Two strongly divergent positions concerning the European Commission’s proposals for a financial transaction tax (FTT) have emerged in Brussels. Pension fund interests vehemently oppose the tax, while other parties, including some members of the European Parliament, take a diametrically opposite view.
The Commission presented its ideas last autumn for the tax “to make the financial sector pay its fair share”, following the crisis. The tax would be levied on all transactions of financial instruments, between financial institutions, when at least one party to the transaction is located in the EU.
The exchange of shares and bonds would be taxed at a rate of 0.1%, and derivative contracts at 0.01%. The Commission estimates that the FTT would raise annual revenue of approximately €57bn every year. It could become effective from 1 January 2014.
Opposing the so-called ‘Tobin’ tax is the European Federation for Retirement Provision (EFRP), which expresses “its deep concern” and says the tax would “severely impact pensions beneficiaries” if approved in its current form.
In a position paper, the federation continues that IORPs would be “deeply affected”. It makes the point that the tax would be a disincentive for pension funds, and IORPs, to carry out transactions. This could possibly lead to a less efficient investment, it writes. Liquidity would be reduced, and hedging would be more expensive.
It sees a clear risk of financial players avoiding the tax because it is “applied only at EU level”.
Patrick Burke, EFRP chairman, says that under the proposal, the increase of costs would be born by pension beneficiaries. Pensioners would be affected by a tax to recover costs from the financial crisis, for which they were not responsible.
In a press release, the EFRP states that, so far, only the Czech Republic, Denmark, Ireland, Malta, Sweden and the UK have expressed their opposition to the Commission’s proposal. It invites the European Parliament and the Council of the EU, representing national governments, to dismiss the proposal. It continues that, in any case, they should “take into due account the consequences of the FTT in terms of decrease of benefits for pensioners”.
The Dutch Central Bank calculates that the proposed measures could cost its pension funds around €1.7bn per year.
Sibylle Reichert, Brussels represenative of the Dutch Pension Federation, says a knock-on effect makes the effective rate of the FTT on securities up to 10 times higher than the specified rate of 0.1%. This is due to the chain of trading and clearing that lie behind most securities transactions.
A similar view was earlier expressed by the Dutch pension fund manager APG, which concluded in a memorandum that the tax would hit ordinary pension savers “very hard”.
However, other sectors have strikingly different viewpoints. One such position is from the European Parliament’s Socialist party. It writes that “long-term investors, like pension funds and insurance companies, will pay least, and short-term speculators, like hedge funds, of high frequency traders (HFT) will pay most”.
In a recent study, the party argues that, if one assumes that the average pension fund holds a stock for two years on average, it would buy and sell only half its portfolio in one year. This would bring the effective tax rate of 0.1 % down to an equivalent of only 0.05 %.
In contrast, the party continues, a high frequency trader (HFT) can turn over its entire portfolio in a day. Hence, it would pay transaction taxes of 50% per year. The left-wing party describes as “one of the most attractive features of the FTT the creation of disincentives for short-term speculation, as opposed to long-term investment”.
Pension fund interests may take heart from the opinion of centre right MEP Markus Ferber, who, at the recent meeting of the relevant European Parliament’s Economic and Monetary Affairs Committee (Econ), warned that there is a need to ensure that the cost of the tax was not simply transferred down the line to pension funds. Similarly, Sharon Bowles MEP, committee chair, tells IPE that there is no reason why the rules cannot be modified. FTT should target prop trading and HFT.
A draft report from the committee’s rapporteur (co-ordinator), Anni Podimata MEP, is expected in March. A vote in at a plenary session of the Parliament could follow, in May.