economic issues. It also addresses the question of investment restrictions and the Member States' prudential supervision of pension funds (Chapter III). The latter subject will be dealt with in part 3 of this article. 2.4

Directive 98/49/EC on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community

Directive 98/49/EC23 is a rather modest attempt at dealing with the freedom of movement. The Commission's initial objective to guarantee cross-border membership in pension schemes has only been addressed with regard to assigned workers.

" Community Charter of 9.12.1989, COM (89) 248 final. " Bittner, supra n. 5, p. 53. 21 See Article 10 (1). 22 COM (97) 283. The "freedom of movement" considerations in the Green Paper are largely based on the Report of the High Level Panel on Free Movement of Persons of 18 March 1997 chaired by Mrs Simon Veil. 21 See from a French point of view Brunet, "Retraites comple'mentaires: La directive 'sauvegarde' [Supplementary pensions: the "Safeguard Directive"], La lettre de I'Observatoire des Retraites, No. 11, March 1999, pp. 7-9. 2

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Directive 98/49/EC is based on Articles 51 and 235 ECT [now Articles 42 and 308 EC, respectively].24 Article 235 ECT only ensures that self-employed persons are also protected.25 It is doubtful whether Article 51 ECT can serve as a basis for a directive on supplementary pensions. It used to be common ground that "social security", within the meaning of Art 42 EC, covered only those branches of social security covered by Article 4 of Regulation (EEC) 1408/71, but not supplementary pension schemes, particularly not those that are voluntary under national laws of Member States.26 By using Article 51 ECT as a basis for the Directive, the Commission has clearly indicated that it regards the protection of the occupational pensions of posted workers (as defined in Article 3 (e) of the Directive) as a matter of freedom of movement. Consequently, the Directive takes a clear position in the above-mentioned controversy.27 It constitutes a compelling argument in support of the claim that posted workers are protected by the freedom of movement even if in transferring them their employer is making use of his freedom to provide services at the same time. 2.4.1 Objective The Directive is aimed at protecting the rights of members of supplementary pension schemes who move from one Member State to another. Such protection will contribute to the removal of obstacles to free movement of employed and self-employed persons within the Community (Article 1). The only schemes excluded are those covered by Regulation (EEC) No 1408/71 being part of the first pillar of the social security system.28

Art. 95 EC [Art. 100a ECT] on the Single Market could not have served as a rule of competence. According to Art. 95 para. (2), para. (1) shall not apply to measures with regard to the freedom of movement and the rights and interests of employed persons. This legislative technique was accepted by the ECJ in Case C-300/84 van Roosmalen [1986] ECR 3097, on extending the scope of Regulation (EEC) 1408/71. 26 Bittner, supra n. 5, pp. 58-59. See section 2.1 supra. It was uncertain, in particular, whether the French system of supplementary pensions on the basis of collective agreements (AGIRC, ARCCO) should be regarded as part of the first pillar of old age security and therefore covered by Regulation (EEC) 1408/71, or as part of the second pillar, consequently falling within the scope of the safeguard directive. France opted for the former solution. See OJ [1999] C 215/1.

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2 A.I Particular provisions and their impact in Germany 2.4.2.1 Continuation of contributions to supplementary pension schemes Article 6 deals with the continuation of contributions made to supplementary pension schemes by and on behalf of posted workers. Article 6 (1) does not provide for a mandatory continuation of contributions. Such a provision would be outside the Community competence and also violate the principle of subsidiarity, as it is up to the individual Member States to decide whether supplementary pensions are voluntary or compulsory.29 Article 6 requires Member States to adopt such measures as are necessary to enable contributions to continue to be made to a supplementary pension scheme established in a Member State by or on behalf of a posted worker who is a member of such a scheme during the period of his posting in another Member State. This requirement is already fulfilled under German law. A posted worker is one who maintains his employment relationship with the employer who has transferred him abroad for a limited period of time. As to the duration of the 'posting' Article 3 (e) states that a posted worker means a person posted to work in another Member State and who under the terms of Title II of Regulation (EEC) 1408/71 continues to be subject to the legislation of the Member State of origin. As long as the applicable social security law does not change, that is for 12 months with a possible extension of another 12 months,30 the worker is posted in the sense of the Safeguard Directive. German law does not restrict the continuation of contributions for such a limited period of time. Neither does it require the employer to continue the pension scheme. But there are no obstacles to this being done and it is common practice to continue pension contributions for a posted employee in the same way as if he had not been posted. 2.4.2.2 Exemption from any obligation to make contributions Article 6 (2), providing for an exemption from any obligation to make contributions in the country where the posted employee is working, is a necessary supplement to paragraph 1. If the employer, or the employee, were required, in addition to the contributions made to the pension scheme for the posted employee, to pay also for a pension scheme in the country of "posting", this

