This month may herald the release of the directive on supplementary pensions by the European Commission – now confirmed as an agenda item in the diary – but it is by no means the end of the European legislative process….
The process is one thing, however, the politics of the affair another.
And as Piia-Noora Kauppi, a Finnish MEP actively involved in much of the Parliament’s work on supplementary pensions, explains, there is much headway to make before a deal is brokered on the directive’s final form.
According to Kauppi, the supplementary pensions directive is already encountering interim resistance due to the French presidency of the EU.
“ The Commission has a draft directive they could give to the Council and the European Parliament (EP) today, but the French are not willing to put the issue on the agenda in the Council during their term.
“ This means that even if the Commission produces the draft directive in September and the EP quickly prepares their first reading report (possibly before the end of the year) the directive would not go anywhere in the Council before the Swedish presidency.”
She notes the background for the French decision: “ The pensions issue is sensitive in France and Lionel Jospin does not want to be seen as the ‘wrecker’ of the French pensions system. He is a candidate in the presidential elections and it could have serious effects on the campaign.”
However, Kauppi believes it is now time to choose between the timetable and the substance. “I think that the issue of pension market liberalisation is urgent, so it should be processed as swiftly as possible. With this in mind it would be best to begin the process during the French term if politically possible. On the other hand, if we are willing to wait until the Swedes take the presidency, this is a cold shower for the timetable, but the results may be better in substance.”
In terms of political party views within the parliament, Kauppi says the biggest divide is the risk question. “Should it be the employer (and finally, the state), which carries the risk of economics, and insurance, etc or should the risk lie with the employee?
“ This is the fundamental difference between defined benefit (DB) and defined contribution (DC) schemes.”
Kauppi says this impinges on the issue of biometric risk coverage also. “In the EP, the socialists believe biometric risk should always be covered otherwise they say the product should not be seen as a pension product, but a pure saving instrument.
“My political group (political centre right, EPP), together with the liberals, would leave it up to the individual employers and employees to decide the kind of risk coverage that best suits their interests.”
Kauppi believes the tide has turned in the DB/DC debate. “Traditionally DB schemes have been seen as a more secure way to guarantee proper pensions for retired workers.
“Of course, this supposes that people are unwilling to take any risk on their pension benefit. I, and more generally the centre-right in Europe, believe that the risk coverage and the relation between inputs and outputs could be left for individuals to decide. This is not higher mathematics but something which is very easy for ordinary citizens to understand and compare against different goals.
“The actual asset management in both systems is done by professionals, so the individuals only have to choose between basic scheme models. This is not harder than the choice between different Ucits-funds or mortgage deals.
“Both, DB and DC schemes can cover biometric risks though, if it is made necessary for them to do so. That is why, I believe, that both models can succeed in the market side by side. In my opinion, the healthy competition between different models is welcome in the market.”
On the tax question, Kauppi does not believe the EP has the remit to tackle what is essentially an individual country issue. “Since tax is largely in the hands of Member States, I see it as a waste of time for the EP to focus on tax, since we do not have the tools to take up this issue. She mentions, however, that the EP has shown support for the so-called ‘EET-model’.
And Kauppi believes the work of the EP is essential for such a crucial future issue as supplementary pensions.
“The EP must legislate to create a single market for the pensions capital and at the same time guarantee that employee rights are sufficiently taken into account.
However, one thing she feels both Commission and Parliament must do is make clear the options involved for ordinary citizens and voters.
“They (and we as the politicians) should reveal the entire issue for the greater audience: “Either pensions have to be substantially decreased in the future or we have to accept that a far greater part of GDP will have to be put to pension financing.
“A recent study revealed that the same level of pensions could be provided with a funded system at one third of the cost of an unfunded one.
“In this sense, it is also worth mentioning that the competitive benefit in DC schemes is their full funding compared to DB schemes.
“The answer is clear: for the younger generation one of the biggest political challenges is to make sure that the today’s working generation shifts more to DC schemes and puts more political importance on the issue of pension funding or makes the necessary cuts to pensions and other social security legislation now,” Kauppi says.