When it comes down to multinational pension arrangements in Europe, and, more particularly, the endeavours of European legislators to find a solution to the issue of pan-European pensions, the strangest scenarios can often seem quite commonplace. And so it was at the 2002 IPE Multi Pensions conference in Amsterdam at the beginning of December.
Traci Hughes, the Paris-based HR director of Colgate Palmolive Europe, gave an idea of just how weird and wonderful multinational pensions arrangements still are: “Whoever said that the truth is stranger than fiction is absolutely correct,” she warned before starting.
Hughes then went on to describe the career path of a Colgate Palmolive employee of Dutch extraction who had been expatriated by the company into Italy, the UK, back to Holland, and then on to France and the US: “Now, what do you think her pension arrangements would be now that she is preparing for retirement?” Hughes asked dryly.
She explained that Colgate Palmolive had been co-ordinating with the tax authorities of each country where the employee had worked and were still faced with the task of trying to reconcile this information with the country in which the employee eventually retires. “We are looking at tax calculations here, there and everywhere, and quite frankly, it’s a bit messy!”
Hughes acknowledged that while employees generally wanted to stay in their home country social security systems “because they know it and feel comfortable with it”, on the company side, Colgate Palmolive had, over the years, been directing employees towards one company pension plan for simplicity reasons.
“Owing to the lack of a combined pan-European pension plan, this means that all of our international expatriates are now in the US cash balance scheme. This in itself can cause problems because culturally our European employees are not used to this type of arrangement.”
Hughes said she believed that a pan-European pensions plan would be attractive and ease the cost burden for multinationals, but added: “The big question is still how long it will be before it becomes reality. Global careers are becoming more of the norm than the exception, so it is an issue that needs to be tackled, particularly in terms of cost saving fund structures.”
Hughes’ overriding message was that the pensions and benefits problems faced by multinationals when dealing with an increasingly mobile workforce are not getting any easier.
For the providers at the conference then, it was a question of demonstrating what they are doing in the area to address such issues.
Lucille Knapp, vice president and head of European business development at Northern Trust used the event to roll out a new service aimed at multinationals seeking to evaluate the tax implications of pooling the investments of their various international pension funds.
The service, which Northern Trust claims is the first of its kind on the market, can compare the existing tax position of a subsidiary’s pensions plan against investment in a pooled vehicle. Knapp explained that the system was highly flexible in that it could look at any combination of asset classes, asset allocation strategies and different income yields. The service, she added, could also work for any number of pension plans that a multinational may have to test. “Local tax laws and the circumstances of the plan will heavily influence the type of vehicle selected, and ultimately what you can gain through pooling.
“Tax advantages that can be gained through pooling are attractive, however, the tax consequences of investing in the pool need to be understood in detail.
“The tax will be different depending on each country plan’s individual situation, where they’re starting from, the asset classes in which they invest, and their asset allocation. And calculating the tax effect of investing in a pool for each country plan is key to persuading them that this really is a good idea,” Knapp pointed out.
“If you calculate this plan by plan, then a company can see the potential tax effect using any one type of corporate vehicle structure. Depending on how the local plan currently invests this can be a positive or negative number, so you have to look at this quite closely.”
Knapp noted that a number of multinationals were already using the service.
Industry then it seems is getting its act together on multinational pensions issues, so how about the legislators? The last minute withdrawal of Austrian MEP Othmar Karas from the conference – called away to discussions on the return of the pan-European pensions directive to the European Parliament – reminded everyone that the politicians could not be accused of inaction.
The question amongst delegates was whether it was the right kind of action. Geoffrey Furlonger, pensions director at Lombard International and joint architect of Pepgo – the grouping of 20 multinationals that is seeking to lobby legislators on the issue of tax for cross-border pension plans, gave a useful overview of where the directives on pensions and taxation had got to.
Focusing on the future prospects of the directive, Furlonger opined that the most important issue was ‘Article 20’, which he explained for those not quite up to date with the minutiae of the proposed legislation. “This is the article that says that member states must not prohibit the cross-border sponsorship of pensions, which means that member states should not stop individuals from using a pension plan in another country. It also translates as cross-border membership in reality.
“The bad news is that member states are particularly worried about their own labour and social laws and this means that if one sets up the pan-European pension plans they will still be subject to the local labour laws. Every country has its holy cows in the pensions area.” Furlonger confirmed that the second reading of the directive was due in the European Parliament in late December and that it would go back for adoption by the Council of Ministers in 2003.
On the taxation question, he highlighted the importance of the Danner decision in the European Court of Justice (ECJ) and flagged up a case involving Skandia that is due for judgement in the ECJ in early 2003.
Furlonger also provided an update on the work of Pepgo – the multinational lobby group. The group has instigated a test case through a company called AMS in the UK, which has made an application to the UK Inland Revenue for normal tax treatment on behalf of a senior employee who has been placed in a Dutch scheme offered by a Dutch insurance company.
To date, Furlonger noted, the Inland Revenue was still asking questions about the set-up, which he hoped would be moved on during 2003.
Taken together, Furlonger said he believed such initiatives were having an effect: “My feeling is that pan-European pensions will happen and I think that they might happen sooner rather than later.
“As a result of the Danner case it could be theoretically possible to create a pan-European pensions passport. What we just don’t know is the attitude of the various tax authorities around Europe. Are they just going to throw in the towel, or do we need more cases in this direction and action from the European Commission?”
Other speakers did not wholly share Furlonger’s optimism. Anne Maher, chief executive of the Irish Pensions Board – a seasoned European pensions directive watcher, commented: “Progress is not a word some people would apply to the pensions directive – indeed progress has been very slow to put it mildly, but it is making progress now.
“The danger for the directive at this stage, however, is that some form of social agenda will be introduced during the parliamentary phase. If that happens, or if any additional investment restrictions were included, then countries that have well funded pension systems would have some difficulty with it.”
Significantly, Maher said she felt that many multinationals were not overly inconvenienced with things as they stood, able as they were to use the increasing numbers of pension pooling products on the market.
In terms of difficulties ahead for the directive, she highlighted the issue of cross-border supervision as a potential stumbling block: “Every country has different regimes in place and many do it in conjunction with insurance.
“While I agree that a pan-European pensions law will come eventually, I’m just not sure if I will live to see it!”
Robin Ellison, a partner at law firm Pinsent Curtis Biddle, was less resigned and more resigning on the prospects of the directive: “The ECJ decisions will force member states to give cross-border tax relief, which means that the need for a pan-European pensions directive has pretty much gone away”.
Ellison added that one of the problems with the directive was that instead of giving freedom for investments it was actually proposing a number of restrictions. “If I were an asset manager, a pension fund manager or a large employer, I would be raising an eyebrow at some of these issues, which have in fact become rather counter-productive.
“I think if I had a prayer today it would be that the directive just dies.”
Between optimism, pessimism and fatalism, the strange saga of the pan-European pensions directive rolls on into another year.