Pensions portability: Where are we now?
Not quite a dead parrot, it will take a lot longer to get the EU’s pension portability directive back to life, says Gail Moss
As job mobility within Europe continues to increase, the EU’s attempts to make occupational pension provision portable are now firmly stuck in limbo, with no sign of resurrection any time soon.
While comparisons with the Monty Python dead parrot sketch might be a little premature, there is no doubt that the draft directive, if not actually dead and buried, is firmly on ice.
The draft, intended to set common standards for conditions on acquiring pensions, is being piloted by Dutch MEP Ria Oomen-Ruijten. It was originally put forward by the European Commission in October 2005, and approved by the European Parliament in March 2007.
In December 2007, it received its first reading by the Council of Ministers, but since then has fallen off the radar. And until the Council adopts a position - which triggers a second reading - little is likely to happen.
“To resolve the impasse, pensions must be back on the Council’s agenda,” says Oomen-Ruijten. “But as long as there is still a chance of adopting the directive, there is no other way of providing portability.”
Chris Verhaegen, secretary general, European Federation for Retirement Provision, (pictured right) says: “The good thing about the draft directive is that it puts the issue of cross-border mobility on the agenda. The drawback is that it is over-ambitious - for instance, its provisions on transfers without being penalised, and the ‘right’ to transfer. It also ignores the technicalities of the calculation of transfer values, treatment of incoming transfers, costs of transfers and counselling.”
The most implacable objections have crystallised around vesting periods for schemes, the two extreme positions being taken on the one hand by the Dutch - in favour of short periods - and the Germans, who argue that five years is about right.
But Dutch MP Pieter Omtzigt (pictured left) is against portability, for several reasons. “First, it is subject to the subsidiarity principle,” he says. “Next, the problem which it tries to solve is not well defined. There is a problem for workers moving countries, but it has not been resolved for instance whether transfer payments from different countries can be added up. One solution would be a national agency which countries co-ordinate between themselves, but the proposal doesn’t even look at it.”
Other obstacles which he says require definition are the number of large countries, such as Germany, which have long vesting periods - Omtzigt would like to see these abolished -and the need for clear calculation rules.
“Life expectancy in Latvia for instance is 66, but in Spain it is 30.”
He says that Germany does not wish to lower vesting periods further for two reasons: “In our system, a lower vesting period means that the Treasury could lose taxable income, which is a big problem for the government. And pensions are used by employers as a tool to attract and retain staff. This tool loses its value if we reduce vesting periods even more.”
Deborah Cooper, principal at Mercer, says: “This imposition of a one-size-fits-all structure doesn’t work very well. From the UK’s point of view, for instance, the directive doesn’t look as if it will make a large difference. However, each country is different, and not all of them have such flexibility.”
She says: “Germany has a lot of unfunded schemes, so they would have to find the money to give transfer values. In contrast, Dutch schemes are largely funded, but as they are industry-wide schemes, there is less demand for transfer values. That means they would have legislation foisted on them with no benefit.”
But is portability at all achievable?
“Yes, provided you know from which system to which other system you want to transfer,” says Verhaegen. “To be sure there are no ‘leakages’, it is necessary to determine those systems that permit individual transfers.”
Verhaegen says this is not only a tax issue, but also one of social policy.
“It is therefore imperative to model the EU pension systems into a pillar structure which would ensure that each member state must decide to which pillar certain pension schemes and products belong,” she says. “This seems to be a very difficult issue. However, if an individual changes member state and employer, the transfer of accrued vested rights through a capital sum may become a viable option, provided there is a suitable receiving pension institution that can handle the ‘transfer in’.”
But she adds: “Ensuring there is ‘no loss of rights’ - as the draft directive claims - is very difficult to achieve. And this is one of the reasons why it has stalled.”
Verhaegen says that in general, the EFRP is in favour of labour mobility. But she adds: “Instead of dealing with transfers, the Commission prefers to use the concept of ‘portability’, which is in fact trying to grant the same vested rights across the EU. In the current variety of systems and vehicles this seems too far fetched, especially since no other harmonisation is envisaged in the area of pensions.”
In her opinion, the portability directive has to be sent back to the drawing board and given a more modest scope, while still going a step further than the directive on safeguarding supplementary pension rights. The directive’s lack of progress does not automatically mean it will progress no further. Commentators point to the fact that the working time directive has suddenly stuttered into action after a long period of dormancy.
The Czechs are not expected to see it as a priority of their presidency. And this year’s European elections will prompt a reconsideration by Parliament of the original resolution. A diplomatic source says: “It has been blocked at a political level for a year, and it is not likely to come back.”
The directive is not yet dead. But its chances of reaching fully-fledged legislative status appear further away than ever.
The Irish perspective
Since 2004, Ireland has seen a rapid influx of immigrants from eastern Europe, many of whom work in the construction industry.
But now, the recession is taking its toll.
Last month CPL, Ireland’s largest recruitment company, predicted that one-third of Ireland’s 200,000 Polish workers would leave within a year, lured by brighter growth prospects at home. 13% are expected to leave within two years.
This appears to be the very scenario which pensions portability was designed to address.
However, Patrick Ferguson, chief executive, Construction Workers’ Pension Scheme, says that his scheme is not particularly affected by the fate of the directive, although he is in favour of portability.
Around 10% of his scheme’s members are foreign nationals. Scheme membership is compulsory, with no vesting period.
“Under Irish legislation, members are entitled to a transfer value if they want it,” he says. “The problem is that a high percentage of migrants are Polish. Legally, we can’t make transfer values to Poland because it hasn’t put into effect the IORPs directive published 18 months ago.”