How do you run a transnational pension fund for individuals from 15 different countries that changes 50% of its members every five years?
One answer might be: with great difficulty. But such is the task of the pension scheme of the members of the European Parliament.
The MEPs’ Additional Voluntary Pension Scheme was set up by the Bureau of the European Parliament (a cabinet organisation of MEPs which oversees parliamentary procedure) in June 1990 as a supplementary plan for members.
Significantly, the defined benefit scheme is a funded plan – unlike the unfunded scheme for staff of the European institutions – with current assets standing at over e112.5m.
In July 1993 a superannuation format for the fund – an ASBL (Association Sans But Lucratif) – was set up under Luxembourg law, with the first board of directors of the fund elected in October of the same year.
Adrian Cunningham, secretary to the fund, comments: “The scheme vehicle is in Luxembourg for the sole reason that the administrative centre of the parliament is there, and the banking centre background to Luxembourg helps.
“Currently we run a SICAV alongside the ASBL as the investment vehicle for the fund, with the ASBL as the sole shareholder of the SICAV. New legislation on pension investment vehicles in Luxembourg could mean we change the current arrangement to just a single fund entity though. We are certainly looking closely at the recent developments.”
The investment manager to the fund is Credit Agricole Indosuez Luxembourg, which acts as the non-shareholding partner in the SICAV.
Overall the investment policy for the fund is 45% bonds, 50% equities and 5% cash reflecting a desire for the fund to be well diversified globally.
Performance since the implementation of this asset allocation strategy in 1995 has been 15% a year, exactly in line with the benchmark – a mix for fixed-interest of the JP Morgan Europe and JP Morgan ex-Europe indices, for equities the FT European Union Net-Dividend, FT World ex European Net-Dividend, and for cash a seven-day euro deposit rate.
Consultant Bacon & Woodrow is the actuary to the scheme with PricewaterhouseCoopers acting as accountant to the plan with auditing carried out by Deloitte & Touche.
Like the pension scheme of the staff of the European Union, the members’ scheme is based on a one third, two thirds contributions ratio, with member payments deducted at source by the parliament from the MEPs’ general expense allowances.
Cunningham comments: “This is principally the only way that contributions can be collected, and unfortunately there has been press speculation, particularly in the UK over this system. It is not the case that pension contributions are being paid from members’ expense allowances, be-cause members refund from their salaries the pension contributions deducted from their allowances.
“Until a ‘European’ salary for MEPs is introduced, and whilst wages are still paid to them by their national governments and in their home countries, the options for collecting contributions are limited,” Cunningham points out.
“The alternative would be to receive some kind of standing order every month from each one of the 400 members of the scheme involving 15 member states using 14 different currencies. This would be a logistical and fiscal nightmare.”
The scheme’s administrators acknowledge that the deduction of pension contributions from a members’ expenses may not be the the ideal solution to the problem, but certainly believe it to be the most efficient and workable, whilst also noting that it eliminates the problem of pension arrears and subsequent investment losses.
Significantly, an EU Court of Auditors report is set to come out in the next couple of weeks concerning the MEPs’ pensions scheme, which is expected to give the scheme organisation, including the system collecting contributions from MEPs, a clean bill of health.
Furthermore, the regulations of the fund have always provided for its half yearly and annual reports to be submitted to the chairman of the European Parliament’s budgetary control committee and the president of the Court of Auditors of the European Union – so that by regulation both have always been kept informed of the fund’s development and financial position.
The actual format for the plan also relates to the contentious issue of MEP salaries, only recently put to the test before the European Parliament.
Italian MEPs, for example, can ex-pect to earn twice the salary of a UK member, with a Portugese members taking home even less than their British counterparts. Coincidentally, across the EU member states the average salary comes out at around that of a British MEP, which is about £45,000 a year.
As Richard Balfe, MEP and chairman of the board of directors of the fund points out: “The idea is that if you could resolve all these salary issues then you would have a flat rate of pay for all MEPs, but feelings against such measures are strong. Firstly, the big earners such as the Italian and German members are not very much in favour of a drop in pay. But also on a governmental level, for example in Portugal, it would be difficult to increase the pay of European parliamentarians to a level above that of domestic politicians – so there are significant political implications involved in such change.
Nine years after its implementation the MEPs’ pension fund is in a position of financial stability. However, as Balfe points out: “It has been a bit of bumpy ride” At the outset it was decided to peg the level of contributions to those of the unfunded European Parliament staff plan. Later, when outside actuaries were called in to look at the funding level of the plan, they pointed out that the contributions did not match the benefits of the scheme, creating an inbuilt actuarial deficit.
“Unfortunately, this situation was allowed to continue for another few years before any action was taken, but eventually the parliament resolved the issue by funding two-thirds of the deficit from its own funds, and then by implementing an additional levy on scheme members at the time for the remaining third,” Balfe explains.
The funding gap was subsequently closed by the end of 1997.
The full benefits of the plan include a spouse allowance of 60% of the full pension as well as survivors cover of 12.5% per child up to a maximum of 100% of the full retirement pension.
The reduction in the minimum contribution period came in response to the entry of Sweden, Finland and Austria into the EU in 1995, which meant that MEPs from these member states facing just a four-year term in office would be unable to qualify for benefits from the scheme.
Cunningham comments: “Given that many MEPs only serve for one five-year term and can now qualify for a pension after three years of contributions, the scheme has – at e749 per month – a very high individual contribution rate.” For the normal five years of contributions the current pension received at age 60 is e1,092 a month. For members with more than five years contributions the pension increases pro rata.
During the European parliamentary session of 1989–94, 320 MEPs (60%) joined the scheme, of whom 104 are now receiving retirement benefits.
More recently, during the 1994–99 parliament 419 (67%) MEPs joined the scheme. After its shaky start, Balfe feels the scheme has dealt with many of the problems facing pan-European pension schemes.
“The significant thing about the scheme is that it is a funded plan at the European level which covers MEPs in member states where the funding of pension schemes is still a relatively low political priority. To a certain extent we are part of a funding education process in Europe, in tune with many of the initiatives and proposals coming out of the EC on the subject of pensions,” he says.

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