29

Bittner, supra n. 5, p. 122 Art. 14 No 1 of Regulation (EEC) 1408/71, OJ [ 1971 ] L 149/2. A further extension is possible under the frequently used exception procedure of Article 17 of Regulation (EEC) 1408/71. See Steinmeyer, Nomos-Kommentar, 1.17, p. 1 No. 3. 30

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would be a financial burden making posting unattractive and therefore restricting freedom of movement. Under German law, where supplementary pension schemes are not compulsory by law, such a double payment is conceivable only in the exceptional case of a collective agreement on supplementary pensions being declared generally applicable31 covering posted employees working in Germany for a limited period of time. However, according to the rules of German private international law foreign labour law continues to apply to an employee posted to Germany for a limited period of time. Therefore, it is a highly controversial question of German conflict of laws whether such an employee can be affected by a collective agreement under German law.32 This complex and rather special issue has, of course, not been addressed in the Directive. It is, however, a general weakness of the Commission's legislation on freedom of movement that it treats cross-border employment relationships in general and the problem of posted workers in particular as if there were no question as to which labour law applies. 2.4.2.3 Preservation of pension rights According to Article 4, Member States shall take the necessary measures to ensure the preservation of vested pension rights for members of a supplementary pension scheme in respect of whom contributions are no longer being made as a consequence of their moving from one Member State to another, to the same extent as for members for whom contributions are no longer being made but who remain within the same Member State. This provision is an expression of the freedom of movement in its relative sense. Its objective is not freedom of movement as such but non-discriminatory treatment of movement within one Member State, on the one hand, and of cross-border movement within the Community, on the other. Under German

law, accrued pension rights are treated equally regardless of whether the employee moves within Germany or to another Member State33. If the vesting period has not yet passed the accrued rights are forfeited. This may pose problems with regard to the freedom of movement in its absolute sense,34 but not to the freedom of movement as a relative concept.

31

Allgemeinverbindlicherklarung according to § 5 TVG [Law on Collective Agreements]. See Bittner, supra n. 5, pp. 434 et seq, 446. 33 This was not controversial and is now expressly stated in the recently enacted § I b (1) BetrAVG [Law on Occupational Pensions]. See section 2.2 supra. 32

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2.4.2.4 Cross-border payments If national law allowed the Member States in which a pension scheme is located to deduct taxes or transaction charges from cross-border payments made to members and other beneficiaries under a pension scheme, this would impede the pensioner's right of residence under Regulation (EEC) No 1251/70 and Directive 90/365/EEC. Article 5 which provides for cross-border payments net of any taxes and transaction charges is a corollary of the free movement of persons as well as the free movement of payments.35 Generally speaking, these requirements no longer pose a problem in the Member States.36 The Commission's proposal of 19 November 1997 included a provision for cases of foreign assignment with continued payment of contributions in the home country. That provision required the host country to treat those contributions in the same way as contributions to a comparable scheme on its own territory." The Council had to strike it out, since the Member States wished to retain their sovereignty in tax matters.38 2.4.2.5 Information to scheme members According to Article 7, Member States shall take measures to ensure that employers, trustees or others responsible for the management of supplementary pension schemes provide adequate information to scheme members, when they move to another Member State, as to their pension rights and the choices which are available to them under the scheme. Such information shall at least correspond to information given to scheme members in respect of whom contributions cease to be made but who remain within the same Member State. This provision expresses a reasonable standard of information, which would enable the employee to make an informed choice as to whether to make use of

35

See Consideration No. 11 of the Directive. Communication by the Commission SEC (91) 1332 final; Steinmeyer, "Arbeitsrechtliche Probleme der betrieblichen Altersversorgung im europaischen Binnenmarkt" ["Labour law problems of supplementary pensions in the European Internal Market"], in: Festschrift Ahrend (Koln: Schmidt 1992)481. 37 This idea has already been formulated in the Working Document XV/2040/92-DE rev. 1, pp. 13et seq. 38 Following the ECJ decision in Case C-118/96 P Safir (28.4.1998) [1998] ECR 1-1897 on Swedish legislation establishing different tax regimes, according to the place of establishment of the undertaking providing services of life assurance, a number of multinational companies have formed a committee to set up a test case on pan-European pensions. The test case shall be set to provoke a reaction from tax authorities, which shall then lead to a referral to the ECJ. The aim is to obtain a court decision allowing companies to set up pan-European pensions lawfully even without a directive. See Baker & McKenzie, Pensions Law Newsletter, October 1998. 16

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his freedom of movement. The second part of Article 7 is an expression of the freedom of movement in its relative sense in that cross-border mobility may not be treated less favourably than mobility within one Member State. 2.4.2.6 Evaluation At least from a German point of view the aim of Directive 98/49/EC is rather modest. Its standards are already satisfied, except for the provision on information to scheme members. It is somewhat surprising that the Directive treats the problems of free movement with regard to posted workers as if there were no question of the applicable labour law. In Germany, this question is particularly controversial with regard to one major issue of free movement and social protection that has not at all been addressed in the Directive. Are persons working abroad for whatever reason, for a limited period of time or on a permanent basis, and who continue to be covered by a pension scheme in their home country, protected in the event of the insolvency of the employer in their home country?39 This question has not been dealt with in the Directive presumably because it is of concern only in those Member States in which supplementary pensions are financed directly by the employer.40 This matter does not concern those Member States in which supplementary pensions are provided for by a separate legal entity, such as the pension funds in the UK and the Netherlands which are also the largest institutional investors in the capital market. This leads to the second part of this article, the institutional aspect of supplementary pensions.

