Those who have followed the occupational pension directive’s tortuous progress will find great relief in Ecofin’s political agreement last month. But now there is a long overdue consensus, champions of the directive could be excused for seeing this as a hollow victory.
No sooner had Ecofin decamped from Luxembourg, having passed it and numerous commentators began dismissing it as relatively meaningless in the absence of tax harmonisation.
This viewpoint is far from revelatory- multinationals have long been saying tax discrepancies are the biggest hindrance to pan-European schemes. And dismissing Spain’s achievements is unfair as its presidency has reinvigorated the European pensions debate.
In January it inherited a fairly stagnant legacy from the Belgians who had done nothing but issue a consultation paper to member states; an action that allowed them to put the directive to one side.
Spain’s perseverance has paid off and allowed it to fulfil its promise to get the directive completed in six months. There was one brief, if rather violent, hiccup earlier in the year when it tried to introduce quantitative investment restrictions.
France and Belgium, in particular, both wanted more restrictions yet France’s eleventh hour decision to back the directive was seen as a milestone. The only delegation not signed up to the directive are the Belgians.
Koen de Ryck, managing director of Pragma Consulting, says it is shame the Belgians have not endorsed the directive as there is no reason why they shouldn’t have. “A number of other countries that have more reasons not to support it have agreed,” he says.
That aside though, and once the commission published the document on June 5, it emerged that the fuss had had the desired effects and the restrictions were relatively unrestrictive.
In practice the Spanish solution is a two tier approach- domestic funds are to be treated according to local legislation while cross border funds are subjected to a few guidelines (see box).
Belgium’s refusal to agree to the directive is now all but academic. The agreement is being translated and put into legalese and will return to the Parliament for a second reading later this year.
Which leaves the question of whether the directive is any good. Statements from various related organisations, including The EFRP and its chairman Alan Pickering and FEFSI, the European Federation of Investment Managers unanimously praise the Spanish, Ecofin and the agreement.
But so as not to detract from the achievement, each statement places at the end, a proviso. “A true single market for occupational pensions will only be accomplished once a more co-ordinated approach on taxation is possible,” says the EFRP.
FEFSI adds that the commission need to implement the policies it announced in its April 2001 tax communication on the elimination of obstacles to cross-border pensions.
One of the fiercest critics has turned out to be the Mercer Human Resource Consulting who suggests the directive will in practice make it no easier to establish cross-border pension funds. European partner Mark Sullivan claims multinationals will not bother embracing the new framework as the additional regulatory burden will barely be beneficial.
He says that such multinationals can already achieve significant savings by centralising management of individual cross border plans and that they already benefit from the economies available through cross-border investment management.
He goes further than the EFRP in saying that a real breakthrough will only come with the advent of tax harmonisation, most likely the result of a test case in the European Court of Justice. Mercer suggests member states lack the will to fight for tax harmonisation.
Ieke van den Burg, a Dutch MEP, says that the parliament realised all along that it needed to work on the pensions directive and tax issues simultaneously; hence the communication last April.
But those expecting a resolution to the tax issue via the Brussels legislature can expect a long wait. Frits Bolkestein, the other Rapporteur for the communication (along with van den Burg), shied from producing a directive on the grounds that tax votes require unanimity.
He had initially promised the commission a proposal for a tax directive but, says van den Burg “only made a communication as he was afraid a legislative proposal would not surmount this unanimity requirement”.
So although a solution from Brussels will take forever, there are some encouraging signs in the form of the well-publicised Danner case and the recently-launched appeal on behalf of the business and IT consultant AMS Management Systems by the Pan European Pensions Group (Pepgo).
The Danner case centres on German-born Rolf Dieter Danner and examines whether a restriction in Finnish law, which makes pension insurance contributions made from Finland to a foreign institution taxable, is contrary to the EC Treaty.
Earlier this year, the Advocate General was cause for optimism after he suggested Finland’s position contravened EU law. The Advocate’s opinion is not legally binding but is seen as a reliable indication of what the final judgement will be.
A few steps behind the Danner case is Pepgo, an association of over 20 multinational companies including Swiss Life and construction company Kvaerner eager to launch cross border pension schemes. It has, on behalf of AMS, sought permission from the UK Inland Revenue to place one of its UK employees in its Dutch company pension scheme.
At present the Dutch scheme caters exclusively for employees working in the Netherlands but the IT company has asked that it and its UK employee be granted the same advantageous tax treatment while in the Dutch fund as they receive in the UK.
The Inland Revenue is expected to throw this request out as it, like European counterparts, discriminates between foreign countries’ occupational schemes and domestic ones. AMS says this eventuality will force it to seek a judicial review in the UK courts, from which it would, if necessary, seek referral to the ECJ in Luxembourg.
Mercer, who is backing the Pepgo project, says an ECJ ruling that the UK tax treatment is discriminatory would open the way for multinationals to place their EU employees in one fund without suffering the existing discriminatory tax treatment.
Geoffrey Furlonger, an independent consultant and co-manager of Pepgo says the AMS application is particularly significant as it involves the two member states with the largest pension fund industries.
“It also involves an employee who intends to reside in a single country, which would be case for the vast majority of members of future pan-European pension schemes,” he says.
Elsewhere and Skandia, the Swedish insurance company, has submitted papers to the ECJ back in March challenging Swedish legislation stipulating that employer contributions to insurance-backed pension funds are only tax exempt if made to locally-domiciled insurance companies.
Although the process is arduous and cumbersome (the Danner case has been spluttering along for over five years now), the more test cases there are, so the greater the chance of a precedent.
De Ryck welcomes Danner and Pepgo in that they appear to be the only viable avenues to pursue. “All taxation issues require unanimity and so it extremely difficult for the Commission to take any initiative,” he says.
Yet he believes that a degree of patience is required. With masterful understatement he says: “Pepgo is a child that has had a very difficult birth, it has taken years.”
As for Danner, “most people talk about it as if it is completed but the judgement has yet to be passed. I don’t underestimate the opinion of the Advocate general but that does not mean that the court will follow it. In most cases it has followed opinion and we hope that the judges will follow it but it is not for certain.”
Van den Burg believes the Danner and Pepgo cases are useful in that they put pressure on member states. Although Danner is unresolved, she says there are indications it may be having the desired effect in that member states appear to be preparing themselves to accommodate foreign workers if the ruling goes against them.
“Finland is already preparing to change it policy and there sill be others that have the same unequal treatment,” she says.
But she laments the lack of any co-ordinated approach to tax. One of the approaches put forward by van den Burg was an open method of co-ordination, rather like that applied to pensions recently, which she maintains could help speed court cases and the Commission’s attempts to resolve the issue.
But other than the notion of ‘information exchange’ put forward by Bolkestein in the communication, there is little else underway that is going to move the debate forward. Bolkestein hinted that they might bring more cases to the ECJ under article 229 on infringement cases.

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