Regulating Pensions in Federal Systems: Lessons from Recent Attempts
Steven L. Willborn
University of Nebraska College of Law
Telephone: 402-472-2161
E-mail: Willborn@unl.edu

1. The Two Initiatives
   1. The Proposed Directive

      Citation: Proposal for a Directive on the Activities of Institutions for Occupational Retirement Provision, Commission of the European Communities, COM(2000) 507 (Oct. 11, 2000) (http://europa.eu.int/comm/internal_market/en/finances/pensions/ com507en.pdf).

      Status: The Commission initially presented the proposal in October, 2000.

      In November, 2000, the Commission submitted the proposal to the European Parliament. The President of the Parliament referred the proposal to the Committee on Economic and Monetary Affairs as the Committee primarily responsible for review and to three other Committees for their opinions: The Committee on Employment and Social Affairs, The Committee on Women’s Rights and Equal Opportunities, and the Committee on Legal Affairs and the Internal Market.

      In June, 2001, the Committee on Economic and Monetary Affairs issued its report which recommended 97 amendments to the Commission proposal.

      In July, 2001, the Parliament voted 458 to 111 (with 11 abstentions) to approve the proposal as amended and forward it to the Council and the Commission.

      If the Council accepts all of Parliament’s amendments, the proposal is ready to be adopted. If the Council disagrees with some of the amendments, a Conciliation Committee is jointly convened by the Presidents of the Council and Parliament.

      Description: The Proposed Directive has several major provisions:

      Notice. The Proposed Directive requires “institutions for occupational retirement provision” (“institutions”) to provide information to both regulatory authorities and members and beneficiaries.

      Investment Practices. The Proposed Directive’s investment rules generally follow modern portfolio theory. For example, the rules apply the prudent person rule, require diversification, and evaluate investments based on the portfolio as a whole.

      Funding. The Proposed Directive requires full funding in most circumstances.

      Cross-Border Activities. The Proposed Directive requires Member States to permit cross-border provision of retirement services and specifies that the social and labor laws of the sponsoring entity (e.g., the employer) apply to cross-border provision.

   2. The Uniform Law

      Citation: Uniform Management of Public Employee Retirement Systems Act, 7A U.L.A. 510 (1999).

      Status: At its 1997 annual meeting, approved by the National Conference of Commissioners on Uniform State Laws after a three-year drafting and consultation process and recommended for enactment in all the States.

      Only enactment is a partial one of fiduciary sections in South Carolina.

      Description: The major provisions of the Uniform Act provide for:

      Fiduciary Duties. The Act articulates the fiduciary duties of those who control public pension funds. A major purpose for the initiative was to modernize state fiduciary standards to align better with modern investment practices.

      Disclosure. The Act requires regular and significant disclosures by those managing public pension systems.

2. Issues
   1. Modern Investment Practices

      A major purpose of both laws was to permit and encourage, rather than interfere with, modern investment practices. As a result, among other things, both proposals articulated the “prudent person” rule as the primary fiduciary standard, both require diversification, and both call for review based on the total portfolio, rather than on individual investments.

      For both laws, this effort seems relatively uncontroversial. In Europe, there was some concern that the standards may interfere with quantitative investment measures and, hence, with the ability of public agencies to regulate investment. The solution to this suggested by the European Parliament was a transitional period during which limited quantitative rules would still be permissible.

   2. Reporting and Disclosure

      Both laws impose reporting and disclosure obligations. Both require reporting to regulatory authorities and to individual participants and beneficiaries.

      These requirements were a major obstacle to enactment of the Uniform Act and an issue in Europe. For the Uniform Act, the drafting committee made vigorous efforts to minimize reporting costs while requiring responsible disclosure. The committee also made a conscious decision not to exempt smaller funds, on the theory that a responsible pension fund simply could not be operated without the required disclosures. Smaller funds have been major opponents of the Act in large part because of the disclosure obligations.

