Giving mobile workers pension wheels
Promoting labour mobility within Europe is one of the central aims of the EU. Yet one large obstacle to this is the portability of supplementary pension rights.
A European Commission directive, adopted in 1998, was intended to give supplementary pension rights the same sort of protection as basic pension rights. However, its effectiveness is largely limited by national legislation. The directive protects accrued pension rights only to the level guaranteed within a member state’s borders. The trouble is that different EU countries have different rules on portability. The Netherlands, for example, offers full transferability, while Spain offers little or none.
As a result, there is effectively no legislation at an EU level to protect the supplementary pension rights accrued by workers who move from one country to another.
The EC says it now believes that the absence of a comprehensive regulatory framework for supplementary pension rights is creating barriers to the free movement of workers and is jeopardising the proper functioning of labour markets.
The commission is currently planning to adopt a communication that will launch the first stage of a consultation with the social partners on the subject.
In advance of the results of this consultation, Off The Record has carried out its own poll of pension fund managers’ views on supplementary pension rights, both within their own countries and within the EU.
The results show that most pension fund managers think that portability is something worth striving for. Almost two thirds (61%) of the people who responded to the survey think that full pension portability within the EU will benefit their organisation. One manager of a multinational pension fund says it is long overdue: “This is particularly the case for any EU institution which is not subject to national legislation of any EU member state. Such European institutions are viewed as an ‘overseas’ scheme. Although the EU Treaty provides for member states to co-operate, this is not always implemented easily without long periods of negotiation, which sometimes can take years.”
At the other end of the scale, the manager of a large UK pension fund says he is “unsympathetic to these proposals (a) because there is far too much legislation and regulation/quasi regulation anyway and (b) because funded UK pension provision has little to learn from EU countries where most pensions are paid from revenue.”
However, this is an isolated view, it seems. The vast majority (94%) think there should be common legislative provisions that guarantee the transferability of supplementary pension rights within the EU. Similarly, 83% of respondents believe that employees working within the EU who leave their home country should be entitled to continue their membership of their home country pension plan.
An equally large majority (94%) believe that the same portability rules should apply for people moving jobs, whether this is within their own country or to a different country within the EU. One manager of a Dutch pension fund says that the EC should follow the example of Holland, where “leaving an employer later on or staying with him gives you the opportunity to either get out or bring in your former pension plans from other employers. The transfer is made and calculated by an agreed set of rules ( the so-called 4% commitment). This should be easily agreed by the EC.”
Since supplementary pensions are governed by the subsidiarity principle – the principle that national governments have the right to define the role of their pension schemes rather than the EC – should this principle apply to the portability of supplementary pensions?
Opinion is fairly evenly divided on this. A small majority (56%) think that the issue of pensions portability is a matter for the governments of EU member states. A UK pension fund manager suggests that “governments should have a role to ensure accountability”.
Similarly, most almost two thirds (62%) think it is up to individual countries to improve the portability of supplementary pensions, although some qualify this by saying that this should be done within the framework of a European directive. One fund manager agrees that it is the job of individual member states to improve pension portability, but doubts if they ever will.
However, a sizeable minority (38%) are opposed to the idea of applying the subsidiarity principle to pension portability. The manager of one Portuguese pension fund says the job of improving the portability pensions must not be entrusted to member states: “If it is left to each country the right to improve portability, countries will of course try to protect their own business and that will hinder any progress on portability issues, which have to be dealt with within European wide framework.”
A manager of a Dutch fund says that the subsidiarity principle is already being abused, and that will do nothing to improve the portability of supplementary pensions. “You only have to look at other legislation that is ruled by the subsidiarity principle – every country is trying to protect itself. So in this case you cannot solve the problem. Barriers will still remain in existence.”
Another Dutch pension fund manager suggests that supplementary pensions are a personal rather than national issue and that governments already have too much economic and fiscal influence over them: “In an ideal situation the supplementary pension should be an individual right that does not depend on citizenship in a certain country,” he says. “National governments have currently national budget influence -– such as tax and national income policy – which is attached to pensions. This should be detached first, otherwise pensions portability is hardly possible.”
Portability will depend on legally guaranteed vesting rights in defined benefit pension schemes, and most respondents (78%) agree that vesting rights in should be guaranteed by law in all EU countries.
The largest single group of respondents, 46%, say that these rights should be available between two and five years, 31% say they should be available immediately and 23% say that people should expect to wait five years or longer for vesting rights.
Portability will also depend on a consistent approach to pensions indexation. Here, opinion was again divided. A small majority (56%) agree that pensions in payment and deferred pensions should be indexed by law. Most feel that it should be tied to the consumer price index or any appropriate index to living standards the consumer price index. One UK pension fund manager suggests that the index should be “relevant to the business area of the pension scheme”.
“Indexing is necessary to make pension funds more proof against inflation and so they can be transferred if necessary on a later occasion,” one manager says: “There should be no loss from such a transfer.”
However, 44% see no need for a legal requirement to index supplementary pensions. One manager of a German pension fund points out that indexation cuts across the operation of some pension plans. “Such indexation would mean that career average plans which are still customary in Germany would no longer make sense. With lower expected inflation rates for the future such career average type plans are often quite adequate.”
Defined contribution (DC) schemes are, by definition, more portable than defined benefit (DB) schemes. Most (83%) think that if the problem of supplementary pensions portability is unresolved, the move out of DB schemes will accelerate.
About the same percentage (88%) think the implementation of full pension portability, both within the EU and within member states, is only possible with further EU legislation. “There must be at least an EU directive, setting the time limits for implementation into national legislation of EU member states,” is a typical view.