Europe’s politicians involved in the quest for a single pensions market can enjoy a new and comprehensive report while on their summer break. The European Financial Services Round Table (EFR), which comprises chairmen and chief executives of some of Europe’s largest financial institutions, has published a new report into the benefits of a single market and how, in its opinion, it can be achieved.
Claims early on in the report suggest that Europeans remain blissfully unaware of the gap between expectation and reality in terms of what they will receive in retirement. The report, ‘One Europe, one pension – affording the future’, makes little reference to the directive and instead takes a longer term look at the logistics of producing a single market.
It correctly highlights tax harmonisation and worker mobility as two of the most important elements of securing a European market but in addition, it outlines the benefits to employers, employees and member states of such an achievement. And then it goes on with a series of recommendations.
Pehr Gyllenhammar, chairman of CGNU and the EFR says the recommendations are feasible but that a lack of political will could have severe consequences. “If the EU and its member states fail to act rapidly and prioritise change, they will consign millions of Europeans to poverty in old age and wreck Europe’s proudly and painstakingly achieved social models,” he says.
The report argues that a single market would create substantial benefits for European consumers and boost economic growth. As for worker mobility, it claims that the variety of pensions systems is imposing unacceptable barriers and often severe tax costs when people move around the EU. In addition, closer integration would encourage greater private pension provision, something member state are unanimously promoting.
In its report, the EFR says the EU: “is still woefully short of achieving the single market in pensions,” and so makes a series of recommendations. First up is nothing new – it urges European institutions to adopt the prudent approach to investments. It accepts the political decision by ECOFIN in June but is now pressing for reform on the social, labour and tax fronts.
It maintains that the second step is to establish a common platform to bridge and accommodate the fundamental differences in the EU. It lists these areas as taxation, regulation, product transparency, scheme information and security; each applied equally to second and third pillar provision.
And so on to issues including taxation, mobility, security, flexibility and transparency. On taxation, it argues that there should be no discrimination for investing in or spending pension savings in other member states. New EU member states should, in addition, be obliged to introduce a pensions taxation system compatible with an EU-wide system.
The report backs up what many in Brussels are pushing for- a switch to an exempt, exempt, taxed (EET) system. This is in place for 11 of the 15 member states. Denmark, Italy and Sweden retain an ETT approach, Luxembourg a TEE approach, as does Germany which also runs an EET approach.
“Although this general acceptance of the EET proposal would not provide a complete solution, it would help to reduce the mismatch that leads to double taxation or to no taxation at all,” says the report.
In terms of mobility, the report is pushing for pension holders to be able to change jobs, country of employment or country of residence or retirement without being penalised.
“For employees who remain with the same employer but move to a new member state, there should be no legal or tax barrier to employees remaining in scheme membership even though they may move to a different member state, while still employed by the same company,” it says.
It is also calling for what it calls a ‘fair’ pension payment for employees who move to a new member state on retirement. “We suggest that no penalties should be imposed simply as a result of moving to a different member state and seeking mobility of the pension income.”
Individuals at retirement age should also have the right, if they wish, to transfer the fair value of their pension entitlement to an approved provider of their choice anywhere within the EU, without being penalised.
It also tackles the issue of vesting and what it refers to as ‘early leavers.’ According to the EFR, pension rights should be vested immediately, or in other words, members should have a guaranteed right to benefits the moment they join.
“In order to address the disproportionate costs of administering very small pensions, it should be open to schemes to pay cash values at a de minimis level in lieu of preserving trivial pensions,” says the report.
“As a general rule, we suggest that there should be no discrimination in the benefits for early leavers compared with the benefits for active members in any form of pension arrangement,” says the EFS.
Given the recent corporate scandals and the closure of numerous final salary schemes, it is of little surprise that security is another big issue for the EFS. Bottom line, it is seeking an assurance that a fund is properly managed and that sums contributed are safeguarded.
The committee welcomes adoption of the prudent man investment principle and maintains quantitative restrictions are outdated. “Given today’s highly sophisticated portfolio investment tools, restrictions based on such quantitative criteria are simply outdated and can only hinder pension funds from applying the most advanced pension investment concepts,” it says.
Nevertheless, it makes a few further suggestions and suggests that schemes’ governing bodies adopt a written statement of investment principles including: the overall risk policy of the pension scheme, the support offered by the sponsoring company, the type of pension plan, national regulations concerning the calculation of technical reserves as well as the solvency requirements. It should also include the strategic asset allocation and the investment styles applied.
The report also calls for proper instruments for correctly measuring and controlling risk and it suggest pension funds should be required to conduct ALM studies on a regular basis.
Other recommendations include the harmonisation of asset and liability valuation techniques across Europe and that the solvency of providers should be regulated in a risk-based, capital framework.
The report takes a relatively liberal line on the flexibility of pension schemes and argues that pension holders should have a choice of retirement age, albeit subject to the requirements of the employer and state.
“While recognising that pensions are a life-long income stream, there should be flexibility in the level of payments received each year to reflect the changing income needs of pensioners. This will usually be achieved through various types of life-long annuities in order to cover the longevity risk,” it says.
On transparency, it asks for a fuller disclosure of information on every element of pensions provision. “Each participant in the system should be sent a yearly update of the pension rights they have already secured, based on their past work history and what they might expect at retirement, as a first step towards making people aware of the pension gap they face to stand on retirement.”
It is also calling for more details to be distributed to the policy-holder during the investment period. Investment funds should be described in a uniform way in terms of the fund’s investment objective, its asset allocation strategy and all costs and fees and how they are incurred.
The report closes by saying that, if its recommendations are taken up, then member states will benefit through increased participation in private pensions and a reduced dependency on state systems. As would employers who would benefit from easier administration, greater flexibility, increased staff mobility and higher benefits at the same cost.
For Gyllenhammar, the benefits of an integrated pensions market in Europe are clear. “The initiatives that need to be taken to create a more integrated pensions market and encourage greater take up of private pension schemes are easily achievable.
“The European Commission, the European Parliament and national governments have been working to advance a single market but still have much to resolve.
“What is needed is political will and we call in politicians at European and national levels to seize the initiative now before it is too late and Europe’s pensions nightmare really does come true.”

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