In April’s response to last year’s European Commission communication: ‘Towards a single market for supplementary pensions’, the European Parliament endorsed much of the reform direction emanating from Brussels prior to the emergence this month of the long-awaited green paper on supplementary pensions.
Wilfred Kuckelkorn, German MEP and rapporteur for the European Parliament Committee on Economic and Monetary Affairs, outlines how he sees the European pensions project going forward. “The final objective of the whole European legislation procedure is achieved when cross-border affiliation to one pension institution becomes a reality for European companies,” he affirms.
However, reiterating the parliament’s support for taxation on contributions when benefits are paid for reasons of greater capital accumulation due to compound interest, Kuckelkorn notes the national budgetary hinderances to tax transformation.
“Because income tax increases and decreases over a period of time in most member states, the tax burden on the taxpayer diminishes, since income from a pension is generally lower than income from employment.
“On the other hand, economic growth increases the tax base and in the medium term, there should be no serious tax loss. However, since member state budget plans are reassessed every year, the potential gain to national budgets, depending on the member state involved, might amount to several billion euros. The short-term revenue shortfall results from the lower tax rates which apply to lower incomes in the subsequent pension period. That is the predominant factor which will make it difficult to implement the harmonisation project.”
Kuckelkorn notes though that tax-co-ordination seems more feasible if the type of harmonised product is restricted to biometric risk coverage. “This means that cross-border affiliation is most likely to be achieved first for these products and product providers.”
He maintains that biometric requirements should, in principle, include safeguards for longevity, surviving dependants and invalidity, which can be undertaken by defined contributions (DC) and defined benefit (DB) systems. “The safeguard of biometric risks is managed either internally by the provider of the capital-management or delegated to an external provider of insurance services.
“In the DC case the recipient of supplementary pension is going to contribute a defined amount of money every month or every defined period.
“In future, these schemes might be more convenient for companies. However, this does not exclude aspects of social solidarity!”
For Kuckelkorn, the European Parliament’s assertion that PAYG systems should remain the cornerstone of pension systems does not mean countries with generous but demographically precarious social security systems will shirk the supplementary pensions issue.
However, he points to country specifics demanding serious consideration. “In Germany a certain level of pensions must be provided by the PAYG system, which is based on a generation treaty. By paying pensions for the older generation the younger generation obtains property rights.
“Violating property rights is forbidden by the constitution in Germany. Thus, a significant substitution of the PAYG system through pension funding would violate the constitutional rights of German citizens. Nevertheless, the funding systems will play a more and more important role in German pension systems as an efficient addition and support to the PAYG system.”
On the prudent person principle, Kuckelkorn believes framework conditions should cover internal and external supervision and insolvency insurance, with monitoring by a supervisory authority. “A qualitative approach to supervision of institutions for occupational retirement is highly welcome but needs an efficient supervision institution familiar with qualitative supervision rules. Member states which have applied quantitative supervision so far need a transitory period to build up new supervisory institutions. To guarantee fair competition between pension providers a European supervisory authority might be the most adequate solution in a longer term,” he adds.
However, Kuckelkorn believes the most important aspect of prudential financial management could be legal differentiation. “According to the respective coverage of biometric risks the accrual accounting and the investment strategy is rather different and should be based on different rules and reflected in two different directives.
“A mixture of the British minimum funding requirement and pension compensation scheme together with the American Pension Guarantee Corporation might be an appropriated basis for further discussion on protection against loss of profits resulting from illegal transactions,” he notes.
On book reserve systems and vesting period discrepancies, Kuckelkorn envisages a gradual erosion through market forces. “The German book reserve system does not hinder a European pension solution but is clearly limiting to the national market. Accordingly it will be eliminated in the long term by market mechanisms. Lengthy vesting periods should be adapted in the light of the European integration of supplementary pensions as they constitute a serious obstacle to freedom of movement.
“Nevertheless, a reduction in the length of such periods entails high costs for the undertakings concerned. Cautious changes should therefore be approached in trialogue meetings between labour, management and national governments.” And Kuckelkorn believes the parliament could continue to be an important check against a Commission which he feels is focusing too closely on the financial as opposed to the philanthropic. He says: “The purpose of old age provision is to assure the existence of human beings after the active working period. Providing for old age is not primarily a capital formation process but a process of providing socially adequate safeguards against certain risks in life.
“In my eyes the Commission (as far as DG Internal Market is concerned) is looking far too much at the role of pension funding for capital markets.
“You always have to take into consideration that pension capital might not only boost capital markets but jeopardise them too. Capital markets cannot guarantee the ability to absorb the rising amount of old age provision savings. With reference to capital markets you have to bear another point in mind: economic analysis clearly points out that European and world economics are passing a summit of return on investments in capital markets in the coming years.
“Taking into consideration the fact that demographic tension on labour markets will be reduced and wages may rise, the return on investment may drop significantly in 20 to 30 years’ time.”