With the Spanish presidency citing pension reform and the occupational directive as high on its agenda, it seems appropriate to take stock of the European industry. And where better to do it than at the Royal Institute for International Affairs’ annual European pensions conference. For two days, delegates in London heard views from across the board including those from trades unions, country representatives, tax men, multinationals, lobby groups, investment managers and politicians.
The largest problem for the pan European pensions directive remains the issue of tax and Peter Schonewille, the administrator at the European Commission’s direct taxation unit ran through the latest developments. When the communication was launched last April, member states were urged to eliminate tax inefficiencies before they had their hands forced by legal precedent from the European Court of Justice.
The communication remains what Schonewille calls a “soft law” approach in that it is neither regulation nor directive. Nevertheless, he says, he hopes it will enable scheme members to make cross border contributions. There is enormous support for the communication according to Schonewille, who says that ECOFIN sees it as “being logical and in the interest of member states”.
Another issue he covered was the legitimate concern many member states are showing, especially given increased labour mobility, about the ability to collect their entitled pension revenues. There is consequently a proposal to set up an automatic ‘exchange of information’ scheme between occupational schemes, one that builds on the 1977 mutual assistance directive. Given the number of Europeans that decamp to Spain to retire, he said this issue has a particular resonance with the current presidency and that therefore swift progress in this area is likely.
The tax communication also aims, among other things, to create an exempt, exempt, tax (EET) scheme across Europe for two reasons. First, it is the most practical solution in that eleven of the member states use it while four don’t. Secondly, with a greater proportion of the population over retirement age predicted, it make sense for member states to collect taxes when pensions come to maturity opposed to at the outset. But there remains a group in the European Parliament that wants to see something stronger that the aforementioned soft law approach. In Shonewille’s opinion, this is unnecessary and he claims the majority of the Parliament is convinced member states can amend their tax rules before they face lawsuits at the ECJ.
And on this subject, he gave a brief account of the Danner case of December and then moved on to an interesting development about to grace the ECJ. Skandia is submitting a case to the ECT challenging Sweden’s decision to forbid nationals taking out insurance products in other countries. Combined with the PEPGO case, there is a gathering body of momentum.
Another fresh perspective came from Peter Smith, the pensions adviser at Eurocadres, a social partner and a group associated with the European trades union congress. He said that the Danner and Skandia cases might prove useful in shifting the debate forward and that there are encouraging signs elsewhere. Representatives from the actuarial groupe Consultatif are carrying out useful work on such matters as European wide assumptions, standards for European asset transfers and a survey of occupational schemes. “We were pleased to note that one of our earlier suggestions was reflected in an indication that the transfer of rights, as opposed to the technical transfer of assets where a non-funded scheme was involved, might be referred to a new forum working group,” he said.
As the occupational pensions directive is ultimately designed for companies, and because multinationals are those most eagerly anticipating it, their thoughts and input are of interest to the policy makers. Martin Jack, the man responsible for IBM’s schemes in Europe, spoke at the Royal Institute two years ago when he referred to the nirvana of a single pension fund with a sole asset pool and administrative system.
A look at the IBM set up makes it easy to see why the directive appeals. Across Europe the computer company has 10 pension plans, five insured plans and two unfunded schemes. Although the plan in Portugal is 1/400th the size of the German one, it requires the same amount of time and attention.
“Viewed from an American perspective,” he says, “this looks incredibly inefficient.”
Some of the schemes have surpluses, others are close to deficit yet there is no means of pooling the funds. Moreover, there are sub optimal asset allocations exacerbated by local investment restrictions. A genuine pan European pension scheme would alleviate these problems but as for progress in the directive, Jack’s reaction was mixed. On the issue of prudential standards, he said the group welcomes it as best practice but that it their policy at the moment anyway.

As for the prudential person principle, he says that they are disappointed with the five year introduction period. “We would have preferred to have seen the prudent person principle effective immediately rather than after a transition period.” But IBM, many other multinationals and member states will be up in arms at Spain’s latest proposal. It is apparently trying to persuade the Council to include quantitative investment rules – the prudent man plus principle – in the proposed directive (see News, page 2). A confidential proposal from the Spanish delegation to the Council working group for the directive contains sweeping restrictions on investing in real estate and private equity and on the use of derivatives.
If accepted, it would mean a regression from the Parliament’s decision last year to back the prudent man principle and to end quantitative investment restrictions within five years. This back-flip penalises DB schemes and, if accepted, will no doubt be opposed by the likes of the Netherlands, UK and Ireland.
The Spanish delegation has apparently drawn up confidential proposals to be discussed at a 22 February meeting of the directive’s working group. This document is understood to recommend investment be restricted to companies in OECD countries and to listed companies. It is also believed to recommend banning pension funds maintaining an open position in derivatives.
Chris Verhaegen, permanent representative at the European Federation of Retirement Provision (EFRP), said the proposals do not account for different countries’ use of DC schemes and DB schemes. “There are two different situations in Europe, and our view is that this has not been taken into account sufficiently by the Spanish presidency when they launched their proposals.” Most agree that Spain’s promise to make the issue of pensions a priority during its presidency is a welcome change from the lethargy felt under the Belgians but others fear the latest proposals could set the directive back a year and a half.
This potential change to the investment restrictions were unknown at the of the conference. But on a more positive not, Jack said that the elimination of restrictions on approved asset managers and custodians is a welcome move. As ever, it is the tax question that remains the biggest stumbling block and consequently the proposals by the EFRP are most interesting, not least because, in his words, “the pressures are building on multinationals to sort out pan-European pension plans”. Two years on, he concedes there has been progress but is frustrated it has taken so long to get this far.
This is a view echoed by the trade unions. “The debate on European pensions remains frustratingly slow and subject to hiccups like the October 2001 ECOFIN meeting. We are therefore slightly anxiously awaiting the consultative paper to the social partners drawing on the earlier reports of the three Pensions Forum working groups: acquisition and preservation, transferability, and cross border membership of supplementary pension rights,” said Smith.
Where the unions disagree vehemently with the commission is the latter’s belief that involving social partners in managing schemes is a matter for member states. “For us, this is a priority issue which must be addressed at the level of the new European institutions now being proposed,” says Smith.
But he finished on an optimistic note. “Despite all appearances to the contrary, it remains an issue on which, perhaps unexpectedly, there is a high level of agreement between the central players including the social partners and the pensions industry. This cannot be caricatured as a European bureaucratic nightmare like the apocryphal straight bananas. So far, however, there has been an ongoing failure of political will.”