On May 1 2004 there will be some new members of the European club. That date will see Cyprus, the Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia join the European Union. Enlargement will add more than 100m people to the EU once Romania and Bulgaria become members after 2007.
The enlargement finalises a process that, in essence, started with the fall of the Berlin Wall in 1989. And it was in November of that year that the first Warsaw Pact country applied to join the Council of Europe. Willy Brandt once said: “The West of Europe cannot prosper in the long run if the East of Europe suffers in the long run.”
In 1993, in Copenhagen, the existing member states agreed in principle that the former Communist countries could join the EU. And so the Accession Treaty with the new member states was finally signed in April this year.
Under the so-called Copenhagen criteria, there are three criteria for the new members. They deal with the political stability, market economy and the implementation of EU legislation.
Alongside enlargement is another EU project, the Financial Services Action Plan and, specifically Directive 2003/41/EC – ‘On the activities and supervision of institutions for occupational retirement provision’ – the pension funds directive. This became EU law in September and member states now have two years to implement it.
So these two great schemes, enlargement and financial action, will converge next year, and the new member states will have to abide by EU legislation, including the pensions directive.
A report from the European Parliamentary Financial Services Forum, an influential body of MEPs and financial market executives, puts it succinctly. “For the EU 15, the main challenge is to ensure the effective completion of the whole FSAP on time. As for the candidates, they should ensure the removal of the remaining barriers faced by the EU15 financial services providers.”
The forum sees pensions at the very heart of the enlargement process. “Falling prices will result from economies of scale, particularly in the funds industry where costs savings are welcome at the time of pension-system reforms.”
Make no mistake, enlargement means that the single market will get bigger. “As regards technical regulations, the ‘one standard for all’ principle of the single market will be extended to the acceding countries,” says Günther Verheugen, EU commissioner for enlargement.
The launch of the pension fund directive is not the last word on EU pensions activity. The commission has said that it is examining whether to propose a directive on the portability of occupational pensions. And the Commission has made it clear that it wants to coordinate social protection at the EU level. Such moves make it clear that pensions are still high on the community’s “to do” list.
But how will the new member states’ existing pension systems fit in with those of current members?
As Verheugen acknowledges: “En-largement implies the incorporation of economies with different levels of development and significantly different economic structures and – what is perhaps the most challenging – with the particular background of a complete system transformation.”
In pension terms, there are basic issues at stake here, to do with terminology, models and regulation. What you have is a problem of different countries, which have, over time, come up with different solutions. How are they all going to come under one banner?
Ironically perhaps, former Dutch Prime Minister Wim Kok in his assessment of enlargement for the Commission, said that current EU members could learn from the reform already undertaken by the candidate countries. “Their experience - for example, in pension reform - should be exploited in the Lisbon Strategy.” Kok said the candidate countries should be involved in the strategy as soon as possible.
Interestingly enough there appears to be little consensus on key pension terms such as pension fund, pension plan, occupational/personal, and mandatory/voluntary. There are at least four accepted definitions currently used, from the World Bank, the International Labor Organisation, the Organisation for Economic Cooperation and Development - and the definitions embodied by the EU directive.
For example, the OECD and the directive have different definitions of the term occupational pension plan. And that’s before national legislation becomes involved. It could be that such factors may determine how the directive is applied.
For the OECD an occupational plan “is linked to an employment relationship”. Occupational plans are established by employers and groups of employers (eg, industry associations), sometimes in conjunction with labour associations (eg, a trade union) in order to provide retirement and related benefits for the employees of the plan sponsor(s). The plan sponsor is responsible for making contributions to occupational pension plans, but employees may be also required to contribute.”
Whereas the EU Directive’s definition refers to an “institution for occupational retirement provision” that is not necessarily linked to a sponsor or, as the OECD says “linked to an employment relationship”.
The directive states: “An institution, irrespective of its legal form, operating on a funded basis, established separately from any sponsoring undertaking or trade for the purpose of providing retirement benefits in the context of an occupational activity on the basis of an agreement or contract agreed individually or collectively between the employer(s) or their respective representatives, or with self-employed persons, in compliance with the legislation of the home and host member states and which carries out activities directly arising there from.”
The term ‘occupational’ means more or less the same across the Anglo-Saxon sphere. Although the term ‘occupational’ is a clear-cut one to understand and is readily translatable – the approach may differ from the candidate countries.
There is a disparity even in what is meant by the term pillars. The European directive does not require that member states have the same pension system structure – it talks of ‘coordination’ but not ‘harmonisation’. But at least the directive assumes that they share characteristics.
For the World Bank, whose definitions are used by many accession countries, the first pillar is a publicly managed, pay-as-you-go, defined benefit system. For the ILO it is a minimum anti-poverty pension that is universally available -financed directly from general revenues and indexed. The OECD definition is just ‘public plans’. The directive refers to publicly managed pension schemes with defined benefits and pay-as-you-go finance.
There is just as much difference in second-pillar terminology. For the World Bank it is a privately managed and mandatory, while the ILO sees it as a mandatory public PAYG social insurance pension. The OECD sees both mandatory and occupational pension plans. The directive sees the second pillar as privately managed pension schemes which are provided as part of an employment contract.
The classification confusion continues into the third pillar. For the World Bank it is a voluntary, individual account that is privately managed. The ILO says it’s a fully funded defined contribution scheme, perhaps privately managed, to supplement the public scheme - it includes both occupational and individual schemes. The OECD talks of mandatory and voluntary personal pension plans. The directive refers to ‘personal pension plans in the form of saving and annuity schemes’.
The difference in models could well have significant implications for the way the directive is applied. The directive does not cover the whole pension market of some countries as large parts of their pension systems do not come under its classification.
Moving on from terminology, there is, of course, a significant divergence in regulation. To take one example, countries that operate two types of ‘system elements’, such as occupational or personal, within the same pillar face a hard regulatory task. Should the two types be regulated by different rules? And if personal plans are not covered by other directives, then that begs the question as to what exactly is the right regulation that must be applied.
With enlargement, 2004 is shaping up to be one of the most momentous years in the EU’s history. Let’s hope that the nitty gritty of pensions regulation doesn’t get lost amid all the excitement.