Doubts about speedy progress
We’ve had the draft directive from the Commission. Now it’s the turn of the parliament to turn its hands again to the European supplementary pensions debate.
With the rapporteurship in the hands of the European Christian Democrat Party – largely sympathetic to the broad findings of the Commission – a relatively easy passage could be expected.
However, the appointment of Othmar Karas, a member of the Österreichische Volkspartei as rapporteur to the parliament, has brought comments from observers about his close links to the Austrian and German life insurance industries – strong lobbyists on the European scene.
And as Piia-Noora Kauppi, a Finnish MEP and a colleague of Karas in the Christian Democrats, notes, the proposals of the Commission may look easier to push through than previously thought, but it will not be plain sailing.
“Because the directive is purely about supervision this makes the important issue for us the acceptance of the prudent person principle, which is a major part of the draft directive. I would like to see an overall prudential rule, but I understand that it is quite a leap for some countries where the tradition has been for quantitative restrictions.”
Kauppi believes privately though that the 70% ceiling for equities is quite high: “Even for a very young pension scheme I think this would be enough.”
But she counters that the issue is a matter of principle as much as technical judgement, albeit adding: “I think this is a compromise we shall have to make.”
Nonetheless, she believes that market forces will negate the debate somewhat. “The host country influence will only be on labour and contractual law issues. “Markets will handle any problems and schemes will move to where they can get what they require.
“For example if I was a German employee I would buy a product from Luxembourg where they don’t have these restrictions and put 85% in equities.”
Countries that impose investment restrictions, she says, may lose out. But she notes: “If it is a matter of competitive disadvantage for the home country business then I am sure they will get rid of these restrictions very quickly.”
She also notes that the biometric risk debate, which has been a significant stumbling block to parliamentary consensus in the past, gets little mention in the document.
“This directive has only one article which mentions biometric risk and that is one reason why it will be easier to get it through parliament. We have paid too much notice to biometric risk because there are so many other aspects in this bill.”
Kauppi says she hopes the minority, which lost both in the committee and in the plenary on the green paper with the idea that pension products must ensure full coverage of biometric risk, will “stop banging their head against a brick wall”.
However, Kauppi envisages a number of hurdles to the directive’s progress as it stands.
“In parliament, even if we can find compromises, there is a part of the process where we have to draft a resolution on the directive and here parliamentary members can say whatever they want about the pensions review. We may have some problems here.”
However, she applauds the Commission’s work on the ‘European passport’ for pension providers.
“Now there is recognition of a European-wide mutual basis for a level playing field. If an investment group meets the right criteria it can operate cross-border.”
Looking ahead to Commissioner Bolkestein’s proposed taxation review in the spring, she comments: “The basic aim I have heard is that there should not be tax discrimination on the pan-European playing field.
“So, if, for example, in Germany you want to give different tax advantages for schemes which cover biometric risk and those which don’t – you should give the same advantages to non domestic schemes as you do to home country schemes. It is a mutual recognition issue and we have such good tax lawyers in the Commission that I am sure they can find some sort of solution.”
Kauppi believes that information requirements and cross-border reporting will become vital to the equation, but acknowledges the problem that some countries fear they may lose significant fiscal revenues – a point that could become integral to the parliamentary debate.
“This has hindered the discussion because many people think that if we adopt so called EET models (exempt contributions, exempt capital growth, tax on benefits) then this will put off taxation revenues for member states and the marginal levels will become lower.”
She feels member states have to begin looking long-term though.
“Yes, this will decrease some tax revenues for member states, but we have to remember that by moving to funded schemes these member states will have to raise less taxes for pensions in the end.
“It is better to tax this way and see it as an incentive for people to save more. Then you take more tax overall. In some member states the final person who pays the benefits is the tax payer and if pension schemes are better funded then there is not so much pressure on the tax payer.”
Indeed the parliament, she notes, may not be where the real problems for the directive lie – taking into account the fundamental issues at stake. “I think the process will be fairly easy in the parliament but in the Council of Ministers I think we will see some problems.
“The first problem is already there in that the French don’t want to take this issue forward during their tenure. “Germany also has proposals to change its first pillar and this issue cannot be just looked at on a second pillar level, it has to look at state pension issues also.”
Kauppi says she has heard that both lobbying from Germany and some clauses from her native Finnish camp prompted the book reserve exemption from the directive.
“I think there were also Italian clauses on individuals members of pension funds and the fund’s beneficiaries being part of the decision making processes of the funds.
Going forward, she also feels there are other issue which need to be considered by the parliament: “I think we have to look at the third pillar also where we have a lot of products which might be sold as second pillar pensions if the rules are different and they cover all the articles on mutual recognition in the market.
“For example normal mutual funds which are not operating in the pensions market at the moment would be interested to get this kind of business.
“At a political level I don’t think we should decide what kind of products exist in the market.
“If they fully fulfil all the requirements then it is up to employers and employees to decide which schemes best serve their interests. This would mean better competition inside the pillars but also amongst different types of pension plans.”
This competition aspect, she believes, could also be used more generally to bolster the first pillar.
“I would like to see something like that which is happening in Sweden with the PPM for individuals to decide what they do with their money.
“There are psychological advantages to this. As individual investors begin to see their assets grow they might be tempted to put more money in. Equities are very good in the long term with stable volatility over the long term for pensions and it is always good that people are more aware of the pensions system.
“For some people there is some shock news and when they see what they will receive in retirement it encourages them to save more.”
In terms of the timetable for the parliament’s work, Kauppi expects a report by her party to have been drafted for December/January with a vote to come in February and a hearing in the plenary by March/April.
“It’s not very useful to be too fast now in the parliament because in the council they are not going to move before January.”
But in a parting anecdote, she gives a good idea that progress may be slower than the industry hopes for.
“I was talking very recently to a Swedish official, who commented that he thought the supplementary pensions directive was going to be one of the easiest to pass through the European council of ministers.
“Then, he went away and talked to with a few people more closely involved in the debate and called me back to say that he had changed his mind and that it was more likely to be one of the most difficult!”