Dipping your toe in the pool
With computer giant IBM now apparently re-thinking the idea of pooling its European pension assets because of uncertainty over tax harmonisation, where exactly does that leave the whole pooling and pan-European pensions debate? In short, can pooling deliver on the hype?
The company is understood to be unwilling to commit itself to either Dublin or Luxembourg while the tax harmonisation issue is still unresolved – and that it is prepared to wait as long as necessary. It sees itself as a standard-bearer and clearly does not want to be the first to dip its toes in the water.
Whatever IBM’s reservations, and while the concept of the pan-European scheme may be some distance from reality, the ability to pool pension assets is already here. Groups such as Northern Trust and State Street have put their heads over the pooling parapet, and Unilever is working with Deloitte in the area.
Pooling’s proponents say it can generate economies of scale and significant cost savings. IBM’s decision to hold back may well put that claim under the spotlight and prompt the question of whether the technique is worth pursuing at all. Significantly, IBM is understood to be less concerned with the cost than with getting it right.
Industry figures such as Willie Slattery, managing director of State Street in Ireland, say the European pension pooling sector could be worth up to e1trn within five years. “We’re talking about very big asset pools,” Slattery says.His firm was involved with Deutsche Asset Management’s first common contractual fund, which started off with £128m and about 50 clients.
Peter Kraneveld, special adviser at PGGM, and a long-time watcher of the pan-European pensions scene, says he is still confident that asset pooling as an idea will take off. “It’s obvious that regulation is incomplete and as far as the European directive is concerned it’s not even implemented yet asset pooling is taking off,” he says. “So you see new opportunities being taken before the regulation are in place.
“The tax issue still has to be tackled to a very large extent as well as issues like comparability and portability. You should be able to move from one country to another and should have no trouble.”
Leonardo Sforza, head of EU research at Hewitt Associates says that so far it is only the financial framework for pan-European schemes that is pan-European. “There’s no way multinationals can set up a pan-European pension fund because there is no harmonisation of rules governing contributions and benefits,” he says.
But he rejects the view that there are barriers to cross-border pensions in general that are based on the lack of financial market integration and barriers to trade in services and obstacles to labour mobility. “My view is a practical one. I can understand the euro-sceptic view but it is not rooted in reality.”
He adds that the sceptics have got it wrong. “They think the European Union is static – that there has been no evolution. But in our eyes the evolution is clear because after September 2005 companies will be able to chose between setting up a pan-European pension fund or not. I am absolutely confident that we will achieve this goal.” On the pooling of assets, Sforza is wary over the cost impact. He says: “There are some countries where if you set up a pension fund you can only use the service providers of that country. So there is no competition between service providers.
“So the service providers can increase their costs which has a negative effect on the management of the fund – these providers are usually not the best in class in the market anyway. But with the single market you will really be able to use what makes sense for you.” Lombard International Assurance’s Geoffrey Furlonger, spokesman for the Pan-European Pension Group, or PEPGO, raises the intriguing idea of a ‘northern European pension zone’.
“Asset pooling can work right now in the liberal Euro-zone, namely Scandinavia and Luxembourg. So maybe we are talking about a north European pensions zone for now. But the only issue holding things up are the tax barriers in Spain, Denmark and Belgium. I think that everyone will be on board within three to four years.”
Furlonger adds: “Spain has relatively few domestically based multinationals so if Spanish employees of multinationals are transferred to a Luxembourg fund that is bad news for Spanish actuaries and other local service providers. So you can see a trend emerging where countries agree to asset pooling but will exert pressure to preserve locally based pension schemes. We are seeing a bit of that in Spain.”
So if pooling takes off expect it to have wider ramifications than expected.