      In Europe, the Proposed Directive deals with the problem by exempting small providers. The Commission’s draft exempts schemes with 100 or fewer participants or beneficiaries; the Parliament suggested an amendment reducing the exemption to cover only schemes with 50 or fewer participants or beneficiaries.

   3. Funding

      The laws take quite different approaches to funding issues. The Uniform Act has no funding requirements whatsoever, while the Proposed Directive generally requires full funding, or even more-than-full-funding.

      The Uniform Act avoided funding requirements for three main reasons. First, since the Act covered only public funds, a good guarantor was likely to be available (the public sponsor of the program, which usually has taxing authority). Second, the Act contained thorough disclosure requirements, which would facilitate political pressure on the public plans covered in the event of excessive underfunding. Third, the drafters were concerned about whether the Act could be enacted in the States if funding requirement were included.

      The Proposed Directive’s full funding policy implicitly favors strong security over the competing good of broader availability of somewhat less secure pensions. By requiring full funding in most cases, the Directive attempts to ensure that those with pensions will not be disappointed, but at the same time, the Directive reduces the likelihood that employers and other sponsors will offer pensions at all or offer generous pensions. The better comparison here is not with the Uniform Act, but with ERISA, which makes a sharply different trade-off, permitting underfunding for significant periods of time (and the concomitant risk associated with it) in return for broader availability of pensions. See Steven L. Willborn, Regulating Pensions in Europe and the United States, 5 Employee Rts. & Emp. Pol’y J. 327, 340-45 (2001).

   4. Taxes

      Neither the Uniform Act nor the Proposed Directive address taxation issues. For the Uniform Act, this was largely because taxes are primarily a matter for the federal government and, hence, off the radar screen for a uniform act directed to the States.

      The pension tax situation in Europe is a concern to many in the EU. Most Member States have an EET sytem (exempt contributions, exempt investment income, taxed benefits), but two States have TEE systems. This has resulted in situations of no taxation and of double taxation. In 1992, the Commission forwarded a draft pension directive that dealt with taxes in addition to the matters covered in the current directive, but it was withdrawn after substantial opposition. As mentioned, the current Proposed Directive does not deal with taxes. This is not because the tax issues are not central to the concerns of the EU on issues such as cross-border mobility and harmonization of laws. Rather, it is because the issues are exceedingly complex and changes would be expensive.¹

      Parliament has forwarded the tax issues to the Committee on Economic and Monetary Affairs. On November 7, 2001, the Committee forwarded a resolution for Parliament’s consideration. Among other things, the resolution calls for non-EET systems to move to EET systems and for the establishment of a pan-European pension fund. Committee on Economic & Monetary Affairs, Report on the Commission Communication on the Elimination of Tax Obstacles to the Cross-Border Provision of Occupational Pensions, COM(2001) 214 (November 7, 2001).

   5. Portability

      Portability of pension benefits is a major concern in both the United States and Europe. But it is a very difficult issue, and ultimately neither the Uniform Act nor the Proposed Directive addresses it. A principal reason the portability issue is difficult is that a significant reason employers offer pensions is to limit portability, that is, to retain employees by limiting their ability/willingness to migrate to other firms. Thus, efforts to increase portability in a voluntary system may well decrease the number of firms that are willing to offer pensions in the first place. Portability is also difficult because it has very heavy cost implications. See Steven L. Willborn, The Problem with Pension Portability, 77 Neb. L. Rev. 344 (1998).

   6. Social Goals

      In contrast to government-provided pensions, such as Social Security in the United States, it is more difficult to pursue social goals through the second- and third-tiers of old-age funding (occupational pensions and private savings). These social goals include special protections for women and the poor. Neither the Uniform Act nor the Draft Directive has any significant provisions to deal with these social goals. The European Parliament’s Committee on Women’s Rights and Equal Opportunities filed a committee report on the Draft Directive objecting to this omission.

3. Observations
   1. Consensus

   2. Policy Differences

   3. Money Matters

   4. Social Implications