3.

T H E FREEDOM TO PROVIDE SERVICES

3.1

The Scope of protection

Pension funds accumulate and invest capital in order to provide retirement benefits to their beneficiaries. If economic activity is not to be restricted to one Member State, this raises questions with regard to both the free movement of capital as well as the freedom to provide services. The following remarks focus on the latter freedom only. Freedom to provide services is the equivalent of the free movement of goods

"" See Bittner, supra n. 5, pp. 363-364. This is the case in Germany whenever an employer makes a direct commitment, uses an Unterstiitzungskasse (support fund), and, under certain conditions, direct insurance, to finance supplementary pension benefits. 40

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across borders, the object of the business being the movement of non-tangibles across the border.41 Natural persons as well as companies or firms within the meaning of Article 48 EC enjoy this freedom. The freedom to provide the services of supplementary pensions could mean that undertakings, i.e., companies or firms as defined in Article 48, can finance and manage pension schemes for employers and for the benefit of beneficiaries in other Member States. They could thus establish an internal market for the service of "operating supplementary pension schemes". 3.2

Problems regarding supplementary pensions

The German system of supplementary pension has at present little scope for offering a cross-border service. Book-reserve schemes are the predominant form of organising and funding supplementary pensions by the employer. Consequently, there is no separate institution to avail itself of the freedom to provide cross-border services.42 The other four legally-accepted ways of organising and financing pensions - the Unterstutzungskasse (support fund), the Pensionskasse (assurance pension fund) and the Pensionsfonds (pension fund) and the Direktversicherung (direct insurance contract with an insurance company) - are, in principle, under the German law on occupational pensions (BetrAVG), capable of offering cross-border services. They may all have their registered offices outside Germany. However, in practice, for tax reasons, there are almost no Unterstiitzungskassen outside Germany.43 Pensionkassen, i.e. insurance companies incorporated under the German law on occupational pensions for the sole purpose of organising and financing pensions for the employees of a firm or a group, are usually set up in Germany. German employers are reluctant to use an insurance company in another Member State to provide cross-border services in the case of a Direktversicherung, even though "group life assurance" services fall within the liberalised internal market for life assurance. The role that Pensionsfonds will play in general and, with regard to cross-border services in particular, is a question for the future. There is no practical experience yet with this new way of financing supplementary pensions under German law.

41

Freedom to provide services can also be seen as a counterpart to the free movement of workers in so far as natural persons move from one Member State to another in rendering their services or labour, see Bittner, supra n. 5, p. 167. 42 See section 1 supra. 43 This form of funding is economically sound only if the Unterstutzungskasse enjoys a general tax relief. If that is not the case and foreign law does not accept the Unterstutzungskasse as a privileged vehicle of retirement financing, it does not make sense to have such a support fund incorporated outside Germany.

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415

EC legislative acts

In 1991, a first proposal was published for a directive relating to the freedom of management and investment of funds held by institutions for retirement provision.44 It had to be withdrawn by the Commission in 1994, since no satisfactory agreement could be reached in the Council. However, a Communication by the Commission45 outlined principles on the supervision of investments that the national laws were expected to comply with in order to fulfil their commitment to the freedom to provide services. In reformulating and re-framing the withdrawn directive and turning it into a Communication purportedly binding on the Member States, the Commission acted ultra vires. France brought an annulment action with respect to this Communication, claiming that the Commission lacked competence on several grounds. The Communication was consequently declared void by the ECJ.46 In the Green Paper on Supplementary Pensions in the Single Market,47 the Commission made a new attempt to address the problems of cross-border activities concerning pension funds. A new Communication by the Commission of 11 May 199948 expressed the intention to co-ordinate the supervisory framework for pension funds. Finally, on 11 October 2000 the Proposal for a Directive on the Co-ordination of laws, regulations and administrative provisions relating to institutions for occupational retirement provision (IORP)49 was published. This proposal is intended to fill a gap in the legal framework. Whereas the European Union has by now detailed prudential rules for credit institutions, insurance companies and undertakings for collective investment in transferable securities (UCITS), "institutions for occupational retirement provision (IORP)"

