Bringing harmony to harmonisation
Ten years in the cooking but finally we have something on the table to chew over from the European Commission (EC) – a draft directive on supplementary pensions…. So what do you think?
In this month’s ‘Off The Record’ we asked you to be frank about your feelings on the EC’s proposal.
And on the whole reaction appears to be positive, although as the Commission surely knows – you can’t please all the people all the time.
Asked simply whether the EC should be involved in any kind of Europe-wide regulation on supplementary pension funds the resounding response from three quarters was a categorical ‘yes’.
One scheme manager sets out the reasoning clearly:
q Demographic trends are demanding a surge in private pensions;
q Pay-as-you-go systems cannot afford to go on paying for an increased retired population with higher life expectancy;
q Portability within pension schemes will become a must-do task.
Yet when asked whether the EC draft could actually bring any tangible benefits to individual schemes in terms of investment policy, only 56% of you say it would – the inference being that the rest already enjoy sufficient freedom. You principled bunch!
There was some localised dissent, however, with a couple of fund managers noting that they felt the Commission had not gone far enough to overcome domestic barriers. “The probability of enough freedom in investment is too low at the moment,” says one.
For some, the Commission has laid the foundation on which they can finally start building a pan-European pensions strategy: “We will now create a pan-European pension fund and profit from a better risk spread and sector-wise investment managers.”
And almost 70% of pension funds concur that the Commission’s document will reduce the cost of benefit provision for the sponsor.
Nonetheless, as one commentator points out, this will probably only be the case in defined benefit (DB) plans.
A further comment is ambivalent about whether costs will be saved or not: “It depends. Diversification gains are greater when the degree of correlations between financial instruments is lower.
“Cross-border transactions with this in mind only add more risk (specifically currency risk) to the contributions policy. In general, the right overall asset mix with proper governance is able to minimise the sponsor costs.”
Similarly, almost three quarters of respondents believe that the introduction of the generic concept of an Institution for Occupational Retirement Provision (IORP) is a good idea.
Feelings are mixed, however, over whether book reserves and other methods of internal employer pension provision should have been excluded from the IORP labelling – as is the case in the draft directive.
One third of you feel this was the right thing to do – although no opinions are offered – but around a fifth are convinced of the opposite.
The draft directive’s stipulation that IORPs should be allowed to invest up to 70% of assets in shares and corporate bonds and must hold 30% in non-liability matching currencies, receives a slightly cooler welcome.
More than half of the replies feel that these limits are too restrictive with a number mentioning that prudence should prevail. Nevertheless, 20% of you feel these are too generous, with only a handful of respondents believing them to be spot on.
Overall, 55% of pension scheme managers believe there should be no restrictions at all on share investment.
But a few believe this may just be allowing too much leeway into pension fund allocation. As one opines: “Any kind of restriction can apply as long as it is based on proper asset allocation.” Says another: “Any restriction should be related to the time horizon of the liabilities.”
Half the replies state that the prudent person investment rule is a sufficient safeguard here, although there are certain degrees of qualification: “Prudent person should be the first driver in investment. However, some standard investment criteria should also be put in place to avoid issues like cosmetic accounting.”
Another goes further, believing that prudence stops short of full security: “Rules and requirements should be made (inclusive of a code of conduct) with checks and potential sanctions in case of violation.”
The relaxation of country restrictions on the location of investment managers and custodians in Europe will, you say, throw up some previously unavailable benefits and freedoms – with 40% of funds noting that this will open up new provider selection avenues.
And the vast majority of respondents believe in the workability of the EC’s pensions passport idea, where a plan can offer cross-border services while being regulated in the home jurisdiction for investment and prudential issues. Most funds concur with one manager’s reasoning: “ Yes, this will be workable, providing that the level of harmonisation is sufficient.”
Ahhhh…we’re back to that ubiquitous word ‘harmonisation’.
One scheme manager senses that there are issues being overlooked in the debate: “Regulation regarding investment cannot be made without taking the benefits into consideration. An alternative solution is to allocate portfolios to specific benefits and have such sub schemes regulated in the host country of the benefit.”
But looking forward, the introduction of a ‘European passport’ would seem for most pension funds (67%) to indicate that cross-border pension arrangements are on their way.
Some 44% believe that centralisation of pension assets in one jurisdiction will also follow on from the directive, while 67% again indicate that cross-border competition between pension schemes is a future reality.
Other funds note that the directive could be both the harbinger of ‘best value’, and according to one optimist ‘a small step towards genuine European integration’.
Could it be that pensions will bring Europe truly closer together? Well…
Back to earth with a bump. Let’s talk taxation! There is not a single dissenter to argue that fiscal policy will be anything less than key in the European pensions debate.
As one sponsor notes: “For the beneficiary the impact of tax will be driving any decisions.”
To this end we asked you what you made of the European Federation for Retirement Provision’s (EFRP) recent proposal for a system whereby tax treatment for an IORP operating cross-border should be according to local levels on contributions, investment income and benefits.
You were split down the middle. 50% believe that it is workable, certainly on an interim basis. One comment notes: “As a start this system is workable, but eventually, no.”
The arguments against concerned not only different taxation of investment income but also potential discrepancies between contributions and benefits.
“Contributions and benefits should be consistent, which might not be the case if a pensioner is relocating,” says one scheme. Another adds: “This could be problematic if countries go outside of the EET (exempt, exempt, taxed) system. It could only work if there is a large degree of harmonisation.” Ahhh…there it is again – that word ‘harmonisation’!
Perhaps its repetition in answers is indicative of a nagging scepticism in pension funds’ minds.
Progressive draft directive or not, this has been 10 years in the making. How long then before we can say we have truly European cross-border pensions? A third of you believe five years will be sufficient. The same number believe it will take longer than eight!
One thing’s for sure there’s still some way to go…