Sections

Sustainability is key to stability

Despite the latest projections that the EU’s ballooning public deficit is gradually being brought under control, the commission remains keen to press home that there is still much to be done to guarantee the long-term sustainability of Europe’s finances, particularly in terms of pensions expenditure.
Data from Eurostat, the EU’s statistical agency, released on 24 April indicates that the average government deficit for the whole EU fell in 2005 for the second year running (from 2.6% to 2.3%) – although debt, which is the accumulated amount that a government has borrowed at the end of the year, rose slightly (from 62.4% to 63.4%).
The commission is currently working on a sustainability report, to be published in the autumn, which will praise member states for the reforms taken so far, but strongly warn that there is no room for complacency.
An insight of what will be in this report was given by monetary affairs Commissioner Joaquín Almunia on 31 March, who told a conference in Brussels: “The strategy to address such a challenge rests on a comprehensive approach that includes reducing public debts, raising employment levels and reforming pension and healthcare systems.”
In terms of pension reforms, which Almunia says have already been a proven success in some countries, the commissioner commented: “Ageing is not the source of the challenge facing policy makers. The challenge stems from the poor design of our public pension and healthcare systems, which foster unrealistic expectations of citizens regarding retirement.”
Almunia drew on a recent study by the commission to emphasise the pressure that an ageing population will place on Europe’s finances over the next 50 years. For example, the study predicts that, without further reform, EU’s growth rate (currently standing at just 2.4%) will be halved by 2050, while its spending on pensions and healthcare will increase by 4% of GDP.
Others at the conference tended to agree with Almunia’s conclusions. “Excessive deficits should be corrected as a matter of urgency and swift progress should be made towards medium-term budgetary objectives, otherwise the current window of opportunity…will be wasted,” said José Manuel González-Páramo, member of the executive board of the European Central Bank.

Pension funds are likely to be exempted from the new solvency rules that the EU is now drawing up - at least for the time being - following a meeting held on 5 April of the European Insurance and Occupational Pensions Committee (EIOPC), an advisory body to the Commission.
Previously, there had been widespread concern that updating the EU’s solvency requirements would change how pension funds are regulated, because of a provision of the IORP directive that sets the minimum required level of pension assets according to provisions laid out in the EU’s life assurance directive.
But the EIOPC dispelled these fears by agreeing that it did not make sense to include pension funds as part of Solvency II before the new rules have even been finalised, which is unlikely to happen before mid-2007.
The EIOPC recommendations are advisory only, but the commission is expected to follow them. Ivo van Es, who represented the commission at the EIOPC meeting, said that over the coming weeks and months, his department will be gathering member states’ comments about Solvency II and pension funds, with a view to conducting a series of reviews in 2007 and 2008. Only after these will the commission start considering whether pension funds should be subject to the same requirements as insurance, van Es said.
Chris Verhaegen, secretary general of the European Federation of Retirement Provision (EFRP), said that she was “very relieved” that the decision to apply Solvency II rules to pension funds would be postponed. “We want to see the IORP directive fully implemented first,” she added.

Brussels is starting to turn its eye on company pension schemes that are guaranteed by national governments. It is understood to be looking into at least two such guarantees - concerning British Telecom in the UK and the post office in France - and observers think that more could follow.
In BT’s case, the company has admitted that about three quarters of its £36bn (€52.5bn) pension fund liabilities are underwritten by the government, but rejects claims that this gives it an unfair advantage over competitors.
Simon Holmes, a partner at law firm SJ Berwin, agrees. He says that although the guarantees appear to have “some of the hallmarks of state aid”, it is not at all clear in what ways the company has directly benefited from them.
Holmes is one observer that thinks more probes into European pension funds could follow. “In general, the UK is quite strict on the amount of state aid it gives companies,” he said. “Others around Europe give far more.”

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2563

    Asset class: Mid & Small Cap Equities.
    Asset region: Global.
    Size: USD $130m.
    Closing date: 2019-09-27.

  • QN-2564

    Asset class: Large Cap Growth Equities.
    Asset region: Global Developed Markets.
    Size: USD $130m.
    Closing date: 2019-10-04.

  • DS-2567

    Closing date: 2019-10-02.

  • QN-2569

    Asset class: Local Currency Bonds.
    Asset region: Global Emerging Markets.
    Size: $500m.
    Closing date: 2019-10-10.

Begin Your Search Here
<