44

COM (91) 301 final - S YN 363 (12.11.1991). Due to the separation of the economic and the social dimensions, the initial issues of cross-border membership and pensions portability no longer played a role in this proposal. See Zavvos, "Pension Fund Liberalization and the Future of Retirement Financing in Europe", 31 Common Market Law Review [CMLR] (1994) 609. 45 Communication 94/C 360/08, OJ [1994] C 360/7. 46 Case C-57/95 France v. Commission, [1997] ECR1-1627. See Brunet, "Retraite, liberte" de mouvement des capitaux et libre prestation de services" ["Pension, free movement of capital and freedom to provide services"], La lettre de I'Observatoire des Retraites, No. 11 (March 1999) pp. 10, 11. 47 COM (97) 283. For a reaction from the UK point of view see the National Association of Pension Funds' (NAPF's) response to the Green Paper: Partnership on Pensions of 1 April 1999 . Inter alia the NAPF argues that the Green Paper contains insufficient measures to safeguard existing employer-sponsored schemes or encourage new ones to be set up and that the interface between the second state pension, stakeholder pensions and occupational pensions has not been clearly worked out. 48 COM (99) 134 final/2. 49 COM (2000) 507 provisional of 11 October 2000 .

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as the Commission now names what were formerly called "pension funds" are not subject to any Community rules yet50. 3.4

The proposed Directive on institutions for occupational retirement provision (IORP)

The Proposal for an IORP Directive is based on Articles 47 (2) and 55 EC, on the freedom to provide services, as well as Article 95 EC, which provides the competence to enact measures aimed at the establishment and functioning of the Internal Market. Article 95 (2) provides a basis to develop the economic dimension of supplementary pensions only, tax excluded.51 3.4.1 Objectives The proposed directive has two main objectives regarding the conditions of operation and supervision of so-called institutions for occupational retirement provision (IORPs). Firstly, it pursues the aim of liberalising cross-border investment and management services, providing IORPs with a wide range of choices to develop an efficient investment policy by removing the remaining barriers.52 The institutions covered shall benefit fully from the Euro and the Internal Market. Secondly, as a necessary condition for the liberalisation of capital investment, the proposed directive sets funding requirements (Article 16)53 and prudential investment rules (Article 18) as a common standard for the supervisory systems in order to establish a high level of protection for pension beneficiaries. Member States may enact more detailed investment rules than those listed in the directive. These national law rules must however be in accordance with the principles set out in the directive (Article 18 (6)) and may only be more stringent if they can be prudentially justified as necessary and proportional to

Explanatory Memorandum, p. 3. In the beginning, the Commission used to speak of "pension funds". Then it changed to the concept of "institution for retirement provision", COM (91) 301 final - SYN 363 (12.11.1991). Article 95 does not apply to fiscal provisions, to provisions relating to the free movement of persons and to those relating to the rights and interests of employed persons. Explanatory Memorandum, p. 2; Frequently asked questions, p. 2: ; It has already been questioned whether the minimum-funding requirement (MFR) under UK law meets the standard required by the Directive's technical provisions, i.e. the provisions on funding levels. See Ward, "European directive on occupational pensions", Investment Adviser (13.10.2000). See also National Association of Pension Funds (NAPF), press release (11.10.2000).

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achieve the protection (Article 18 (7)). Experience in other Member States can help to determine the necessary standard.54 The proposed directive is not meant to interfere with how Member States organise their pension system and with the forms of financing which they allow. Article 9 is the cornerstone of co-ordination (harmonisation)55 of supervision and provides for prudential supervision by a competent authority that can monitor the conditions of operations of IOPRs. The co-ordination of the supervisory systems is regarded as a necessary and sufficient condition for the mutual recognition of the different forms of organising and funding pensions not dealt with in the proposed directive but clearly envisaged as the next step. This approach is well known from the banking and insurance sector.56 Co-ordination of the supervisory systems is a necessary condition for cross-border activities of IORPs justifying legislation at a European level.57 A further step shall be the co-ordination of tax rules giving companies and employees the right to obtain tax relief on contributions paid to institutions in other Member States.58 As long as there is no mutual recognition of supervisory systems, an IORP that wishes to render cross-border services needs prior authorisation from the competent authority of the home Member State.59 Article 20 lays down the principle of freedom of cross-border activities and proposes a mechanism for co-operation and notification between supervisory authorities.60 3.4.2 Scope and impact on the German system of occupational pension schemes 3.4.2.1 Definition of "Institution for Occupational Retirement Provision" The term IORP is regarded generic enough to encompass the diversity of

54 Jiirgens, "Pensionsfondsrichtlinie: Ein vielversprechender neuer Anlauf der EU-Kommission" ["Pension fund directive: A promising new start by the EU-Commission"], Betriebliche Altersversorgung [BetrAV] [2000] 613, at p. 614. 55 The concepts of "harmonisation" and "co-ordination" are used interchangeably in the Treaty. Co-ordination does not, by definition, interfere less with national law. See Bittner, supra n. 5, p. 23, with additional references. 56 See Explanatory Memorandum, p. 14. 57 Jiirgens, supa n. 53, at p. 614. 58 Explanatory Memorandum, p. 14. Communication from the Commission "The elimination of tax obstacles to the cross-border provision of occupational pensions", OJ [2001] C 165/4. 59 Explanatory Memorandum, p. 12. 60 Explanatory Memorandum, p. 14; Kuckelkorn, "Pensionsfondsrichtlinie und Direktversicherung - was bringt Europa?" ["Pension fund directive - what is Europe up to?"] fle/MV[2000]619,atp. 621.

