Forecasts of Emu doom
Hugh Wheelan reports from the Preparing Pensions for Emu conference in London
The question of whether pension systems in the EU will indirectly affect each other following the introduction of the euro cannot be ignor-ed, according to Rob ten Wolde, general secretary of the Dutch Foundation for Pension Funds.
Speaking at a London conference last month on pension preparation for Emu, he announced an investigation by the Dutch Euro Project Pension Group into the issue, with a report to be submitted to Wim Duisenberg, president of the European Central Bank (ECB).
Ten Wolde argued that with France and Italy financing pensions from tax revenues and facing an ageing population and earlier retirement ages, this would inevitably lead to higher taxes.
As a result people's buying power would decrease and wage demands and prices increase, he said.
This well known wage and price spiral will manifest itself, spreading inflation all across the Emu as the ECB accommodates the effects. Consequently, British, Irish and Dutch pension reserves will decrease in value.
"This may sound like the prophet of doom speaking, but it's a voice we cannot ignore," he warned.
Whilst recognising that the conversion of Dutch bank accounts into euros in 2002 was expected to take place free of charge, with some banks already offering to do so three years early, Ten Wolde stated that the main problem for pension funds would be the internal costs of transition.
"If these are to be allocated to the financing of the pension scheme as a whole, then the employer, associated company or active participants in the fund will have to pay," he noted.
In this case Ten Wolde said separate legislation would be needed in Holland, if they wanted to ensure pensioners and de-ferred pensioners also carried their share of the burden, but he did not see this being pursued.
A provisional estimate on the cost of euro transition for Dutch pension funds is about Dfl200m ($100m), but this could rise in step with increased insight into the problems, he said.
Professor Christian de Boissieu of the Sorbonne in Paris and consultant to the World Bank and European Commission expressed his belief that the'cocktail' of 11 Emu member states attempting tax reforms whilst clinging to the illusion of sovereignty could be 'explosive'.
France, he said was also "going in the wrong direction", to combat the issues of pension reforms presently facing Europe by introducing a 35 hour working week and reducing the age of retirement.
Boissieu stressed the need for a re-duction in tax harmonisation 'gaps' before the implementation of the single currency.
"The question is how, when market forces are pushing us forward and sovereignty issues pulling us sideways," he asked.
"Do we accept the 'revolving tax' proposals, try out a system of passing information between countries on non-resident workers, or do we re-consider the question of tax arrangements completely?"
Regarding France's pension fund provisions, Boissieu criticised Prime Minister Jospin's reluctance to grasp the nettle as a fear of confronting the trade unions.
"We are crazy to keep regulating future financial allocations. We must follow market forces and introduce more pension fund provision to be secure in terms of future liabilities," he stressed. Boissieu's views were echoed by E Philip Davis, deputy head of stage two division at the then European Monetary Institute, now the ECB.
Davis said: "It would seem that a longer working life would ease the problems we face in pensions reform, but the European tendency goes the other way."
He noted also that although Europe had not been idle in attempting pension reform, the present PAYG system, still accounting for 89% of European pensions according to EFRP figures, continued to "crowd out" second pillar schemes.
" We need a move to well developed systems like the UK, where relatively low social security provision for high earners has given increased scope for secondary pension provision."
However, Davis argued that the increasing monetary mobility and transparency of cross border figures resulting from Emu would force governments to reconsider their social security obligations.
"Better returns, lower costs and increased diversification and competition in investment will also ensure the euro acts as a real catalyst for change in the European pension market," he said."