The arrival of a 'miracle'
We have a saying in Germany: “miracles take a bit longer”. This saying applies perfectly to the directive. We had to wait a long time until it came into existence. It is an almost unbelievable miracle that the extremely diverse approaches to pension funding and supervisory regimes for occupational pension financing in the EU could be brought under one common umbrella.
In making judgements on the directive, the following points should be mentioned: Firstly, the directive is welcome, because as a European company:
o We need the efficiencies which the directive promises in order to remain internationally competitive;
o We want to look at our home market Europe as a single operating territory not only from a general business point of view, but also in terms of occupational pensions and;
o Because after all the debate on biometric risks it still allows for the use of defined contribution (DC) pension arrangements, even if there is the possibility for member states, in Article 9 Subsection 2, to require guarantees from plan sponsors.
Secondly, the directive is far from being perfect. There are several reasons for this:
o The first is that it does not address the tax dimension. However, having a consistent, attractive tax regime is vital for companies providing voluntary occupational pensions and for the employees to benefit effectively from these.
It must be noted that we appear to be moving in the right direction as to the tax deductibility of contributions with the recent ruling from the European Court of Justice in the Skandia case.
The situation still is somewhat fuzzy regarding taxation of investment income. It is clearer in respect of taxation of benefits in payment, where we have at least perceivable frontlines. The sunny, southern member states prefer taxation on the basis of the beneficiary’s residence while the pension is received, whereas the rainy, northern member states prefer taxation on the basis of the members’ residence while being employed.
o The second is that the directive’s core is to co-ordinate the supervisory authorities for pension funds in the member states. On the one hand it is therefore complex. On the other hand, it leaves some details open. As a consequence, it can only be a success, if the supervisory authorities of the member states get together quickly and with a lot of good will to agree their new, future way of interaction.
o The third reason is that the directive, states to require guarantees on contributions paid into pension schemes. Hence, it is up to the member states to either allow ‘pure’ DC schemes or not. We would have wished that ‘pure’ DC schemes would be available in all member states without any potential restriction.
o The fourth is that the directive, by the very nature of the topic it addresses, has interfaces with the labour and social law in the member states. This is likely to lead to some still open questions, possibly even points of conflict.
Take ‘employee representation’ as an example. In countries such as Ireland or the UK member representatives on the trustee board may be limited to only two and therefore easily outnumbered by the company’s representatives. Moreover, you may also have pensioners on the trustee board. In other countries, such as the Netherlands or Denmark an equal number of employee and company representatives is required. In Spain, there is even a majority of employee representation required on the control committee for qualified pension plans. So, the question is how to deal with this diversity in a pan-European pension fund. Will we have host country-specific employee representation, that is possibly 15 different employee representative bodies? Will only the employee representation rules of the home country apply or those which provide either the lowest or the highest degree of employee representation? These questions need to be addressed.
From an overall perspective, the directive is best viewed as a first step only. However, without a first step there is no second and no third step, not to say any progress at all.
Withold Galinat is employee benefits co-ordinator with BASF, based in Ludwigshafen