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institutions operating in the Union.61 This very technical concept makes it necessary to check closely which institutions operating in a Member State are included in it rather than be misled by the confusing concept of "pension fund". Article 6 defines IORP as "an institution operating on a funded basis, established separately from any sponsoring undertaking or trade for the sole purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or a contract agreed individually or collectively between the employer(s) and the employee(s) or their respective representatives or between the institution and the individual, both self-employed and employed". This definition is very broad and its real scope can only be ascertained by the long list of exceptions. All institutions managing social security schemes, institutions based on a pay-as-you-go basis, insurance companies, banks, and funds, covered by other European legislation are excluded (Article 2).62 A "de minimis provision" in Article 5 (I)63 will permit Member States not to apply the standards set by the directive to IORPs managing small pension schemes with fewer than 100 members and beneficiaries. If a Member State chooses to make use of Article 5(1), small IORPs typically running a company pension scheme will not come under the supervisory rules and will therefore not have access to cross-border activities. The underlying assumption is that these institutions are not likely to be interested in any form of cross-border activity. The provision is aimed at facilitating supervision in Member States having tens of thousands of occupational pension schemes. Small employers with, e.g., fewer than 100 employees can, however, benefit from the internal market by engaging an IORP in another Member State. 3.4.2.2 Definition of "retirement benefits" and "pension scheme" The Commission's approach is institution-oriented rather that service- or product-oriented.64 The definition of "retirement benefits" in Article 6 (d) is extremely wide, meaning inter alia "benefits in the form of payments, whether for life time, a temporary period or as a lump sum, paid on death, disability, cessation of employment or when a defined age is reached... ". This definition

Explanatory Memorandum, p. 9. As the term is an example of a very technical "Euro speak", the Commission will not be able to prevent people from continuing to refer to the "pension fund directive". In fact, the Commission does so itself: see Communication "The elimination of tax obstacles to the cross-border provision of occupational pensions", OJ [2001] C 165/4, n. 4. See also Hessling, "Die Pensionsfondsrichtlinie und ihr EinfluB in Deutschland" ["The Pension Fund Directive and its impact in Germany"] BetrAV [2000] 622, at p. 623. Explanatory Memorandum, p. 11. This was different in the case of the life assurance directives. See Article 1, Directive 19/261/EEC, OJ [1979] L 63/1.

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differs from a popular understanding that pension benefits, regardless of how they are calculated or how the scheme establishing them is organised, comprise a bio-metrical element in that they are intended to provide benefits of an uncertain duration linked to the duration of human life.65 According to Article 6 (b), a "pension scheme" is "a contract, an agreement, a trust deed or rules stipulating which retirement benefits are granted and under which conditions". The provision does not define these benefits. Therefore, the directive is open to systems in which retirement benefits are regulated by contributions only, as well as to systems in which benefits are determined by a certain percentage of the last salary, or average earnings over a given period of time, or some other kind of output-oriented entitlements rather than input-oriented ones. 3.4.2.3 Coverage of bio-metric risks no defining element of an IORP According to the proposed directive, IORPs operating for the sole purpose of providing retirement benefits need not necessarily provide for the coverage of biometrical risks, i.e., risks linked to human life, including death, disability and longevity as defined in Article 6. This has been criticised since the very basis of the Commission's initiative was the provision of old age security.66 The proposed directive stipulates only (Article 17) that where the IORP itself underwrites the liability for biometric risk and/or where the institution itself guarantees an investment performance or a given level of benefits it must hold additional assets in excess of the otherwise required standard. In such cases the products offered are similar to those provided by life insurance companies. Therefore, the proposed directive requires IORPs offering such products to hold the same additional funds as life insurance companies. In all cases where the IORP does not itself underwrite the coverage of the above-mentioned risks and does not guarantee either an investment performance or a certain level of benefits, it can indeed be regarded as a mere investment vehicle to be used in the management of pension schemes. It is not surprising that the European insurance industry has criticised the privileged position of IORPs, which do not themselves underwrite the liability to cover biometric risks.67 Those have argued that the commitments undertaken by any IORP necessarily comprise, per se, a biometric element as all IORPs are operating "for the sole purpose of providing retirement benefits" even if a

65

This is, arguably, not a defining element under German law. See Blomeyer, BetrAVG [Commentary on the Law of Occupational Pensions] (1997) § 1 n. 11. 66 Critical Kuckelkorn, supra n. 59, at p. 620. 67 See the Comite" Europeen des Assurances (CEA) - i.e. a federation representing national insurance companies associations in 29 European countries - Position paper "Supervision of institutions for occupational retirement provision" of 7.2.2000, p. 3. .

