The cross-border question

What are the key issues underlying CEIOPS' call for clarification of 'cross-border activity' in the European Union's IORP directive?

The European Union's Institutions for Occupational Retirement Provision (IORP) directive of 2003 was intended to be a first step on the way to an internal market for occupational retirement provision organised on a European scale.

In its initial review of the IORP directive last March, the Committee of European Insurance and Occupational Pension Supervisors (CEIOPS), the transnational forum for EU member state supervisors for the insurance and occupational pensions sector, called on the European Commission "to provide and/or ensure urgent clarification at a European level" of certain aspects concerning the nature of cross-border activity. Yet CEIOPS' own data on cross-border cases shows an increase from 48 to 65 in one year. Perhaps not dramatic, but promising.

So why has CEIOPS called for clarification of the cross-border aspects of what it otherwise regards as a 'broadly successful' directive? What are these aspects? Does the issue matter practically? And what might be done to take matters forward?

Cross-border activity - the three approaches

CEIOPS' initial review may be construed as identifying three positions as to what constitutes cross-border activity under the IORP directive:

- Employer-based - where the employer and the IORP are each located in different EU countries. CEIOPS suggests eight countries tend towards this approach.

- Employee-based - where employee (that is, member) and IORP are each located in different countries. CEIOPS suggests two countries tend towards this approach.

- Scheme-based - where the country whose law applies to the pension scheme is not the one whose law governs the organisation and financial services activities of the IORP. CEIOPS suggests 11 countries tend towards this approach. It is not clear what approach the remaining six take.

Practical implications

According to CEIOPS, the different approaches lead to "different notification practices, different legal requirements for IORPs and potential regulatory and/or supervisory gaps or overlaps". This could mean that given the same factual situation, an IORP may be classed as a cross-border provider under one approach but not under another.

An IORP has an interest in knowing if it is a cross-border provider and, if so, which host state is involved. Cross-border IORPs must meet stiffer funding requirements than purely domestic providers. Cross-border providers must also conform not only with national rules but also certain rules of the state into which they are exporting their services (so-called host state rules). Articles 9(5) and 20(1) of the directive require providers to be authorised. If a member state has a system of registered and authorised IORPs, a registered IORP must get authorisation before it engages in cross-border activity. In addition, a cross-border IORP is likely to face problems if it does not comply with the notification procedure in Article 20.

Which approach is correct?

Any legal analysis of the different member states' respective approaches must begin with Article 20, the main provision on cross-border activity, together with the definitions of 'home' and 'host' member states in Article 6. A literal reading of Article 20(1) suggests an employer-based approach. But this raises the prospect of atypical cross-border situations that may be hard to classify under the directive (see cases C and D in the box, p38).

There is little obvious textual basis for the employee-based approach. The best that can be said for it is that it retains an approach based on the location of a party but is a move towards the scheme-based approach.

The scheme-based approach focuses directly on what should be significant - that the nationality of the social and labour law relevant to the scheme is different from that of the law governing the organisation and activities of the IORP. Social and labour law determines the pension product, and regulates the relationship between employers and employees, including any elements of solidarity.

But the challenge facing the scheme-based approach is squaring it with the wording of the directive. An appeal to the definitions of 'home' and 'host' member state must take into account that, inter alia, the relevant part of Article 20, which imposes very basic obligations on member states, is couched in terms of the locations of the IORP and the employing undertaking. It refers neither to home nor host member states.

Moving the issue forward

It is not clear how this issue can be conclusively resolved at short notice. A first step might be to clarify why each member state takes the position it has. It may seem strange that such different views on what cross-border activity means have arisen in a directive intended to enable such activity. It is possible that the directive's provisions are based on the simplifying assumption that employer and employee are generally located in the same country (cases A and B) and that this also determines the law of the scheme.

To assess the reasonableness of this assumption one would need to compare cross-border data using each of the different approaches. If most cases can be satisfactorily dealt with by the literal, employer-based approach, it might be possible to treat C-type cases as simply falling outside the scope of the directive. D-type cases are formally more difficult to deal with, but these too could be classed as falling outside the scope of the directive or perhaps even as domestic arrangements.

This strategy, developed further and coupled with an open and pragmatic view of arrangements falling outside of the formal scope of cross-border activity in the sense of Article 20(1), could eventually converge on the scheme-based approach.