NETHERLANDS – The European Commission’s Frits Bolkestein has said that pension systems would not remain feasible without economic growth.
The internal markets commissioner was speaking during a meeting of the Forum Duivenvoorde in the Netherlands.
He said that without economic growth pension fund systems would not remain feasible. He said the pension fund directive adopted last year was a “very important step”.
“Increased flexibility of the workforce needs to be supported with an European pension system,” he said. The new EU directive was adopted to assist employers to change easily within different social systems within Europe.
As the new directive will be implemented by September 2005, every pension fund is free to be setting up pension schemes outside its own country, within the EU. The latter also means that multinationals will be able to use one pension fund for all its employees in the EU.
He cited research by the European Federation for Retirement Provision saying there would be a possible 0.15% saving - or around three billion euros per year. According to Bolkestein, Dutch pension funds will profit from this most, due to their international experience.
Second part of the directive is focused on the need to optimise the investment portfolio of a pension fund but within the existing characteristics of the pension system. According to the EFRP this will result in another saving of around seven billion euros.
The latter savings will largely come from the fact that there will be no quantitative restrictions anymore. Still, pension funds will need to comply with the governance requirements in the parent country. In all cases, the so-called 'prudent person principle' as a basis for investments will be kept in place.
Still, one of the important issues covered by the directive is that it states that every member-state can keep its current pension system, social and employment laws stay valid as before. The new directive also implements new rules of governance.
Most important is the need to split up a parent company and its company pension fund, both need to be legally independent entities. Additionally, there will be maximum financial donation level for a company to its pension fund.
Bolkestein also stated that corporate governance definitely plays an important role for pension funds. Low economic growth, combined with high capital costs, will directly affect cover ratios at pension funds too. Institutional investors, such as pension funds should actively participate in a company’s strategic planning and transparency issues.
Bolkestein also reiterated that the countries’ refusal to offer tax exemption on pension payments to foreign funds is in conflict with the EU treaty.
In his speech he also focused on corporate governance and reporting issues in relation to pension funds in the EU. He said that all pension funds need to assess future risks related to the negative developments of financial markets, low labour market participation and relatively high increases of labour costs.