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biometric risk is not covered in the strict sense. The insurance industry concludes that, consequently, the coverage of biometric risks may not serve as a distinguishing criterion for applying the established rules proposed in Article 17. This criticism is aimed at what the insurance industry regards as a level playing field for insurers, on the one hand, and for other financial institutions such as banks, on the other. It provides an example of the competition between the insurance and the banking sectors in the pension market. Ultimately it may well provide an incentive for a combination of undertakings belonging to the two sectors as has recently been the case in Germany.68 3.4.2.4 The German institutions covered by the directive Different forms of organising and financing occupational pensions in Germany are affected differently by the proposed directive. This is due mainly to Article 8 of the proposed directive, providing for the legal separation of the sponsoring undertaking from the institution for occupational retirement provision. Consequently, in case of bankruptcy of the sponsoring undertaking the assets of the institution are safeguarded in the interest of their members and beneficiaries. This provision is considered necessary in the absence of a guarantee or insolvency insurance.69 Pensionskasse ("assurance pension fund") In a Pensionskasse, one of the external forms of organising and financing pensions under German law, the funds are completely separate from the employer. Therefore, the employer's insolvency does not affect the fund. Being an insurance company for the sole purpose of financing supplementary pensions for a firm or group,™ the Pensionskasse is governed by the supervisory insurance law that only permits conservative forms of investment. In particular, investment in shares is restricted. Because of these characteristics the Pensionskasse is excluded from the German law system of compulsory insolvency insurance through an insolvency fund. Pensionskassen in their present form operate as insurance companies, underwriting liability for biometric risks and guaranteeing the benefits themselves. The employer only guarantees the payment of the contributions needed to finance the benefits. Article 17 of the

See the take-over bid of Allianz AG for Dresdner Bank AG. Explanatory Memorandum, p. 12. The separation requirement in no way prevents neither the employer nor the company employees from being members of the board of an institution, e.g. a Pensionskasse; Explanatory Memorandum, p. 12. Therefore, IORPs subject to the German laws of co-determination are included in the definition.

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Directive applies, imposing a level of own funds equal to that required for life assurance companies. The application of the Directive to Pensionskassen" as laid out in Article 2 is intended to open up the capital market for this form of IORP and make them subject to the more liberal investment rules of the directive rather than the stricter regime for life assurance companies. This approach raises the question whether they should be brought under the umbrella of compulsory insolvency insurance under the German law on occupational pensions (BetrAVG) from which they are currently excluded.72 The Commission's statement that "a guarantee or insolvency insurance fund replaces any prudential rules"" is correct. However, it cannot be turned around. Even if there are common prudential investment rules under European law, it is still up to the individual Member State to decide whether these rules are sufficient for the protection of employees and other beneficiaries, or whether an additional security net provided by an insolvency fund is to be provided.74 Direktversicherung (direct insurance) One would have assumed that direct insurance (Direktversicherung) is not covered by the directive, as life assurance companies are already covered by the three life assurance directives. Article 2 (b) on exclusions states that institutions covered by the first directive on life insurance 79/267/EEC are not covered by the proposed directive. However, according to Article 4 Member States may choose to apply certain provisions of the proposed directive to the occupational retirement provision business of these institutions' activities, provided that the relevant assets and liabilities are managed by a separate legal entity. This will ensure that the proposed directive does not lead to distortions of competition.75 It is therefore up to national legislatures to regulate group life assurance, as long as they are managed separately, in a way that those can be governed by the proposed directive rather than by the life assurance directives.76 Direktzusage (direct commitment) The most widely used form of financing supplementary pensions in Germany,

71

Frequently asked questions, p. 2. See Bittner, supra n. 5, p. 344. 71 Explanatory Memorandum, p. 11. Bering, "Neue Entwicklungen und Tendenzen auf dem Gebiet der Vermogensanlagen und Versicherungsunternehmen" ["New developments and tendencies in the field of capital investment and insurance companies"], BetrAV [1992] 36, at p. 38. 75 Preliminiary Consideration No. 8. 76 Kuckelkorn, supra n. 59, at p. 620. See also Frequently asked questions, p. 2. Jiirgens, supra n. 53, at p. 614 (possibly covered). 72

