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To fund or not to fund?

The agreement on a new statute in June last year was hailed as a major breakthrough on the way towards a more unified Europe. After 10 years of negotiations the document setting down the duties and rights of members of the European parliament (MEPs) found both the approval of the parliament and the Council of Ministers. From 2009, all MEPs are to get the same monthly salary of 38.5% of the basic salary of a judge at the European Court of Justice (ECJ), which currently amounts to roughly €7,000 but will presumably rise to almost €8,000 by 2009. Agreement on a new pension scheme was also reached, although it was one of the most controversial issues in the statute - and it still is not fully resolved.

In a 2003 draft of the statute it was agreed that the new pension scheme will be set up as a contributory pension fund: "To finance the pensions a fund shall be set up which shall constitute reserves for the pensions" (Article 19).

In an explanatory note to the relevant article it was stated that "the purpose of Article 19 … is to alleviate on a long-term basis the burden on the budget of the European Union." It is also mentioned that the "option of setting up a fund has proved its value in practice".

This draft was adopted by the parliament in June 2003 by 323 to 167 votes with 36 abstentions but rejected by the Council of Ministers which needs to approve of the statute in accordance with article 190 (5) of the European Community. Earlier, the council had objected to the retirement age which was set at 65 and finally lowered to 63, still three years above the council's recommendation.

In the final version of the statute adopted by the parliament on 23 June 2005 and then by the Council the funding and the contribution commitment are missing. Article 14 states: "(1) Former Members shall be entitled to an old-age pension from the age of 63. (2) This pension shall be, for each full year's exercise of a mandate, 3.5% of the salary …" (3) Entitlement to the old-age pension shall exist irrespective of any other pension".

"When the final compromise was found on the new statute, it was decided in the end to adopt the German system for the pension scheme, which indeed is non-contributory," a parliament spokeswoman said. Indeed, in a letter to the parliament president Josep Borell Fontelles on 6 June 2005, the council had stated that it could only agree to the statute if certain points were amended. Among those were the level of salaries, taxation issues, the introduction of a transitional period and the requirement that "pension contributions would be borne by the parliament".

In official statements following the adoption of the new statute, France, the Netherlands and Austria
expressed their disappointment that the Members are not contributing to their pensions. "The EU member states did not want what we wanted and that is for the MEPs to pay contributions to their pensions," Othmar Karas, Austrian MEP and vice-president of the European People's Party said. "All members were against a non-contributory scheme. We wanted to pay contributions and pay those into a fund. This was against the wishes of the Council, especially Germany, and that is why the approach was changed."

Yet while it clearly has been decided that the new scheme will be non-contributory, the question of whether the Parliament is still thinking about funding the scheme is more difficult to answer. While the funding commitment has been taken out of the statute it is now up to the parliament's administrative body, the bureau, made up of the vice-presidents of the parliament, to decide on whether or not to fund the scheme.

"The legislator has clearly abandoned the idea of setting up a pension fund for the joint pension scheme based on the statute," a spokesman for Julian Priestley, the secretary general of the parliament, said. "The Council has in fact specifically opposed the creation of a fund. The conclusion must be that the idea of a ‘fund' has not received the Council's approval." However, he said that the actual implementation will be dealt with by the bureau. "I am not in a position to comment what the bureau will decide on behalf of the pension system," he said, adding that "it will certainly also evaluate the costs and liabilities of any pensions provided for by the statute".

An EU source familiar with the work of the Council suggested that the option of setting up a fund is not excluded by the wording used in the council's letter to Fontelles which only mentions the requirement of the contributions being borne by parliament. "Were the parliament as a result of this wording to choose to establish a fund, objectively there is no reason why they should not. But at that time the council could consider that this is not compatible with the wording they used. Then the council would have the opportunity to go to the Court of Justice over the issue. Whatever the council's initial motive was to phrase the letter in the way it did, the council's motives may change over time."

Currently, a working group at the bureau is looking into the implementation of the statute. A spokesman for vice-president Ingo Friedrich said that the funding option might be a topic to be discussed by the new members of the bureau, which will be elected in January. "As the statute only comes into effect in 2009 there is still some time for a decision," he said.

Similarly, the parliament's press office stated that "parliament, ie, the bureau, will have to decide on whether to fund the new pension scheme under the new statute or whether to finance it from the EP budget".

