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Pension portability now approved

The European Parliament recently approved a directive on the improvement of the portability of supplementary pension rights, a proposal that has been held up on the agenda of the European Commission for eight years, due to disagreement between the member states and differences among their pension schemes.

This new directive is intended to protect the pension rights of workers moving between member states. It lays down minimum standards for portability of occupational pension schemes in a bid to improve the ability of workers to carry the pension rights with them as they move across countries.

The coordination of social security is not new to the EU. In fact, pension portability already exists, but the adopted directive extends this right to supplementary pension systems, the so-called second pillar pensions that are linked with employment. The classification of pension rights into pillars owes its origin to the fact that in most countries, the funding of pensions is based on a three-tier system: the first pillar refers to the statutory state pension; the second is the supplementary occupational pension financed or co-financed by employers; and the third is the personal pension funded by individual savings. While current EU rules ensure that workers moving to another EU country do not lose their statutory pension rights, prior to the introduction of this directive, there was no EU-wide protection of pension benefits provided by an occupational scheme. EU citizens risked losing rights when they exercised their right to free movement in the EU, either due to requirements for service of a particular length to acquire rights or because of a long waiting period for eligibility. This, in turn, deterred workers from moving between member states.

The promotion of labour mobility between member states is at the heart of this new directive. The freedom of movement for workers entails the right to accept offers of employment and to move freely within the territory of member states for this purpose. This directive strengthens mobility by reducing the obstacles created by rules concerning supplementary pension schemes linked to an employment relationship.

EU citizens risked losing [pension] rights when they exercised their right to free movement in the EU

Under this new directive, member states are required to implement minimum requirements for the acquisition, preservation and portability of pension rights for EU citizens who go to work in another EU country. In doing so, the directive assists EU citizens who have worked in another member state to maintain their pension rights across borders.

Having said that, the directive stops short of interfering with member states’ rights to organise their own pension schemes. In fact, EU countries retain full control on the organisation of such systems and are not obliged to introduce legislation providing for the setting up of supplementary pension schemes, but if they do, they must comply with the safeguards contained in the directive.

The new rules harmonise the conditions required by a member state for the portability of pension rights.

One important feature of the directive is acquisition. Workers are now entitled to a pension after a ‘vesting’ or waiting time of three years of work, instead of five or even 10 years as was the case prior to the adoption of the new rules. The minimum age for having pension rights guaranteed cannot be more than 21.

Following the vesting period, schemes will be required to preserve members’ benefits and treat them fairly when compared with active members. Where an employment relationship is terminated before a worker has accrued pension rights, the worker can be refunded the pension contributions paid.

Besides preservation, another central aspect of the directive is the strengthening of information rights. Active pension scheme members are entitled on request to information on how potential mobility affects their pension rights. Those who have left the scheme must be informed about the value of their rights.

This legislative measure constitutes an important step towards securing improved rights of occupational pension beneficiaries. Member states are required to transpose the provisions of the directive into their national legislation by no later than four years after the date of entry into force of the directive. In transposing the directive, member states are entitled to implement additional rights or benefits that go beyond the minimum stipulated in the directive.

Josette Grech is adviser on EU law at Guido de Marco & Associates.

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