EUROPE – Pay-as-you-go and book reserve schemes are set to be exempt from the European Commission’s proposed directive on pensions portability.

The exceptions are likely to be welcomed by German pension groups, who had been worried that pension schemes using book reserves, which account for 60% of pension assets, would not have been able to fully capitalise accrued benefits for those who leave.

The Commission is bracing for a battle, as all 25 EU member states plus the European Parliament must agree on the directive before it can come into force.

The proposed directive - on improving the portability of supplementary rights - is set to be presented this week and IPE has seen a draft of the text.

According to Commission sources, there are three areas of the directive that could cause particular difficulty.

The first problem concerns the maximum two-year limit to the period that a worker can be made to wait before enjoying full pension rights (the so-called vesting period). In certain member states, this period is considerably longer, and there is likely to be some hostility at any moves to shorten it.

Secondly, the draft proposal stipulates that the value of dormant pension rights must be protected against any substantial decrease in that value in real terms by regular adjustments. As this could be a sensitive issue for some countries, the Commission decided not to specify how this value might be adjusted, but give member states the opportunity to use their own instruments.

Finally, Commission sources admit that the directive could still cause some problems in countries that have a particularly large number of unfunded pension schemes – such as Germany.

And there could be problems caused by unfunded schemes that might not have the capital available to pay out accrued benefits when an outgoing employee seeks to transfer his pension to another scheme.

Once adopted, member states will have until July 2008 to implement the new law, and can apply for a five-year extension in respect to applying the two-year vesting time period after which a worker becomes eligible for his full pension rights.