How it all came together
After a tortuous 10 years in the making and not a few bruising political encounters, the arrival of the pan-European Pensions Directive came with a swift and unexpected formality that belied its difficult genesis.
The first attempts to introduce a directive had dated back to the early 1990s, championed by then EC Commissioner Sir Leon Brittan. The initial directive communication took shape during 1992/93, although its focus was almost exclusively geared towards asset allocation issues, with very little substance on the liabilities side.
This was part of its undoing. Member state pressure against the directive was aggressive: turmoil on the global currency markets at the time meant that issues of currency matching proposed by the directive were anathema to some countries in Europe.
An ECJ court case brought by the French led to intense discussion on the directive over several months before it was finally withdrawn – much to the relief of many who felt that it had been flawed and compromised since inception.
When Commissioner Mario Monti took up the European pensions baton in 1997, discussion in Europe had moved on. Monti’s fundamental remit was to create a single market for pensions for banks, financial providers and insurance companies, a level-playing field proposition that had been agreed in many other European industry segments.
A study by Belgian consultant Koen de Ryck for the Commission took in broad consultation with the European pensions industry and looked at the impact of pensions on European capital markets and their competitiveness. It was also instrumental in raising the profile of the so-called pensions demographic ‘time-bomb’ in Europe.
The ensuing consultation paper produced by Monti moved the European pensions game forward, including a framework for prudential investment rules, portability and tax issues– the main pillars needed to create an internal market for occupational pensions.
Monti’s directive proposals focused on the prudential framework, the idea being that the Commission’s work on prudent rules would prompt work elsewhere in the Commission on the other two pillars of portability and tax.
The directive was given a fillip in 1999 when the European Financial Services Action Plan (FSAP) was adopted.
The FSAP listed a ‘supplementary pensions market in Europe’ as one of the 43 measures necessary for the creation of a single integrated capital market to be achieved by 2005.
This meant the directive had a political imperative that almost certainly helped to push it forward.
By October 2000, the directive had been published in draft form, and work began on bringing it to legislation in January 2001, starting with the EU presidency of Sweden. The Swedes, however, sought a swift policy conclusion at the European Council level, proposing that ministers adopt a qualitative approach to investment, legal provision and compliance while retaining member state labour laws, and so on.
A number of countries, however, deemed that the Swedes were jumping the gun before serious discussion on the detail of directive had taken place and no agreement was reached.
At the same time the first discussions on the directive were taking place in the European Parliament. When discussions in the chamber became bogged down in issues of social provision (biometric risk/lifelong annuities), the parliament came in for heavy criticism. Claims that the main actors in the debate did not understand the pension fund world were fuelled by accusations that the EP Rapporteur for the directive, Othmar Karas, was an insurance man by background, and being heavily lobbied as such.
The parliament was robust in its defence with Karas claiming that a number of member states were blocking the directive in opposition to prudent investment principles.
When in July 2001 some 100 amendments to the directive emanated from the parliament, the conflicting positions of council and parliament looked intractable.
Noises from the Commission at the time suggested that the parliament’s position was somewhat contradictory – pushing for biometric risk and lifelong annuities while at the same time seeking to abolish quantitive investment rules and full funding requirements.
The view from the EC, it seemed, was to ensure flexibility on products that could be offered for pension provision, a position that didn’t tally with that of the parliament.
When the Belgian presidency of the EU passed in the second half of 2001 with scant real work on the directive, things did not look bright. This changed with the Spanish at the helm at the beginning of 2002. Despite having undergone some tough domestic pension reform of their own in 2001 involving fraught negotiations with trade unions and employers, the Spanish presidency organised a number of seminars on stumbling blocks to the directive, particularly prudent investment rules. Within a few months a form of agreement was being hammered out amongst the various members of the council as the Spanish began working closely with the Commission and with the Danish administration that would take on the EU reins in the second half of 2002.
The Spanish influence led Portugal, Italy, France and Greece to become more open to the directive, while the northern European countries were more attentive to the Danish input. The seeds of a compromise had been sown.
The final stumbling block to a council position was that of technical provisions. With insufficient harmonisation on the calculation of pension fund discount rates, some member states argued that distortions could be used to attract pension activities from other countries. Finally agreement was reached when it was argued that member states were unlikely to play with the security of their own citizens for an issue of cross-border activity.
In June 2002, the council reached agreement, with only Belgium abstaining on social policy grounds.
The council accord, however, had only met around 40 of the 100 amendments proposed by the parliament.
Privately, parts of the parliament were happy to adopt a ‘no amendment’ line and vote with the council proposal, although others feared that the two bodies would have to enter into ‘conciliation’ before agreement could be reached.
When the work started behind closed doors between the Commission, EP Rapporteur Karas and the council, few expected a positive outcome. Eventually, the Commission came up with a set of amendments and at an ensuing trilateral meeting put a ‘take it or leave it’ proposal on the table.
Somewhat surprisingly Karas agreed to the last-ditch proposal – provided that the council could also agree within 24 hours.
All the major players in the council agreed with the spirit of the amended document and Karas himself was then able to secure a favourable vote at the parliament.
The final strings to the European Pensions Directive had been pulled together in less than a week. Not bad after 10 years of hard slog!