The Pensions Regulator yesterday clarified its guidance for cross-border schemes, following negotiations with the Department for Work and Pensions which issued the underlying regulations (SI 2005/3381).

Schemes that have employees in more than one European Union state may find it useful to run a cross-border pension scheme as this can help reduce administration costs. However, as we explained in our earlier article on the Regs, they face a big problem. Under Article 16 para 3 of the EU Occupational Pensions (IORP) Directive 2003/41, schemes involved in "cross-border activities" (as referred to in Art. 20 of the Directive) must be "fully-funded at all times". This means the scheme must always hold sufficient assets to cover its 'technical provisions', ie the liabilities (the scheme funding requirement as defined by PA 2004 s.222).

This is an extremely onerous requirement, especially in the current situation of most UK defined benefit schemes. From 30 December 2005, where a valuation of a UK domestic defined benefit scheme shows that it does not meet the statutory funding objective, it will be allowed to put in place a recovery plan over a time limited period to make good the shortfall. UK cross-border schemes, however, will be required to obtain annual valuations and will not be allowed to have a recovery plan.

TPR understands the problem. TPR - and the Government - also wishes the UK to be seen by non-UK employers as offering an attractive regulatory environment for occupational pension schemes. Accordingly, strenuous efforts have been under way to maximise the scope for UK-based schemes to operate in other EU member states without becoming treated as cross-border schemes under the Directive.

Whether a pension scheme will be classified as a cross-border scheme depends on four facts:

• where the scheme is located;
• whether the members concerned are 'scheme members';
• where these members of the scheme work; and
• whether these members are 'seconded employees'.

A pension scheme, for cross-border purposes, is taken as being located where it has its main administration. If a scheme has an address in the UK and is set up under UK law, TPR says it can probably be taken to be located in the UK. 'Scheme members' for these purposes are members employed in EU member states (see list) other than the UK, by a European employer who makes contributions in respect of their pensions. If the pension scheme is located in the UK and it has members who fit this description, it may be operating as a cross-border scheme.

There is one 'get-out', however: if the only employees working overseas are "seconded employees", then the scheme will not be operating as a cross-border scheme. The term is defined in SI 2005/3381 Reg 2:

"seconded worker" means a person -

1. who -
   1. is employed under a contract of service by an employer established in the United Kingdom and whose habitual place of work under that contract is located in the United Kingdom, or
   2. immediately before the commencement of the period of secondment was employed under a contract of service by an employer established in the United Kingdom and whose habitual place of work under that contract was located in the United Kingdom,

2. who -
   1. was posted before the commencement date for a limited period which had not expired before that date, or
   2. is posted on or after the commencement date for a limited period,

   to a member State other than the United Kingdom for the purpose of providing services on behalf of his employer, and

3. who -
   1. at the time when that posting began expected to return to the United Kingdom to work for the employer described in (a)(i) or (ii) after the expiry of that period, or
   2. expects to retire from employment immediately after the expiry of that period.

The characteristics of a secondment, then, are:

• the employee being sent to work overseas from the UK;
• the limited period; and
• the expectation to return to the UK or to retire at the end of that period.