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the direct commitment of benefits by the employer (Direktzusage) financed by way of book reserves, is excluded from the application of the directive (Article 2 (e) on exclusions).77 One of the defining elements of an IORP, the clear separation between the sponsoring undertaking and the institution, is not fulfilled, when the employer uses this form of financing.78 The employer making a direct commitment and establishing book reserves to provide retirement benefits is not restricted by law from investing the assets covering the liabilities. Rather than keep the assets in the undertaking he may well choose to invest the capital elsewhere.79 In this case, freedom of services means that the undertaking must be able to make use of its negative freedom of services by investing in another Member State. The Commission, however, stipulates that "guaranteeing freedom of investment and management by means of a directive does not seem necessary here".80 This may well be the case under German law, where there are no investment restrictions on the use of the assets covering the pension liabilities as the protection of beneficiaries is guaranteed by compulsory insolvency insurance. However, the definition of an IORP, that it need not guarantee certain benefits itself,81 opens the way for it to be used as a cross-border investment vehicle providing retirement benefits. There is no reason why an undertaking in Germany making a direct pensions commitment should not be able to invest in an IORP in another Member State thus enjoying the negative/ passive side of the freedom of cross-border activities as formulated in Article 20. It is another question whether it is financially attractive for an undertaking, that is in no way restricted by national law in its investment decisions, to invest in an IORP established in another Member State and subject to the investment rules of the directive. Unterstiitzungskasse (support fund) According to Article 2 (d) and the Preliminary Consideration No. 10, institutions such as Unterstiitzungskassen, the members of which have no legal rights

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Explanatory Memorandum, p. 10. This is the only exception that cannot be formulated by naming a certain institution, which is not an IORP, within the meaning of the directive. The exception should be interpreted as referring to the entity demanding investment services, thereby changing the perspective from the positive/active side of the freedom of services to the negative/passive side. In addition, any legislation regarding this way of financing would require tax rules that need unanimous decisions on the European level which could not be based on Articles 47 (2) and 55 EC. See Jiirgens, supra n. 53, at p. 614. " See GroGmann, Die flexible Finanzierung der betrieblichen Altersversorgung mit Hilfe von Spezialfonds [The flexible financing of occupational pensions through "special funds"] (Frankfurt: Lang 1992). See Explanatory Memorandum, p. 10. See section 3.4.2.2 supra.

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to benefits or to a definite amount, and their interests are protected by compulsory statutory insolvency insurance, should be left out of the scope of the proposed directive.82 The reasons given for this exception are somewhat superficial. The argument that members have no legal right to benefits of a certain amount83 is valid only if one reads the wording of the statute literally. The "living" law developed by the courts makes it clear that there is a right to the benefits.84 The second argument is more sound. In order to protect the interests of the members adequately Unterstutzungskassen are covered by compulsory insolvency insurance thus making prudential rules superfluous.85 The true reason why Unterstutzungskassen are not covered is that they lobbied not to be covered. In their present form they are unsupervised as to their funding and investment policies. Investing in the sponsoring undertaking would have to be limited if the Unterstutzungskasse were covered. Unterstutzungskassen have to take a strategic decision whether they want to develop into institutions capable of operating in the European market. In that case, they would have to comply with the proposed directive. Alternatively, they may decide to retain their present position.86 If the exclusion of Unterstutzungskassen in Article 2 (d) of the proposed directive is to become law, this will have a further consequence. The most popular model of those support funds, the so-called "ruckgedeckte Unterstutzungskasse", i.e. an Unterstutzungskasse backed by an insurance, its assets being rights against an external insurer, would be left out as well and not be part of the funding models at a European level.87 It is an open question whether this is desirable. After all, this type of Unterstutzungskasse is perhaps the closest equivalent of a pension fund in the UK or the Netherlands, and it would fulfil all requirements of the directive.88 Pensionsfonds ("pension fund") By legally accepting Pensionsfonds as a new form of organising and financing occupational pensions, the German legislator provides for an additional investment vehicle to be covered by the proposed Directive. Pensionsfonds are intended to be used nationally as well as cross-border. To enable Pensionsfonds to operate in the EC, the German government is authorised to negotiate with

82 See Explanatory Memorandum, p. 10. *' See Explanatory Memorandum, p. 10. 14 See decisions by the Bundesarbeitsgericht, BAG [Federal Labour Court] of 5.6.1984 and of 18.4.1989, AP (Arbeitsrechlliche Praxis) § 1 BetrAVG Unterstutzungskasse, No. 3 and No. 23. 85 Explanatory Memorandum, p. 10. m See Jurgens, supra n. 53, at p. 614. Kuckelkorn, supra n. 59, at p. 620. Hessling, supra n. 61, at p. 623.

