It’s hardly Watergate perhaps, but conspiracy theorists may be intrigued by two high-profile pensions events in Brussels recently.
It is of course possible that the two events are entirely unconnected, yet as one pensions official remarked: “The timing was excellent.”
For those who believe in coincidence, the first event was the European Commission’s saying that it plans legal action against member states over discriminatory pension taxation. The second? A decisive vote on the Pension Funds Directive at the European parliament’s Economic and Monetary Affairs Committee.
Whether the Commission timed its statement strategically or not, what is clear is that the two events represent two sides of the same coin for pan-European pensions.
In early February the European Commission announced legal moves against Denmark, Belgium, Spain, France, Italy and Portugal over discriminatory tax provisions. Denmark was singled out by being sent a formal request to amend its legislation under which pension contributions paid to non-Danish funds are not tax deductible. In effect this is the second stage of a legal process. The other states were sent “official requests for information”, the first stage of proceedings.
The Commission says the preferential treatment for domestic pension funds was ‘incompatible’ with the 1958 Treaty of Rome. Internal markets commissioner Frits Bolkestein said: “Workers should not be forced for tax reasons to take out new pension insurance when they take up a job in another member state and employers should be able to set up pan-European pension funds.
“Unless member states stop discriminating against foreign pension funds, we will not have a fully functioning internal market for occupational pensions even when the Pension Funds Directive is adopted.” Clearly, the Commission feels it has a strong enough case against the member states.
The move was welcomed by observers. “If the single market is to make any sense the tax system of member states’ social security systems must be harmonised,” says Gordon Clark, an economics professor at Oxford University. “It is inconceivable that it can be treated as a nation state concern.”
“Sooner or later the European Union is going to find that discriminatory taxation is contrary to the integration of the EU,” he adds.
Gerry Dietvorst, professor of taxation at Tilburg University and president of the taxation committee at Comite Europeen des Assurances says: “It’s a pity that it’s necessary to do this.”
If the Commission is not satisfied with the responses of the “Taxation Five”, then the matter will eventually go to the European Court of Justice. “No one would accuse the ECJ of being a radical body,” says Clark, though he notes that it has become more knowledgeable about pensions and taxation over the last few years. “There is an accumulated case law that is quite impressive.”
Most infringement cases never reach the ECJ as most countries comply before going to court.
There is no indication yet that the countries have done anything to respond to the Commission. The Commission’s taking Denmark to the second stage of proceedings indicates that it is dissatisfied with the country’s response. Incidentally, Denmark has one of the best records in the EU for complying with EU legislation.
“The Commission would not take such an important and politically very sensitive step case if they did think they had a strong case,” said Chris Verhaegen, president of Brussels-based lobby group the European Federation of Retirement Provision.
“It would be hard to find a court that justified the actions of the member states,” says Leonardo Sforza, head of EU affairs at Hewitt Associates. “The commission has given the states enough time to find different legal arrangements – so they can’t say we didn’t have enough time.”
Verhaegen says the move to end the discriminatory tax regime of member states was crucial to creating a pan-European pensions system, assuming the IORP directive becomes law. “I think it’s vital. Perhaps it’s the most critical issue.”
“You need to provide institutions with a prudential framework, then if you want to promote cross border provision of pension schemes then you have to deal with the tax problem otherwise it cannot work,” Verhaegen says.
The news of the Commission’s beginning legal proceedings against the “Taxation Five” coincided quite neatly with the European Parliament’s Economic and Monetary Affairs Committee voting on the Pension Funds Directive. “It was excellent timing, yes,” says Verhaegen.
The committee’s vote on the Commission’s so-called “common position” of the Directive was a prelude to the full vote on the proposals by the European Parliament. The Parliament is expected to vote on the directive in its March plenary session.
Forty-eight amendments to the directive were tabled. Among them were amendments to do with so-called biometric risk tabled by socialist MEPs which amount to an attempt to ‘socialise’ the directive, in the words of Professor Clark.
Luxembourg MEP Astrid Lulling, a member of the Christian Democrats, reintroduced amendments concerning biometric risks. Her Amendment 20 was on “coverage of the longevity risk as well as of occupational disability and provision for surviving dependants”. And her Amendment 30 sought to ensure “that the institution offers is members the option of payment of disability cover and provision for survivors” where the “cost shall not be contingent on the sex of the member or an individual health check”.
Wilfried Kucklekorn of the party of European Socialists sums it up: “It should be noted that the provisions not only produce a financial sense, but also meet a great social responsibility.”
Such comments encapsulate the divergent views on the aims of the directive. For some MEPs it represents an opportunity to add social elements, yet for the pension industry the directive is purely a financial services instrument.
The rapporteur to the EMAC, Austrian MEP Othmar Karas, has indicated that he does not want to endanger the directive and that he will do his utmost to avoid the process going to conciliation.
“Any of those amendments coming from the socialists are wrong, in our view,” says Verhaegen, “because they want to include social policy provisions in this directive which is only about prudential supervision.” She says the EFRP agrees on the need for a social aspect, though the directive was never supposed to be a social document.
And Hewitt’s Sforza says any attempt to integrate “social” elements into the directive “are in my opinion out of the scope of the directive”.
With the common position having been thrashed out with difficulty over many years, any new elements would open a “Pandora’s Box” he says. He fears everything that has been achieved would be in jeopardy.
The European insurance body CEA considers the common position “could be improved, but not at the risk of losing the directive”.
Professor Clark says the called social provisions in the form of the biometric risks component are a “good thing in principle”.
“In effect what they are saying is they are trying to socialise a pension product, which is a good thing in terms of social policy but not practical,” he says.
He says there are two problems in “socialising” the directive. Firstly, it’s very difficult for financial product providers to provide effective products because it is too expensive and because in effect it involves a cross-subsidisation of risks between different groups. And, with the markets currently bouncing along the floor, providers relying on markets facing uncertain situation need to be very cautious on forward returns. So the combination of higher costs and low returns would be “very unattractive”.
The addition of such amendments to the directive, Clark believes would “emasculate” the industry.
In the final analysis, it may be that there is simply too much riding on the Directive becoming law for failure to be an option. “There is too much political pressure to adopt it and they just can’t afford to let it slip,” says Verhaegen.