For your Euro watch-list
In Brussels-speak, a directive is a decision by the EU. It has to be implemented in national law. The Institutions of Retirement Provision (IORP) directive creates pan-European pension funds. It should have been implemented on 23 September 2005, but towards the end of 2005, less than half of the EU member-states had done so. The ones that matter, Ireland and Luxembourg, had implemented, though and most of the rest will probably come on board quickly.
The key things to watch are the interpretation of “social and labour law” and “sufficient funds at all times”. They are both deal killers. If you take your pension fund to another country you are covered by the laws of that other country. However, the directive makes an exception for social and labour law. By making a broad interpretation of what that means, member-states could completely undermine the directive.
The directive says pension funds should be fully covered at all times. An interpretation of “you must be fully funded at all times” means a target funding ratio so high, that pan-European pension funds will be effectively impossible. Not that it could have been meant this way, because the directive goes on to explain what to do in case you are not fully funded, but that may not stop some member states.
The directive will not work properly as long as there is tax discrimination of foreign funds. Fiscal problems are of three kinds. First, contributions paid to funds in other EU countries must be tax deductible everywhere in the EU. The commission is aware that it often isn’t and is wrestling down countries one by one with the help of cases before the European Court of Justice (ECJ). This fight looks winnable in due time, but so far, only northern European countries have been tackled. Watch if a southern European country is mending its ways.
Second, the member states must recognise each other’s legal instruments for pension funds as ‘transparent’, ie, a British trust, a Dutch stichting and a Luxembourg SICAV must all be deemed worthy of tax deduction in eg, France and vice versa. This network is far from complete and that is deadly. In almost all member-countries, tax is paid on pension payments and contributions are tax deductible. For non-transparent vehicles it would be the other way around. This seems like a second line of defence some member states may be willing to take if they cannot discriminate foreign contributions any longer.
Third, there is the question of withholding tax in non-member countries. If your investment returns are tax-free in your home country, but not if you go to another country you have a problem. The obvious solution is EU-wide double taxation treaties with the countries involved, but member states are unwilling to give up their system of double-taxation treaties to the EU. The best alternative may be another round of challenges before the ECJ to make member states behave. Fortunately, this is not a show stopper, because only the US and Australia are a significant problem and their tax authorities seem cooperative so far.
Not much can be expected in 2006 in the way of pension funds changing jurisdiction. Yet, it might happen anyway if a local authority acts nasty enough. Funds that are driven to the wall by their own government may come to see emigration as their last option. If you see it happen, watch carefully. Those first funds will be trailblazers. By their example, they will lower legal and political cost for the others and you may be in breach of trust for not investigating the possibility of emigration before you know it.
A final note. ECJ jurisprudence holds that if a member-state has been negligent transposing a directive into its national legislation, individuals may still use the rules of the directive in court. Non-implementation cannot stop you from emigration if you need to.
CEIOPS is the name of an independent, Frankfurt-based body of supervisory authorities. It works out common interpretations and understandings in the financial sector for the European Commission, which can choose to follow its recommendations or not. Its problem is that its work is largely centered on banks and insurers and there is very little attention for pension funds.
A few member states and personalities are trying hard to use CEIOPS to equalise pension funds with banks and insurers, notably in an exercise called Solvency II. Their aim is to apply banking rules to pension funds. This ignores the long-term investor role of pension funds. If they get their way, pension funds will be deprived of one of their main reasons to exist, they will lose their unique advantages: higher return, better spread risk and lower cost. Defined benefit (DB) funds will slowly die, as they will effectively be denied the status of pan-European fund. CEIOPS will decide whether or not to apply special rules to pension funds in 2006. This is a key decision to watch.
European Pensions Private Accounts (EPPA) is promoted by EFAMA, a European lobby group for banks and insurers. Its basic notion is that only banks and insurers should do pension fund investment business. It argues that pension funds are just asset managers. It implicitly denies that pension funds have a special advantage. The IORP directive opens the possibility for banks and insurers to be covered by it. It is significant that EFAMA argues instead that pension funds should be brought into UCITS, the banking and insurance directive. EFAMA has lobbied high officials of the commission and the European parliament. Watch for further aggressive action.
This is not a well-known piece of legislation. Officially, it regulates first pillar pension funds and its effect is that beneficiaries don’t lose your claims and rights when you start working in another country. However, the IORP directive says member states can put second pillar funds under this regulation, rather than the IORP directive. That clause has made this regulation a perfect hiding place for funds that do not want or cannot compete internationally. As long as the IORP directive doesn’t work, the clause will be used pre-emptively only. If you see a massive move to bring second pillar funds under this directive something is wrong.
The portability directive
Second pillar DB pension claims are hard to transfer, not only across borders, but in many countries also domestically. The Commission has made a welcome proposal for a text. However, the draft shows clear signs of compromise: it uses unclear language throughout. This language would have to be clarified by the ECJ, an uncertain process that leaves it to judges, rather than to politicians, civil servants or experts to set the rules of transfer.
Moreover, the commission has chosen to include some unnecessary and controversial rules about minimum age, waiting periods and vesting periods in the draft directive. They are controversial because social partners consider them as treading on their territory. Count on slow and protracted procedures. If you see member-states goodwill towards this draft, something is afoot.
The world may not be quite ready yet for pan-European pension funds, a lighter form of internationalism is slowly taking off. Asset pooling is in principle a way to administer assets of several entities jointly. In theory, it promises great savings, not only because it facilitates intra-trading, but also because size has a positive effect on cost. If you see large multinationals taking this route, experience is being gathered, uncertainties are being solved and asset pooling may become an attractive option for you.
The year ahead of us has great potential for European developments.