The European Union could soon remove the requirement that defined benefit (DB) plans must be 'fully funded at all times' if they operate in more than one EU member state, Towers Watson has said.

Towers Watson said that the Commission's proposal for a revised directive is likely to be published within the next two months.

The revised directive could also include other changes that would make it easier for all types of pension plan, including defined contribution (DC) plans, to operate across borders.

Paul Kelly, Towers Watson senior consultant said: "For most employers, the cost of patching-up deficits quickly makes cross-border DB plans a non-starter though some leading multinationals have established such plans in order to close local arrangements or to consolidate assets and liabilities.

"Once cross-border plans are no longer subject to tougher funding rules than single-country plans, employers can look at this afresh. This should also end the situation where employers have to switch off pension plan membership for employees seconded overseas to prevent the cross-border funding rules from kicking in."

Kelly added that a "helpful" change in the revised directive could be greater clarity over what constitutes cross-border activity. He said that this would benefit employers who want to avoid having to comply with cross-border rules as well as those seeking to operate such plans.

Concerns of the 'fully funded at all times' requirement have also been raised during the Scottish independence referendum campaign, as if an independent Scotland is a member of the EU, this would turn many DB plans into cross-border schemes and bring the rule into play.

Kelly said: "Although its days are numbered, the 'fully funded at all times' rule is likely still to apply in March 2016, which is the proposed date for Scottish separation from the UK in the event of a 'yes' vote.

"There is nothing to stop the Commission from proposing the change very soon, but it will take time to bring the new directive into force."

Towers Watson said that any forthcoming directive is only expected to change funding requirements for cross-border DB schemes, and not for single-country plans.

Kelly said: "The Commission wanted to include a complete revamp of the funding framework in this version of the directive. It backed down in the face of concerted opposition but has merely agreed to postpone action in this area. Employers can relax for now but should not presume that they have heard the last of this idea."

First published 05.03.2014

monique_simpson@wilmington.co.uk