Entering into the 26th regime
The European Financial Services Round Table (EFR) has presented a proposal for European pension plans which it believes could resolve pension-related problems in the EU (or at any rate some of them(1). The EFR consists of 20 major European financial institutions(2) and its aim is to make a contribution towards the establishment of a European financial services market.
The EFR's proposal is described in this article, which also discusses the association's position on this proposal and the problems which it seeks to resolve.
Among other things, the EFR's proposal seeks to improve labour mobility and raise an awareness of pensions within the EU by offering solutions for cross-border retirement facilities. The EFR has conceived of the European pension plans (EPP) as standardised individual third pillar products, which can be obtained throughout the EU. EU citizens may decide in favour of a national product or an EPP. The fundamental characteristics of an EPP would be identical in every member state based on a 26th regime system. In this case it is assumed that alongside the regimes of the 25 member states there is a 26th regime. A product which falls entirely within the 26th regime, is treated identically in every member state for the purposes of the law and taxation. If one relocates to another member state, once can simply continue to enjoy the product in the new state.
The EFR has only partially based its EPP proposal on a 26th regime. The reason for this is that every member state has to agree to the rules which are covered by a 26th regime. In view of the fact that the regulations of the member states differ so greatly, the EFR believes that a comprehensive 26th regime will not be feasible in the near future. For this reason the EFR has drawn a distinction between those rules which do fall within the system of a 26th regime and those which differ from one member state to the next.
According to the EFR the following rules need to be covered by a 26th regime:
q Conduct of business - an EPP may be offered throughout the EU by a financial institution (a bank or an insurance company) which is entitled to provide financial services in one of the member states;
q Regulation - such a financial institution should be subject to regulation by the regulatory authority of the country in which the relevant provider has its head office;
q Deferred taxation rule (EET) - the deferred taxation rule (premiums deductible but benefits taxed) should apply in all of the member states;
q Consumer protection - uniform rules should apply to, amongst other things, the provision of information to members, a cooling-off period or right to withdraw, the type of contract and a complaints procedure. In addition, all communication between a provider and a member should be effected in a language of the latter's choice.
Those regulations which are specific to a member state, largely concern matters governed by civil law (such as the law of contract and that applicable to divorce) and tax law (for example, the conditions subject to which premiums may be deductible). Social security and labour law are also involved, where the EPP pertains to the second pillar.
The fact that some rules differ from one member state to the next, gives rise to different compartments, one for each member state. Where a member has lived in four different countries during his working life, he will have to contend with four containers, each of which is treated in accordance with the regime (tax and otherwise) of the relevant member state. When a member attains his retirement age, the balance of each is pooled and paid out to him.
By means of this proposal the EFR is thus seeking to promote the mobility of labour within the EU. There are a number of obstacles to this at present.
It is currently (still) impossible for a member to keep his pension or life insurance active, if he moves from one member state to another. However, recently a draft European directive(3) seeking to enable the international transfer of assets was released. In view of the fact that there is still a good deal of resistance to the contents of this proposal, this directive is not expected to be finalised in the near future.
It is already possible for administrators to offer pensions and annuities in another country. The Pension Fund Directive (IORP)(4) in the case of pension funds and the Life Assurance Directive(5) in the case of insurers make it possible for those with a permit in one member state to sell products in other member states without having an office there. However, in practice this does produce difficulties in view of the fact that the tax, civil, social security and contract law of the member state in which the relevant member is domiciled, is applicable.
As a result, an administrator requires detailed knowledge about the regime prevailing in each member state. Viewed from an administrator's perspective, any new initiative taken to facilitate cross-border retirement facilities needs to focus on making it possible for an administrator to serve the entire EU from one member state subject to identical rules and conditions.
Since the EFR is still assuming the existence of 25 compartments with different regulations governing each member state, the above-mentioned problems will not be resolved. The differences between the various tax regimes will continue to exist, with the result that pension administrators will still need to take into account the different tax regime prevailing in each member state. Different compartments will continue to exist in the case of consumers, with the result that the EPP will be exceedingly complex.
he EFR argues that a comprehensive 26th tax regime will not be feasible in the near future. In itself, this is a realistic approach in view of the fact that the member states would need to agree to this unanimously. However, the EFR wishes to include the deferred taxation rule in a 26th regime. There is as small a chance that all of the member states will agree to this. For example, Luxembourg does not apply this rule. If the EFR's proposal is to meet with success, Luxembourg would have to agree to a tax regime rendering premiums deductible and benefits taxable, which would exist alongside the existing Luxembourg regime. In view of the fact that the EPP would be competing with local pension products, Luxembourg would not be readily inclined to embrace the EFR's proposal.
Given the problems with which the EU is struggling in relation to the facilitation of retirement facilities, any initiative which endeavours to find a solution, is welcome. The EFR's proposal seeks to promote international labour mobility and to raise an awareness of pensions but only succeeds in doing so partially. There are still many obstacles which the EFR proposal fails to overcome.
This proposal offers little in the way of benefits to administrators, because the latter will still need to have a detailed knowledge of the tax, civil, social security and labour law of each member state. The proposal also offers consumers few benefits. The continued existence of 25 regimes (tax and otherwise) and as many compartments would make the EPP rather complex.
If the EFR wishes to produce a proposal that offers added value when compared with the current situation, the Dutch Association of Insurers is of the opinion that it will need to find a solution for the existing tax-related obstacles. The Association understands that this is a difficult task and therefore proposes that an effort be made to reduce the number of tax compartments. For instance, the differences between the member states would need to be identified properly. If this were done, it would then be possible to answer the question as to which of the differences existing between which member states could be bridged. It might emerge that the 25 member states could be broken down into three or four subsidiary groups in relation to the similarities of their products and legislation. At any rate, this would limit the number of conflicting regimes and would make it possible for it to serve as a basis to work towards further harmonisation.
In addition, unlike its current proposal, if the EFR is to facilitate labour mobility, it would need to focus primarily on the second pillar. The greatest impediments to labour mobility will largely be caused by obstacles relating to pensions, hence the second pillar. Moreover, at the level of the EU the scope of the third pillar is limited compared with that of the second.
Only if the above-mentioned points are taken into account, will it actually be possible to achieve the goals that have been formulated: raising the awareness of pensions, on the one hand, and promoting labour mobility, on the other. However, in view of the fact that the European pension dimension is not straightforward, this will not be any easy task.
(1)EFR, Pan-European Pension Plans: Deepening the Concept - Work in Progress-, December 2005. It may be downloaded from the EFR website at www.efr.be.
(2)The EFR members are as follows: ABN AMRO Bank, AEGON NV, Allianz AG, Aviva, AXA, Barclays, BBVA, BNP Paribas, Crédit Agricole SA, Credit Suisse Group, Deutsche Bank AG, Fortis, Generali, ING Group, Munich Re, Nordea AB, Royal Bank of Scotland, UBS AG, UniCredito Italiano SpA and Zurich Financial Services
(3)Proposal for a Directive of the European Parliament and of the Council on improving the portability of supplementary pension rights. COM (2005) 507 final, Brussels, 20 October 2005.
Gerry Dietvorst is a senior lecturer on future facilities attached to the Competence Centre for Pension Research of the University of Tilburg. He is also the director of Interpolis' Kenniscentrum Toekomstvoorzieningen.
L Goverse is a pensions policy adviser with the Dutch Association of Insurers [Verbond van Verzekeraars].
EAP Schouten is a tax policy consultant with Fortis ASR Adviesbureau Fiscale en Juridische Zaken and is associated with the Competence Centre for Pension Research at the University of Tilburg