PensionsEurope has reiterated its opposition to the proposed European financial transaction tax (FTT), arguing that it would be “counter-productive” to efforts to “get Europe growing again, foster investments and create jobs”.
In a position paper on the negative effects of the FTT, the industry group said it supported both the Capital Markets Union initiative and the Better Regulation agenda but repeated its assessment that the so-called Tobin tax would ultimately hurt pension savers.
“The FTT is widely known as a tax on financial services,” it said. “That is a misapprehension – it actually is a tax on savings and retirement incomes. The FTT will ultimately be paid by pension funds’ members and beneficiaries.”
It said the tax, as currently negotiated, would increase the costs, lower the returns and reduce the efficiency of pension funds’ investment strategies.
It also argued that the FTT would significantly reduce hedging activities of Europe’s pension funds and companies, as well as increase the cost of capital for FTT-zone issuers.
“FTT-zone member states,” it said, “would become less attractive, and the movement of capital – particularly between the FTT-zone and the rest of the EU – would be impaired.”
As such, PensionsEurope said the tax should be withdrawn, or that pension funds be exempt from its scope.
“There is a contradiction,” it said, “if the Commission explicitly intends to promote supplementary pensions on the one hand, and some member states introduce a new tax also applicable for pension institutions on the other hand, as the FTT would have a negative impact on these pensions.
“In addition, introducing an FTT will be not in line with the Commission recommendation on EET taxation for supplementary pensions. The FTT should not unjustifiably punish pension funds.”
The industry group contested claims the FTT would only have a small effect on occupational pensions, given their long-term horizons.
“This is due to their increasing risk-management needs – overlay structures or hedging, for example – and prudential requirements,” it said.
“The pending IORP II proposal aims to increase the risk-management requirements for IORPs.”
It further argued that pension funds will need to use financial instruments increasingly to comply with these rules, including OTC derivatives, “which play an important role in risk management”.
PensionsEurope said the negative effects of the FTT would be likely to prevent pension funds from employing some strategies.
“Pension funds use OTC derivative contracts for risk-management purposes, to manage their risks in their balance sheet and liabilities by hedging their interest rate, inflation or currency risks, among others” it said.
“The IORP Directive explicitly allows pension funds to use derivatives for mitigating investment risks and for efficient portfolio management. The FTT would make this more expensive and thus in practice limit the ability of pension funds to hedge risks.”
Due to volatility on financial markets, the “limits” of strategic asset allocation are often reached, it added, necessitating financial transactions for the purpose of rebalancing.
It pointed out that, even if pension funds were exempt from the FTT, the tax would still affect them due to the “cascading effect”.
“For these reasons,” it said, “PensionsEurope calls on the 11 member states participating in the enhanced cooperation on the FTT to withdraw the initiative.”
The controversial tax, which would levy 10 basis points on debt and equity transactions and 1bps on those involving derivatives, was first mooted in Brussels more than three years ago.
In May 2013, the UK challenged the tax, which will not be levied within the country, arguing that it would still affect the City of London’s activities.
In April 2014, however, the European Court of Justice dismissed the case.