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other Member States supervisory arrangements modelled on those in the assurance sector.89 3.4.2.5

Evaluation

It has been argued that the proposed directive could have an even greater impact than the directives on life assurance. In the life assurance sector it is mostly the individual who decides whether to use the Common Market and buy an assurance in another Member State. In the field of supplementary pensions the actors are often internationally organised enterprises having a European •

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perspective. The proposed directive is a modest step towards the harmonisation of funding requirements and investment rules for the institutions covered by it. The next step, the mutual recognition of the supervisory framework in other Member States, could make the procedure of notification of cross-border activities (Article 20) unnecessary as authorisation in one Member State would enable the IORP to operate in all other Member States. However, this second step of mutual recognition will be much more difficult and troublesome than in the assurance sector as the institutions, the supervisory framework and the products offered with regard to supplementary pensions are much more diverse. The Directive is of great economic interest particularly for multinational enterprises, which could decrease costs substantially by pooling all their pension schemes in one fund instead of running different funds in each Member State. Harmonising prudential minimum requirements is a first step in this regard. Smaller IORPs that are currently managing company pension schemes will continue to be subject to existing and in many cases stricter investment rules, if the Member State in which they are located makes use of the de minimis exception. This might have the effect of making small company schemes less attractive. If small undertakings then decided to abandon the solely company-sponsored institutions and, instead, to invest in an external IORP, possibly in another Member State, this would be in line with the Commission's intention to promote the pooling of capital in IORPs. One may argue that in some countries the exclusions of the proposed directive comprise the majority of cases.91 At present, this is certainly true for Germany where the most widely used form of financing occupational pensions

See § 117 VAG (Law on the Supervision of Insurance). Jiirgens, supra n. 53, at p. 614. It would be interesting to know to what extent these potentially international actors have continued to act provincially with regard to the Direktversicherung and to which extent they have made use of the liberalised market for life assurances. 91 This is the case in France and Italy. See Hessling, supra n. 61, at p. 623.

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is the Direktzusage.92 The capital invested in Pensionskassen currently only amounts to about 22 per cent of the overall capital invested or reserved for supplementary pensions in Germany.93 The present picture may change if the directive leads to an increase in the use of Pensionskassen. Finally, it remains to be seen which role the Pensionsfonds will play in the German system of old age security. Once the regulatory framework for Pensionsfonds has been set up in its entirety, this may well give the directive a completely new field of application and much greater importance in Germany.

4.

FINAL REMARKS

Old age security is a subject of great social and political importance. It must therefore be a matter of European concern as well. The EU can base its competence in this field on a significant number of provisions in the Treaty, when addressing the social as well as the economic issues of supplementary pensions on a European level. However, according to the general principles of European law, there is no competence for legislation on supplementary pensions as such. An inevitable consequence is the incoherence of the legislative activities of the EU in this field, yielding a patchwork of different rules of varying detail, generality, quality and impact. This field of "supplementary pensions" has proven to be too complex and controversial to deal with its social and economic aspects simultaneously. Therefore, the EU is approaching the subject from each of these angles separately. Freedom of movement has to be guaranteed for employees and, to a certain degree, for pensioners as well. Cross-border mobility may not infringe the employee's social protection against the loss of accrued pension rights. IORPS

will enjoy the freedom to provide cross-border services and the freedom

of cross-border investment. Undertakings will enjoy the negative freedom to avail themselves of cross-border services and cross-border investments. The two directives discussed in this article are just a first step towards achieving these objectives. The Commission acknowledges that contributions paid to an IORP are a form of deferred salary. The rights acquired through the payment of those contributions determine the standard of living of those concerned. Protecting these rights is therefore regarded as being at the heart of the wider objective of

More than 56% (300.3 billion DM = 153.4 Euro) of the overall capital invested or reserved for supplementary pensions in Germany is in book-reserve schemes. Urbitsch, "Deckungsmittel der 2. Saule wiederum gestiegen" ["Capital stock of the second pillar increased again"], BetrAV [1999] 73. 93 Urbitsch, ibid., at p. 73.

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strengthening the EU social model.94 However, the Commission decided that this aim will not be achieved by defining the product of "supplementary pensions",95 but rather by creating a legal framework for increased returns on invested capital and a prudential framework providing security against losses due to fraudulent behaviour.96 As the Commission avoids defining what qualifies as a "supplementary pension" and what its objective within the wider field of old age security might be, it is, at this point, difficult to judge whether the proposed economic measures will lead to a convergence with the social objectives.

Explanatory Memorandum, p. 7 on protection of beneficiaries. Critically Hessling, supra n. 61, at p. 623; Kuckelkorn, supra n. 59, at pp. 619 et seq.; favourably Verhaegen, "Pensionsfondsrichtlinie - Die Zukunft der Pensionskassen im europaischen Umfeld" ["Pension fund directive - The future of 'pension funds' in the European context"], BetrA V [2000] 323, at p. 327. * The Commission refers explicitly to the prevention of a situation comparable to the Maxwell pension scandal in the UK (see Frequently asked questions, p. 3.) that lead to the Pensions Act 1995. Under this Act the employees' protection is mainly guaranteed by a minimum funding requirement; supervision by the Occupational Pensions Regulatory Authority (OPRA); and the additional safety net of the Pensions Compensation Board. Strict investment rules are not a feature of the Pensions Act 1995 and it remains to be seen whether it needs to be amended in this respect if the proposed directive becomes law.