Pension funds to fall under scope of financial transaction tax – Brussels

EUROPE – The European Commission has confirmed pension funds will fall under the scope of the controversial financial transaction tax (FTT) but argued the impact on their activities would be "extremely limited".

Setting out the details of the new FTT tax approved earlier this month by the EU finance ministers, the Commission recognised that pension funds were "important" actors on financial markets.

It said that, while pension funds would be subject to the FTT, the impact on their activity would vary depending on their portfolios and investment strategy.

"Pension funds generally have a diversified portfolio of assets and invest their money in financial instruments, mainly bonds, but also in assets that are not affected by the FTT, such as cash and currencies, deposits, real estate, loans, gold and silver," the Commission said.

It also claimed "conservative", fully funded pension funds tended to follow low-risk strategies – typically reflected in the buying of equities and bonds when issued and then holding them to maturity.

"Such transactions are not covered by the scope of this tax," the Commission said.

However, it stressed that, for pension funds trading assets on a high-frequency basis, the tax would be higher.

"An effect of the FTT could be to deter high turnover in pension funds and encourage a move towards more long-term handling of funds," it said.

"This, in turn, could substantially reduce the management fees of those funds in which pension funds often invest."

Under the details set by the Commission, an FTT of 0.1% will be applied to shares and bonds, units of collective investment funds, money market instruments, repurchase agreements and securities lending agreements, while a tax of 0.01% will be charged on derivative products.

In April last year, a resolution passed by the EU Economic and Monetary Affairs Committee (EMAC) sought to exempt pension funds from the FTT.

After a number of MEPs requested various exemptions, the final resolution included a provision waiving the tax on transactions carried out by pension funds.