The Nobel Prize-winning economist Bill Sharpe has famously said that retirement drawdown is the “hardest, nastiest problem in finance”. In EU politics, the same thing could pretty much be said about taxation.
Tax remains the preserve of member states under the provisions of the Treaty of Rome, other than a few areas where the EU has the ability to intervene against anti-competitive or discriminatory tax policies, or those that work against the single market.
More than 20 years ago, a judgment by the European Court of Justice (ECJ) in an anti-discrimination case found in favour of Rolf Dieter Danner – a physician with dual German and Finnish nationality who found that Finnish legislation did not allow him to contribute on a tax-favourable basis to a German pension scheme while he was resident in Finland. The court’s decision in that case was a boost to pan-European pension portability.
But this removal of direct tax discrimination has not boosted cross-border pension contribution levels or played any significant role in improving pan-EU labour mobility. According to EIOPA figures, just 0.2% of IORP members contribute on a cross-border basis.
The real issue, rather, is not with the portability of incentives but the level of incentives applied in the first place. With around a third of EU household savings in bank deposits (more in countries such as Germany and Austria), the stated aim of EU policy, latterly through the guise of the Savings and Investment Union (SIU), is to channel this wealth into long-term productive capital, particularly through workplace pensions.
Shifting wealth from banks is likely to be gradual. As such, this quasi-captive savings pool provides cheap funding for the thousands of retail banks across the EU. These are often sub-scale institutions with a strong geographic lending and deposit base.
Removing this cheap funding ought to promote greater banking efficiency over time through consolidation, but this is likely to be gradual. Measures to accelerate a migration away from bank deposits are likely to face stiff resistance, both from the banking lobby and politicians.
This puts even more onus on pensions policy. Building productive asset pools will require both well-designed pension and savings policies – including pension system design as well as policies such as auto-enrolment – and will need to include equally well-designed tax incentives. EIOPA chair Petra Hielkema made this point in a speech earlier this year. The downside is, of course, that while not outside the line of sight of EU institutions, taxation is, and remains, a purely domestic matter.
For most countries, pension tax incentives are likely to take the form of some form of income tax deductibility, although lump sum top-ups also feature. Models vary widely across the EU and wider Europe, although more than half of OECD members apply some form of exempt, exempt, taxed (EET) model, where contributions are tax-exempt to some level on the way in and in the capital build-up phase, and taxed when they are withdrawn as pension income.
Tax deductibility of employer contributions is also important. In some countries, the level of contributions and deductibility is related to collective bargaining agreements. The OECD points to the Denmark and Sweden models, which do not apply the full EET model as investment returns are taxed, although the levels are set much lower than for other capital gains.
What is perhaps lacking is an objective understanding of what works best. Now, some countries – Estonia, France, Germany, Luxembourg, the Netherlands and Spain – are working together in a so-called European Competitiveness Laboratory. The aim here is to harmonise long-term savings products, and the initiative is open to the other EU member states to join if they wish.
Administering pensions was once a burdensome, paper-based process for smaller and medium-sized companies, which was probably a factor that restricted the development of supplementary pensions to larger firms and multinationals.
The European Commission’s Your Europe online portal for businesses helps employers understand national procedures for business permits, pensions and social security. It has reduced the time spent by non-domestic firms on these matters from an average of 26 hours to just four minutes, and it is the EC’s most visited site, with 32m visitors.
Technology is enabling the spread of pensions like never before.
Now back to the nasty side: fiscal realities in most countries are such that more generous tax incentives for pensions may not look like a priority – far from it, in fact. Lithuania, for example, has moved to abolish tax incentives for employee contributions to third-pillar schemes. But they are a good long-term investment.
This is surely the time for EU member states to back the SIU with coordinated tax policy measures for supplementary retirement provision.
Liam Kennedy, Editorial Director
+liam.kennedy@ipe.com
