EUROPE – The Association for Financial Markets in Europe (AFME) has argued that the European Commission underestimated the "severe" impact of the financial transaction tax (FTT) on pension funds.

In a report compiled by consultancy Oxera, the AFME takes issue with a number of the European Commission's assumptions on the controversial tax.  

Brussels, in its assessment of policy options and the impact of the tax, concluded the FTT would have "a rather limited impact" on pension funds.

According to the AFME, however, the FTT would have a "relatively severe impact" on actively managed pension funds,

The association went on to warn that the tax's drawbacks could accumulate "significantly" over time.

"The Commission assesses the impact of the tax on two illustrative pension funds – one passive and one active in terms of trading," it said.

"It finds a very small impact on the passive fund and a substantial impact on the active fund, reducing the final pension by nearly 8%."

For the AFME, the Commission's outcome on the "rather limited impact" on passively managed schemes is due to "assumed mitigating actions", such as reducing trading activities, not using repurchase (repo) activities and reducing derivative contracts.

The association also rejected the Commission's assertion that pension funds stood to benefit from the reduction of activities by financial intermediaries through lower transaction costs

"This is contrary to the evidence that lower liquidity increases transaction costs," it said.

The AFME dismissed the idea that taxing private pension funds would increase savers' confidence, particularly with regard to actively managed funds.

"Ultimately, any FTT is a tax on the end-users of financial instruments, which includes pension funds," it said.

"Any changes in pension fund activities in response to the FTT will bring new costs, which have not been considered by the Commission."

Finally, the AFME pointed out the risk of pension funds shifting into untaxed investments, sometimes to the detriment of pensioners.

"The Commission's analysis suggests pension funds should adopt buy-and-hold strategies, and identifies that the tax would favour such strategies over more active asset management," it said.

"However, the picture is more complex than this. Pension funds have other options, which would reduce or avoid the FTT as well, such as investing in foreign funds (outside the FTT zone), private equity and commercial property. These alternatives, and their associated risks, have not been considered."

The AFME called on the Commission to weigh a range of different pension products in different EU countries, as well as explore alternative strategies that pension funds may adopt, and "the costs and risks" associated with these alternatives.

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