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​The case for a European Pensions Union

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Pascal Borsjé and Hans Van Meerten of Clifford Chance Amsterdam make the case for ‘Brussels meddling’

The strengthening of European financial supervision raises questions about the sovereignty of national governments and the desirability of transferring powers to ‘Brussels’. Some people are even calling for integration to be reversed (at least partially). The pension issue does, however, require a European approach.

The sustainability of pension systems in the EU cannot be viewed separately from the stability of the European financial system. At the same time, social unrest, due to uncertainty about retirement provision combined with the fact populations of the EU member states are aging, has implications for the European economy as a whole.

In addition, in the European employment market, pension schemes in cross-border situations are often beset with practical problems. If, for example, a person accrues a pension in one member state and receives pension payments in another, this pension can be subject to double taxation, i.e. pension contributions that are not initially subject to tax relief in the member state where the person works (and are thus taxed) are taxed again in another member state (where the person receives retirement benefits).

The pension problem is one facing Europe as a whole and requires an integrated European approach. This also presents opportunities for member states that have a complex and well-developed pension sector, such as, for example, the UK and the Netherlands, with extensive funding-based pension schemes. Major UK and Dutch asset management organisations and pension providers, as well as insurance companies, could very well offer their services and know-how abroad. With greater efficiency and economies of scale, the strengthening and further development of fund entities and the provision of pension services could also benefit the European pension market and those participating in it.  

Furthermore, an increasing number of employees within the EU market work in cross-border situations and stand to gain from a better integration of pension accrual in the European employment market. A lack of European integration is keeping the markets closed off, and, as a result, opportunities for growth and improvement in European pension and employment market are not being sufficiently harnessed.

Brussels to lead the way?

The European Pension Fund Directive, which has been in force since 2003, is designed to facilitate the provision of a European cross-border pension scheme. On the basis of this directive, some member states have over the previous years pro-actively implemented specific legislation to stimulate the establishment of dedicated cross-border pension service providers from their jurisdiction, such as the Premium Pension Institution (PPI) in the Netherlands, the Pension Savings Association (ASSEP) and Pension Savings Company with Variable Capital (SEPCAV) in Luxembourg, and the Organisation for the Financing of Pensions (OFP) in Belgium. There is a fear, however, that achievements in the traditional funded (defined benefit) pension systems may be eroded by further European integration of the pension sector, that Brussels may for instance introduce legislation ‘Europeanising’ the pension reserves held by the local pension entities of the member states.

Banks and insurers must adhere to basic European norms that promote the stability of the banking and insurance sectors and thereby the European economy. The European Insurance and Occupational Pensions Authority (EIOPA) aims to subject European pension entities to a similar regime by revising the current Pension Fund Directive. In our opinion, this would ultimately serve to protect members of pension schemes and, for example, to prevent pension funds from allowing a lack of clarity to exist about their ability to meet their obligations towards their members. However, there are those in the pension sector – as well as, for example, certain Dutch politicians who see such a European norm as unnecessary meddling – that “Europe should keep its hands off our pension reserves”. These representatives evidently prefer to keep decision-making powers in their own hands. In recent years, however, many members of Dutch pension schemes have had to adjust their expectations regarding Dutch retirement provisions considerably. With a European framework, Brussels could lead the way and thereby prevent such disappointments.

The Hogan Case

More generally, it must not be forgotten that the European Union is more than just an economic partnership. Consider, for example, the respect of the rights of the elderly to lead a life of dignity and independence anchored in the Charter of Fundamental Rights of the European Union. A retirement provision forms part of preserving this dignity and independence. And in the Hogan case, the European Court of Justice ruled, for instance, that, if an employer becomes insolvent, there must be a certain minimum guarantee for members of the company’s pension schemes.

Given the above, we put the case that consideration should be given, within Europe, to forming a European ‘Pensions Union’ that underpins pension law with a stronger European framework and clear (basic) norms.

This could prevent retirement provisions from being insufficiently facilitated or even carelessly managed in another member state, with the attendant negative socio-political consequences in that particular state. In such a case, any (socio-)economic problems would also entail risks for the state budget in question, which, in turn, could have consequences on the European financial system as a whole. A ‘pension crisis’ in, for example, Germany could also have a direct or an indirect impact on the economy of other member states.

As an accompaniment to a European framework, the goal of further integrating the European pension market could be achieved by putting into place common (basic) rules regarding the accrual and payment of retirement provisions that could at least be provided, in part, by local or cross-border pension entities, as an alternative to local pension rules in each member state.

In our opinion, a scheme that in any case establishes legally clear, individual rights for members could be a good starting point. For that matter, experts in the pension sector have long been pondering these solutions and EIOPA, too, is now investigating the possibility of taking the first step in this direction.

Right to self-determination

Would such a Pensions Union be a step towards losing the right to self-determination or even the local pension participants ceding sovereignty over their own pension system and reserves? We do not believe that either the current European pension legislation or the development of a European Pensions Union would impair any Member State’s sovereignty. They merely provide better protection for members of pension schemes which, in some cases, can never be provided by national policy makers, e.g. in the case of cross-border situations.

Since as far back as the 1960s, it has been established that European cooperation (among sovereign states) under European treaties requires a collective exercise of powers (as held by the European Court of Justice in the Van Gend & Loos judgment). But this European cooperation is voluntary and, like any international cooperation, can also be voluntarily terminated – the EU Treaty contains a specific ‘exit’ clause for this. In that sense, the member state still have full sovereignty.

Leaving the European Union would obviously have so many practical and economic implications that the decision to do so would not be taken easily. As it happens, the small group of European countries that do not belong to the European Union, e.g. Switzerland, Norway and Iceland, have, for the sake of their economic interests, fully integrated the most important European laws and regulations, including the provisions of the aforementioned Pension Fund Directive, into their own national legislation. However, these countries were unable to play a role in drafting the directive, and the specific exceptions that the Netherlands was able to stipulate for its own pension system were unavailable to them.

The common framework provided by a European Pensions Union and a European basic pension scheme would, in fact, protect members of pension schemes across Europe in the accrual and enjoyment of their pension entitlements. It would also support the complex and developed UK and Dutch pension sector, as well as international companies that have cross-border operations. Furthermore, it would provide a general boost to European economic stability and the accomplishment of social objectives. The pension issue, therefore, requires a European approach.

Pascal Borsjé and Hans Van Meerten are both lawyers at Clifford Chance Amsterda

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