The Dutch pension fund associations have called for a study into the connection between pension funding and future EMU budgetary restrictions in their Monti green paper submission.
In a strongly worded paper, the associations contend that the careful bi-lateral and multi-lateral approach to harmonising pensions taxation will brings years of delay in achieving the paper's ultimate ends while strongly rejecting the case for a level playing field between pension funds and insurers.
Looking at PAYG systems, the paper produced by the Foundation of Company Pension Funds (OPF) and the Association of Industry-wide Pension Funds (VB) says: The financial burden of ageing would have to be carried by future generations of active workers, possibly through increased pension contributions or through higher taxes."
It continues: "Such increases should, in our view, remain within the limits that are allowed by the EMU stability pact. OPF/VB are in favour of a study of the correlation between the various pension systems and the pursued budgetary discipline."
Noting that, in the past, Dutch funds had invested at a low risk but also low return due to ignorance of asset liability modelling (ALM) but that this had now changed, the res-ponse observes tartly: "To our re-gret, we must now observe that what Dutch funds themselves have long been doing wrong, due to poorly de-veloped insight, is at present being compulsorily practised in many EU countries where governments are en-forcing rigid restrictions."
On taxation, the paper, unsurprisingly, supports tax free contributions and investment returns and taxation of eventual benefit but believes that this may not be achievable if the sovereign approach to taxation remains.
"If European authorities rely on this approach now, they will be in a weaker position and stand to lose many years when an integrated European solution comes to be preferred. Treaties, moreover do not lend themselves to easy adaptation."
Also on the taxation issue, the associations offer to provide an "inventory of bottlenecks" where funds are confronted by unfair taxation practices in other states.
The paper makes a strong case for an "individualised set of prudential rules for pension funds", rejecting some insurers' calls for a 'level playing field'.
In support of this argument, the paper argues that pension funds' existence rests on the principle of solidarity while insurance companies are profit-motivated and set "sharp premium rates". It also observes an "increasing tendency amongst insurers to present their shareholders with short-term profits and to be less prepared to maintain the larger reserves than would be commercially re-quired".
It also believes that the commission should recommend derivatives, participations and tactically-based liquidity positions within portfolios.
It continues: "If the commission were to include the use of derivatives in its analysis, this might change the general irrational perception of this category as a mere instrument of speculation and emphasise its potential contribution to diversification, guarantees, product extension and im-provement of returns." John Lappin"