Time for hard questions
The EU Treaty commits us to establishing free movement for goods, services, capital and workers in a single market. This merits and demands our constant support. So any measure to improve economic mobility can only be welcomed. In parallel, we need to ensure that our social protection systems not only keep step with increasing mobility but that they are capable of confronting the profound societal challenges facing us all.
This is why the EFRP is committed to establishing worker mobility but has serious reservations about the current EU proposal intended to establish portability for - some -workplace pensions. Even if the draft law, launched by the European Commission on 20 October 2005, undergoes a facelift it still stands in need of thorough, public debate: do we want portability of workplace pensions, if it means lower pension quality or reduced population coverage without any guarantee that it will really increase mobility?
In our view, to be meaningful any EU measure on portability must:
q Be cost-effective;
q Respect subsidiarity;
q Be sufficiently clear without being over-prescriptive.
From a user-perspective – whether employee, employer or pension fund - this test cashes out in terms of ‘workability’. Failure means increased costs - generated by the need to comply, dealing with confusion and the inevitable risk of litigation – without achieving a practicable system of portability.
The Commission’s own pledge to produce better regulation needs to make itself better felt here.1
Does the present portability proposal pass the test?
We are unconvinced that the portability proposal passes the test. Even if substantially ‘tweaked’ it could do more harm than good.
It is unlikely to be cost-effective. On the contrary, we believe it encourages a trade-off between portability and levels of social protection.
The Commission’s impact study encountered widespread criticism. Even if absence of portability were a major barrier to occupational mobility, shorter acquisition periods, rights to withdraw contributions or capital at short notice, imposing a ‘fair adjustment’ mechanism, the rules on transfer and on information will each increase costs. Pressure on defined benefit schemes to close or become defined contribution schemes will intensify. This boosts the general trend in occupational pensions to place more and more risk onto the individual - a development, that in our view few policymakers understand is happening.
Employers finance occupational schemes from a finite budget. So the Commission version of portability would mean increased contributions or reduced benefits, closing doors to new entrants or even closing down schemes altogether: access to and adequacy of workplace pensions will suffer. The effects on sponsor competitiveness are equally negative.
We will not even consider the cost effects of excessive implementation by member states with a bad habit of ‘gold-plating’.
Subsidiarity demands that the EU only address problems that member states cannot solve individually. In the area of social and labour policy the Commission must make out a particularly strong case for intervening. If it can, it must take the least intrusive route.
The pension fund directive is a model in this respect, signalling at key points to all stakeholders that social and labour policy aspects of pensions – including occupational schemes - are national matters. No such reminder appears anywhere in the draft portability directive. Cross-border mobility should not be used as a device to insert harmonised acquisition conditions or ‘fair adjustment’ techniques into member state social and labour law.
Basic legal clarity is not about in-depth prescriptive detail - just that general rules can be applied by each member state in a workable way, meeting national requirements without generating cross border inconsistencies.
But the treatment of transferability in the draft directive is not so much vague as muddled. Defined in one part as a capital transfer (sensible) it is treated elsewhere as if it were a transfer of pension rights (unusual). Transferring levels of rights across different types of scheme is exotic to the point of being meaningless. Practicability and subsidiarity demand a pure capital transfer approach.
The preservation mechanism – allowing former employees to keep acquired rights in their old scheme – is based on undefined notions of “fair adjustment” and ‘non-penalisation’. Most stakeholders seem to understand this as indexation – but the word ‘indexation’ appears neither in the Commission draft nor in the supporting documentation. When pressed as to what ‘fair adjustment’ covered, the Commission said “that a variety of adjustment methods could be used, depending on the type of pension scheme.”2 If “fair adjustment” is not about indexation, it should say so. Some Member States have proposed simply striking out this suggestively worded provision. It is hard not to sympathise.
Even if these two elements are clarified, other ‘technical issues’ need addressing before we have a practicable legal framework. All have economic implications, some also involve basic policy choices. Why, for example, should regulation 1408/71 be used to define the scope of this directive? Is the scheme of a new employer obliged to accept incoming transfers? If not, what happens?
A workable system of portability means not only introducing the right system – whose details will inevitably vary from member state to member state – but introducing it in the right way. It took the Netherlands over 10 years of learning via voluntary arrangements amongst groups of companies to create a knowledge-base for a workable system of portability. The same should apply at EU level bearing in mind that there are at least 25 types of occupational pension arrangements.
Nor may we lose sight of what portability is for. It should be about making the umbrella provided by workplace pensions more effective. This means extending it to those currently outside its scope by offering increased levels of affordable, adequate protection. Portability should be auxiliary to this. Creating portability by shrinking the umbrella means turning what should be something open to the workforce at large into a luxury item reserved for a pampered few.
The delphic phrasing of parts of the draft directive is worrying. It risks generating ‘mission creep’ at EU level – providing a role for the Commission or some committee mechanism to pronounce in greater detail what the wording ‘really means’ once the directive has been adopted.
The cryptic wording has led one national association for occupational pensions - not normally given to excessive language - to raise the possibility that we may be dealing with a Trojan Horse. If this is a wooden horse, now is the time to look inside. Unjustifiable extras and wording that could spring social policy surprises at a later date must be stripped out.
Portability is a worthwhile objective – but it must not disrupt the systems it is meant to serve. We need a simple, workable measure that provides added value and that disturbs national pensions systems only minimally. At present, the augurs for a good law are not favourable. The forthcoming debate must be real – this means being able to consider rejecting the current proposal. It even means reflecting whether legislation is still the best way ahead at this stage.
If this horse is not about mobility - or if it harms our pensions systems - it must be left on the beach.
Chris Verhaegen is secretary general of the European Federation for Retirement Provision in Brussels
1 See the cluster of initiatives associated with and following on from the Commission initiative of 5.6.2002 “Action plan ‘Simplifying and improving the regulatory environment’” (COM(2002) 278).
2 See footnote 29, page 19 page Council document 6036/06 of 08.03.2006 on the Council’s Social Questions Working Party meetings of 07-08.02.2006 and 22.02. 2006