Print the Directive

It is expected that within the current year the Directive 2003/41/EC of the European Parliament and Council dated the 3^rd of June 2003 on the activities and supervision of the institutions for occupational retirement provision will be implemented in Cyprus ( by law). The global and final analysis of the way that this directive may affect the operation of the Fund can be made only by examining the provisions of the law. In any case its influence on the operation of the Fund may be summarized to the following essential points:

• The supervision shall be assigned to specialized state services which will be responsible to constantly monitor the activities and the way of operation of the Fund. The article 7 of the Directive is characteristic since it states that "the regulations of supervision aim at ensuring a high level of security to the future pensioners by imposing severe supervision standards and also rendering feasible the effective management of the occupational pension systems”

• The fact that the Funds are and should act as long-term investors is established as in paragraph 31 there is a reference that “the institutions are very long-term investor. Redemption of the assets held by them cannot, in general, be used for any purpose other than providing retirement benefits". Also paragraph 33 mentions that the restrictions to certain class of investments which can not be easily liquidated are prohibited. “As very long-term investors with low liquidity risks, institutions for occupational retirement provision are in a position to invest in non-liquid assets such as shares as well as in risk capital markets within prudent limits. They can also benefit from the advantages of international diversification. Investments in shares, risk capital markets and currencies other than those of the liabilities should therefore not be restricted except on prudential grounds”.

• Its objective should be that the distribution of assets must be carried out at any time according to the obligations and benefits that must be provided to the members and based on the prudent management of assets. The principle of prudent management of assets constitutes the most important element of the directive, but it is not specified in detail what does this represent.

• It requires the legal distinction between the financing undertakings and the Fund (something which it applies).

• It sets out the conditions for the operation of the Fund:

- to be operated by persons indeed of good repute, who have either the same appropriate professional qualifications and experience or to employ advisers with the appropriate qualifications and experience.

- that properly constituted rules regarding the functioning of any pension scheme operated by the institution have been implemented and members have been adequately informed of these rules;

- that the members are sufficiently informed of the conditions of the pension scheme, in particular concerning: (i) the rights and obligations of the parties involved in the pension scheme; (ii) the financial, technical and other risks associated with the pension scheme; (iii) the nature and distribution of those risks.

• It specifies the need to establish annual accounts and annual reports.

• It requires that the declaration of the investment policy principles is notified to the members and their beneficiaries.

• It requires that each member receives also, on request, detailed and essential information in relation with :

- the target level of retirement benefits, if applicable.

- The level of benefits in case of termination of the employment.

- The range of the investment options, where applicable, and the existing portfolio of investments, when the member bears the investment risk, as well as information on the risk and the expenses related to the investments.

- the arrangements relating to the transfer of pension rights to another institution for occupational retirement provision in the event of termination of the employment relationship.

• It requires the establishment of, and to be reviewed at least every three years, a written statement of the investment policy principles. The statement shall be updated immediately after any significant change in the investment policy. The member states shall ensure that such statement contains, at least, matters such as the investment risk measurement methods, the risk management processes implemented and the strategic allocation of the assets in respect of the nature and duration of the pension liabilities.

• It requires that investments are carried out based on the “prudent management rule” and according to the following rules:

- the assets shall be invested in the best interest of members and beneficiaries. In the case of a potential conflict of interest, the institution, or the entity which manages its portfolio, shall ensure that the investment is made in the sole interest of members and beneficiaries.

- The assets shall be invested in such a manner as to ensure the security, quality, liquidity and profitability of the portfolio as a whole.

- The assets shall be predominantly invested on regulated markets. Investment in assets which are not admitted to trading on a regulated financial market must in any event be kept to prudent levels;

- Investment in derivative instruments shall be possible insofar as they contribute to a reduction of investment risks or facilitate the efficient portfolio management.

- The assets shall be properly diversified in such a way as to avoid excessive reliance on any particular asset.

- Investment in the sponsoring undertaking shall be no more than 5 % of the portfolio as a whole.

- It is prohibited to the institution to borrow or act as guarantor in favour of third parties unless if it does so for reasons of liquidity and on temporary basis.

- To invest up to 70% of the assets covering the technical reserves or of the aggregate portfolio in shares, negotiable securities treated as shares and in corporate bonds listed for negotiation in regulated markets, as well as to decide the relevant weight of such securities in the investment portfolio.

- To invest up to 30% of the assets in currencies other than those to which the liabilities are expressed.

- To invest in risk capital markets.

For the Fund is also important to adopt ex officio the provisions on the correct investment practice as described in CIPFA Pension Panel Principles for Investment Decision Making in the Local Government Pension Scheme in the United Kingdom (Guidance note issue No 5). The 10 principles governing the correct application of an investment policy are as follows: