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Going for middle ground

Othmar Karas, rapporteur for the European Parliament on the long-awaited supplementary pensions directive, has laid out what he sees as the salient points for the forthcoming parliamentary discussion in a working document released last month.
In the document, the Austrian MEP and representative of Europe’s Christian Democratic Party, gives an outline to the debate, which is shaping up to be one of the parliament’s most controversial for some time.
Indeed, opposition political parties within the parliament have already begun to get entrenched and take their positions over the passage of the directive.
At a December conference, Karas’ fellow countryman, MEP Harald Ettl, a member of the European Socialist party, declared that the left would bring the debate squarely on to issues of social protection: “If biometric risk is not included in the directive then we cannot have this,” he declared.
The appraisal of the draft directive precludes a hearing Karas will chair with a panel of experts from the pensions field – expected to include representatives of multinational pension plans – at a meeting of the European Monetary Affairs Committee (EMAC) on February 6.
In the report, Karas firstly redraws the demographic backdrop against which the implementation of the directive is being made.
He notes that, while today there is on average 3.5 workers for every pensioner in Europe, by 2025 this figure will have dropped to two for one and even one for one in some member states.
Without a solution to the problem, he says, today’s younger generation will end up paying higher taxes for no greater reward on retirement.
He also reiterates the role of the European Parliament to provide “coherent conditions” for the upholding of the principles of the Treaty of Rome.
In the pensions context, he says, this includes the freedom of employers and employees to move across EU countries without hindrance, as well as the liberalisation of capital and capital markets products within the union.
And on the first and perhaps most difficult hurdle to any agreement in the parliament; the issue of biometric risk, Karas sketches out the polemic where a compromise will be sought: “As far as one sees pension funds as complementary to the first pillar – where such risks are normally covered, it would appear that the inclusion of such cover would be thoroughly justified. This is particularly true in the case of longevity, which is the goal of any pension fund.”
He posits the counter argument, however, suggesting that individuals should have the freedom to choose which pension product they require: “It is questionable whether such (biometric) limitations within the context of the guidelines make any sense.”
Karas suggests a halfway house may be found in promoting such biometric vehicles through incentives, which, he says could lead to product providers concentrating on such principles.
Addressing the issue of guarantee rates for supplementary pensions, Karas notes that these will certainly play a role in giving beneficiaries a higher level of planning and security.
But again he notes a possible downside: “Return rates of capital can be reduced by this. These aspects have to be weighed up when discussing whether a European directive is compulsory or should instead be left to national law providers or individual contracts.”
Similar polarities, he says, can be seen in the debate on quantitative investment restrictions versus the prudent man rule. “Detailed quantitative principles make it difficult to manage pension funds properly and lead to lower returns.”
Pointing to a commission study he demonstrates that between 1984 and 1988 pension funds with quantitative rules returned an average of 6%, whereby their prudent counterparts returned 10%.
He adds: “The option to allow member states to keep their quantitative rules is controversial, as this is seen by some member states as superfluous and harmful.”
Again though he returns to the reality of the discussion lying ahead; empathising somewhat with the arguments of countries with a limited share culture and greater need for pensions security in the public eye.
Nonetheless, Karas suggests that in these countries there will still need to be a progressive move toward the prudent man rule even if the quantitative investment restrictments are provisionally maintained.
However, the Austrian MEP warns of the need for further explanation of the principle. “The concept of the prudent man rule without conditions is currently used in many countries, but it is considered that there is questionable translation of this into different languages.
And he adds: “For example, prudent man rule is only suitable where there is certainty that the investment portfolio is correctly aligned to the membership structure in order to gain optimal results and retain the security of the investments.”
The quality of investment management for pension funds using prudent rules should also be verifiable at all times, he opines, adding that in the event of irregularities punitive action should be applicable by regulatory bodies.
Other difficult questions to address, he suggests, will include cost transparency and membership participation in schemes – factors, which he notes differ enormously between member states and may stretch the remit of Brussels legislation.
“The question is whether these issues will actually be met in this directive, or require a further directive or indeed be met by national governments,” says Karas.
On competition between providers, Karas believes the Commission has done its work to pave the way for an open market, citing the inclusion of insurance companies in the draft directive.
Significantly, he points out that insurers would be “interested” in convergence of the supplementary pensions legislation toward the existing life insurance directive.
“Parliament will have to look at the question of whether it can guarantee the right of free access to this market for products from different providers and thus ensure the investors freedom of choice.”
Whilst seeking to end competition disparities though, he says, parliament also needs to consider more precise definitions on the functioning of life insurance companies within the new directive.
And on the great stumbling block – tax – Karas concedes that this cannot be dropped from the debate: “The significant steps already taken here must be followed by further measures such as co-ordination of national tax systems at a community level.”
Nonetheless, the MEP recognises that parliament has to cede the final decision on tax to member states, pointing out that tax questions are considered part of the unanimous voting principle of member states.
But he adds: “We have to bring these two issues together (pension and tax reform) so that no-one has the excuse that they are waiting for the other to be achieved.”
This, he notes, will depend largely on the progress of European internal market Commissioner Frits Bolkestein. “It will only be possible to get a conclusive analysis when the Commission has agreed on its April tax initiative.”
He adds forcefully, however: “Deletion of the tax discrimination measures, which are a hindrance to employers is of the highest importance for the completion of the single market. Many of these measures are invalid and should not in principle exist any more.”
Undoubtedly, the supplementary pensions question will go hand in hand with tax reform, and in a parting shot Karas warns the industry not to get too carried away with itself, despite the prize ahead: “As desirable as a quick treatment of this is, we should not lose sight of the completely positive effects of the development of company pension funds and security, which may only be achieved when a single market for tax becomes effective.”
With the rapporteur stating that a decision on the common view of the parliament be taken around Easter, with a decision in the plenary to come by the end of April/start of May – we may not have to wait long to see how much of the Commission’s draft directive will survive the imminent political crossfire.

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