Hugh Wheelan takes a look at the responses to the EC green paper on pensions
The European Commission's green paper on supplementary pensions in the single market has prompted an unusually uniform response on the main principles set out though consensus continues to be hampered by detail.
In total, 76 responses were received mainly from the member states, the economic and social committee, the financial sector, trade union representatives and academics.
On the subject of asset allocation, most member states and the financial sector felt that a conservative asset allocation policy in fixed income securities (eg government bonds) was not the best strategy for the future. Preference was given towards investment in equities, which it was felt could better meet the long-term nature of pension liability. However, concerns were also raised about the uncertainty in the future over continued high yields from equities, and in particular those of funded schemes, where a detailed risk analysis is missing.
Differences were accepted though in the investment strategy of fund managers, due to a variety of reasons, such as the type of pension product on offer (ie those involving elements of life assurance, or those which are 'pure' pension products), or the lack of an equity culture in some member states.
Widespread support was also voiced for the use of modern asset/liability management (ALM) techniques, in combination with portfolio diversification and investment freedom for managers and trustees. As a result, it was remarked that supervisory bodies would have to be more dynamic and flexible, with a much greater focus on long-term security and the meeting of liabilities.
All responses stressed that capital markets within the EU could absorb the expected growth in pension fund assets and provide sufficient liquidity. The majority of contributions also announced that they expected rapid expansion of an EU-wide corporate bond market, feeling that EMU would intensify competition and further economic growth in Europe.
On the subject of appropriate prudential rules for a single market, broad agreement came on several key re-quirements. Firstly, that these be authorised by a competent authority, along with the set up of criteria for the suitability of fund managers. And secondly, that these are accompanied by regular reporting and powers of intervention by the supervisory authority, backed up by rules on the investment of members' contributions.
The rights of fund managers to offer their services freely throughout the EU was endorsed by all the contributors. However, views differed greatly on the 'prudent man' concept and the proper way to diversify investments.
Half of the opinions backed complete self regulation for managers to match investments most appropriate to the nature of their liabilities. The other half felt that a few fixed rules on the minimum spread of assets would guarantee proper portfolio diversification, without significantly affecting returns.
Opinions were similarly divided on the question of whether pension funds should be covered by the same rules governing life assurance companies, with some considering them sufficiently similar for this to happen. Others remarked that because pension funds did not guarantee eventual payment of benefits and that risks were assumed by the sponsoring company or the employees themselves, this could not be justified.
Views also differ on the possibility of actually being able to introduce a directive which could enable adjustment of rules on pension and life assurance funds, although this is re-peatedly called for by the financial sector.
All the responses to the green paper welcomed the proposal on safeguarding the supplementary pension rights of employees and self-employed workers who move within the EU. However, it was agreed that the commission should firstly look more closely at issues such as transferability of rights, lengthy vesting periods and double taxation, which were considered key obstacles to the movement of workers in Europe
To this end, the possibility of creating a pensions forum was suggested by many respondents.
The general view on the question of free movement of workers was that the current tax rules are its biggest barrier. Concern was raised about a lack of mutual recognition of schemes and double taxation, to which many member states proposed bilateral agreements as the only solution.
This was questioned by some member states and the financial sector, who stressed the disadvantages of such an approach, ie - partial coverage of many bilateral arrangements, the complicated number of texts involved, different treatment of identical situations and the difficulty of subsequently switching to a multilateral approach.
Many observers called for the adoption of community rules which would address these problems of cross-border tax discrimination. Such rules, it was argued, would provide for mutual recognition of schemes and prevent double taxation.
Other members though considered this unfeasible and likely to undermine the tax base in some countries. As such, they suggested the EU's role should be one of co-ordination only.
It was also felt that the diversity and complexity of supplementary pension schemes were in themselves hindering the proper functioning of the single market, and that a single currency would merely show these problems up more clearly.
On the other hand, some contributors criticised the green paper for not focusing on the favourable impact of the single currency on supplementary pension schemes. They pointed out that the greater size and liquidity of capital markets in the union should generate higher returns and ultimately reduce the cost of retirement provision.
In conclusion, the contributors to the debate on the green paper stressed the unique opportunity provided by the single currency to supplementary pensions, whilst outlining the need for the establishment of an appropriate prudential, social and tax framework with better co-ordination of national policies, if it is to be fully ex-ploited.
The same contributors take the view that the medium and long term ap-proach should be to strive for real harmonisation of the tax treatment of supplementary pensions. Failing this, they suggest the setting up of European pension funds, which would manage pension plans in several member states while complying with the social and tax legislation in those countries.