The EU will not see full pan-European pensions until the taxation issues are resolved, Anne Maher, head of the Pensions Board, the Irish pension regulatory body, told the recent investment conference of the Irish Association of Pension Funds in Dublin.
Frits Bolkestein, the EU’s internal market commissioner, had considerable ambitions for the area, she said, “He appears to want all EU countries to agree to give tax relief for pensions contributions and tax pensions when they are paid.”
She saw number of potential approaches including “a proposal for a pensions tax directive and also possible cases being taken to the European Court of Justice in order to force countries into EU-wide tax co-ordination for pensions.” But going for a bilateral basis through tax treaties might be a quicker route as this would be easier for individual countries to agree than trying for unanimity among all EU members, she added.
Maher also pointed to the European Federation for Retirement Provision’s idea of a single licence for a tax favoured vehicle, to be piloted in Ireland, the Netherlands and the UK, which between them have over 70% of EU pensions assets. “The taxation issue will not go away.”
Referring to the new National Reserve Pension Fund, for which legislation was expected to be passed in the Dail shortly, she said that with IR£6bn (e7.6bn) ready to be transferred in to the new fund, it would be the country’s largest pension fund. “Assuming an annul investment return of 5% in real terms and with no drawdowns allowed, the fund could approximate to over 33% of GDP by the end of 2020.”
The experiences of a number of the different Unilever group pension funds in Europe were described by Angela Docherty, senior corporate investment consultant with the group in London. “Psychologically, funds do not like to disinvest from their home markets,” she said. Investment managers had an important role to play here in pointing out that investors most look for the best sectors and best stocks on the market. “But the pace of change will vary and it could be up to five years before everyone accepts that Euroland equities are the home market.”
In some markets, the move from the bond to an equity culture was still in progress, she pointed out.
In France, as well as introducing its new defined contribution scheme, Unilever is putting together options on longterm savings for members, with a equity focus. “Currently, people just buy bond products, with low returns in the current interest rate environment.”

Looking at the Irish scene, the overall figures show that there has been a substantial rebalancing of portfolios between 1997 and mid-2000, with a 12% reduction in the domestic equity component of Irish equities, from just over 30% to under 20%.
“About 4% of that is due to falls in the market, and you can wonder how much of this fall was because people knew there would be this movement out, without any significant inward movement, given that Ireland makes up 1% of the European equity index.” She said, “So 8% of the 12% fall is due to the actual withdrawal from the market.” But as there had been no reduction in equity holdings overall, managers were reinvesting elsewhere.
She said the E200m Unilever pension fund in Ireland, was like most other local funds having had two balanced active managers, being well funded and being measured against a peer group benchmark.
A strategy review process had started in 1998, with the euro as the main catalyst for change. Its main outcome is for a restructured portfolio with four specialist managers, one with 25% Euroland equities, including Ireland, 40% global mandate equities including Euroland, 5% emerging market equities and 30% Euroland bonds. “Currently, there is strong Irish equity focus but how do you manage this so that it won’t be to the detriment of the fund, as you move to where you want to be?” she asked. The ‘euro-route’ of the fund would be an Irish component equal to 10% of the fund by 2001, 5% by 2002 and 1% by 2003. She thought a “slow and steady pace” was the way to go.
Looking at the role of indices in measuring performance of funds, Sandy Rattray of Goldman Sachs International in London asked if there were flaws in the way an index measured performance? “There were 41 additions to the S&P500 last year, and passive managers would have had to buy the stocks to add to the index.” In the period between the announcement and being added, 36 of these outperformed an average about 9%. “Free money, it seems,” he commented. In the US markets, indices are not being neutral and are not necessarily representative. This was worring as it was having impact on what they were trying to measure.”
In Europe, the trend was the same when stocks being added to the index were bought. “People who were not index followers should be willing sellers into this situation.” In addition to indexed funds, portfolios with controlled tracking error needed to react to index changes, Rattray pointed out, adding that in the UK nearly every active managers is a risk control manager. “It is one of the most risk controlled markets in the world and the active funds were having even more impact on the index changes than the passive managers.”
As managers were buying and selling stocks on these changes, he said. “This is money on the table and it amounts on average, depending on the index, to 30 to 50 basis points of performance a year. This is a big number and not been looked at in a great amount of detail.” Rattray’s advice to managers was to use a “good benchmark that nobody else uses”.

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