Push to break down barriers
The EU was created to enable free movement of people, goods and services. Yet people who decide to live and work in a different EU member state find it very difficult to take their pension plan with them.
Pensions are governed by the widely different legal and tax regimes implemented by national governments. Although the EC is certainly in favour of improved pension portability and has taken steps to that effect, progress is slow.
Pension issues and the impact of demographic trends such as the ageing European population are not yet at the top of the agenda in Brussels or in the EU member states. My past experience as global head pensions of ING Group enabled me to see how governments around the world are responding to pension challenges.
I see no corresponding level of awareness in Europe and I think many European countries are way behind in getting their act together.
If we lose on this one it will have an impact on the strength of the euro and the competitive position of the economies.
In this respect, the old member states can perhaps learn from the new entrants. Poland is the frontrunner in this respect. Like Chile, the country made the shift from a mono- to multi-pillar pension system in one big bang. In 1999, Poland created mandatory private retirement accounts for more than 10m workers. The reform has had a positive impact on the state budget and has substantially increased the confidence of the Polish citizens in their pension system. Several emerging economies all over the globe now regard the Polish reform as role model.
Other countries in central Europe are also planning or contemplating reforms. In Slovakia, the reforms will hopefully continue despite the recent political disruption and Romania is preparing legal changes that will create more opportunities for voluntary corporate pensions.
But ‘Old Europe’ is moving too. Around the same time that Poland changed its system, Sweden implemented a reform with both pay-as-you-go and pre-funded components. In the UK, a commission chaired by Lord Turner has presented plans for a new pensions settlement for the 21st century. These include changes to the state system to provide a more humane pension for people who have not been able to save much for their retirement themselves. The commission also proposed changes to the occupational pensions and more facilities for people who want to work beyond the retirement age or who want more flexibility.
The Netherlands, the country with the highest retirement savings per capita in the world, discontinued tax incentives for early retirement as of this year and introduced a new instrument, called a ‘life time savings account’, which enables workers to make tax-free savings for various types of unpaid leave. The arrangement is meant to respond to the need for greater flexibility in work patterns.
Old Europe can learn from new Europe about the introduction of notional defined contribution systems, and especially mandatory individual pension accounts. In its turn, new Europe can benefit from the expertise in some of the old EU member states with occupational pension funds. All countries need to take a close look at their pension systems to assess whether they will be affordable in the long term under the pressure of their aging population. They need to put their own house in order and in addition they should co-operate more to make sure that pensions are portable across the EU.
With the directive on institutions for occupational retirement provision (IORP), the EU demonstrated that it is serious about creating cross-border pensions. The IORP is a typical example of the new type of EU laws that focus on basic principles rather than contain too much detail. The IORP regulates the producer of pension products, while the products remain national. It enables pension provision via a single license throughout the EU based on home country control. It harmonises organisational, operational, information, funding and investment aspects of pension funds, but leaves the social and labour law requirements of the individual EU member states untouched.
All 25 member states committed themselves to adopt the IORP by September 2005 but by the end of the year only 11 had entirely or partially adopted those principles. This is yet another proof of the lack of a sense of urgency when it comes to pensions. Nevertheless, the introduction of the IORP is a positive development that should be encouraged.
The IORP may enable portable pensions for employees of multinationals with large pension funds. However, it covers neither all European employees nor self-employed professionals.
The European Financial Services Round Table (EFR), an organisation that brings together the CEOs of the 20 largest European insurers and banks, has come up with a different, wider concept. The EFR proposes a ‘26th regime’ structure, a new framework for pan-European pensions endorsed by all member states that complements existing national pension structures.
It says: “Let’s not leave it to 25 bottom-up approaches and let’s look not only to employees of large international companies but also to people of national companies and individuals and see whether a platform can be provided across Europe for people to make some sort of dedicated savings for their old age.”
The EFR rightly states that arranging pan-European pensions by harmonising the national legislation of 25 EU countries is virtually a mission impossible. So why not take a short cut by having an EU-wide ‘26th regime’ framework with only a limited number of basic principles that are acceptable to all member states?
The EFR also takes a pragmatic approach by not trying to design a one-size-fits-all pan-European pension product, but rather a range of products that fits the framework and is easy to understand for the European consumers.
The tax treatment of the EFR concept would be according to the EET-principle, where contributions and investment income are tax-exempt while benefits are taxed.
The payout phase would be life-long, in accordance with the requirements of the EU member states. In the EFR concept there should be simple, but effective guidelines with respect to investments, information and protection of consumer rights.
So far, the EFR has not yet received much applause from Brussels. Still, the EC has not entirely rejected the concept, but said that the EFR should explain the legal implications, the practical feasibility and the advantages of its idea in more detail.
In my opinion, the advantages are quite clear. Portability of pensions is necessary to facilitate increased mobility within the EU and there are obvious economies of scale to be achieved through pan-European pension solutions. Products should respond to what the market needs, and that also goes for pensions. Facilitated by the ongoing advance of internet applications and other technological inventions, consumers will not want to be restricted by national borders.
The EFR recently outlined its plans in its report ‘Pan-European Pension Plans - Deepening the Concept’. In the next few months, the EFR will focus on further outlining the legal and tax framework for its pan-European pension plans and will also conduct extensive market research.
The EC would do well to take a serious look at the plans and pay more attention to the advantages for European consumers that can be gained rather than immediately point at possible legal barriers. The EU was created to remove barriers. That is exactly what the EC should do to make sure that European citizens can take their pensions with them as they move from one EU country to another. The IORP directive and the EFR plans pave the way to making this possible.