Karas was surprised that this was even a question. "I always assumed that the new pension scheme will be funded just like the existing voluntary pension fund is." He explained that while the funding commitment has been taken out of the statute it is not fully off the agenda. "Funding the new pension scheme is not forbidden by the statute," he adds and stresses that this decision is now with the parliamentary administration.

The general secretary's spokesman said: "I would like to stress that many member states of the EU have a budget-based pension system for the representatives in the national parliaments. In these countries the salaries of the representatives are reduced accordingly by a virtual amount which is considered a pension contribution," .

"Although the use of pension funds is common in some member states, the system by which pension schemes are financed from the budget are common in other member states," was the parliament's answer.

Although this decision is no longer to be made by the MEPs, some members have preferences for a funded scheme. "With the EU actively promoting alternative pension funding across Europe a funded scheme would make sense. Also gains from the investment markets for a funded scheme would ultimately reduce the burden on the European taxpayer by several hundred million euros," Finnish MEP Piia-Noora Kauppi said.

Indeed, the burden on the EU taxpayer should the scheme be set up as unfunded would go into the millions. In a briefing note the parliament's secretary general Priestley was presented with actuarial estimates which say that "not funding the new scheme could ultimately cost the EU taxpayer €60m over 10 years, €260m over 20 years and €680m over 30 years".

The MEPs themselves have supported the idea of funded schemes in other instances as well - for example, in the case of the EU's currently unfunded staff pension scheme. In March 2005, parliament adopted a text stating that the commission administration should look into the unfunded staff scheme to "prevent the burden on the ordinary operating budget from becoming excessive, for instance by means of a pension fund". In a text adopted by Parliament in April 2005 it was stated that pension funds have a "key role … in integrating, and guaranteeing efficiency and liquidity on, the European markets" and have a "growing importance to the sustainability of social security systems in view of the fact that the EU's population is ageing".

In its work on the implementation of the statute the working group at the bureau will also look into the future of existing pension obligations by the parliament.

Currently, MEPs can opt to pay into the voluntary pension fund to accrue additional pension rights which around 485 out of 732 MEPs have chosen to do. Each member's own contribution is topped up with double the sum from the European Parliament. In recent years, the method of contribution has come under criticism. To simplify payments the contributions are withdrawn from MEPs' office allowances, as this is the only regular amount members receive from parliament. However, under current regulations the MEPs are required to pay back the money out of their personal expenses.

Despite criticism from the European Court of Auditors and the board of the voluntary pension fund the use of the office allowances is not being audited by the parliament. UK MEP Chris Davies suggested a few months ago that should allegations be true that some members are using their office allowance to pay their pension fund contributions, this would be "akin to embezzlement".

There is also a debate about the €190m European Parliament Pension Fund ASBL (EPPF) concerning the €22m actuarial deficit in this Luxembourg-registered fund. In his budget report German MEP Markus Ferber, rapporteur responsible for the parliament budget, had criticised the fact that in order to address the deficit issue, both the MEPs' contributions as well as parliament's had been raised - resulting in a higher burden for the European taxpayer. "The key question is: should the taxpayer be responsible for topping up the pension fund?" Davies said.

Once the new statute comes into effect, the voluntary pension fund will be closed and will only hold already accrued benefits. However, for an initial period of 10 years, re-elected MEPs will be able to opt out of the new statute, which means that their salary and pension will continue to be paid by their national government.

According to a source in parliament this could be an attractive option for those MEPs who currently receive more generous national payments than those agreed to in the statute. Opting out could also be of interest to governments which do not want their MEPs to be paid more than, for example, the country's ministers. In opting out of the statute, re-elected MEPs can also continue to accrue rights under the voluntary pension fund.

"MEPs who are currently in the voluntary pension scheme and who are re-elected in 2009 and who choose to opt out of the statute, may continue to be members of the voluntary pension fund. In other words, the voluntary pension scheme will continue to exist for a number of MEPs as a separate scheme," a parliament spokeswoman said.

 

Nevertheless, the number of active members in the voluntary pension fund scheme will decline considerably, which might lead to problems in dealing with the deficit. Indeed, since the very first negotiations on a single statute for MEPs began in the mid-1990s the administration of the voluntary pension fund has looked into a so-called "one fund two schemes" approach which would see a joint fund for any new compulsory pension provision for MEPs and the voluntary pension fund but with the two schemes running separately. It also obtained an opinion from a pension specialist at the Law Debenture Trust Corporation who concluded that the approach would be possible to realise.

In June 1999 the board of the pension fund stated: "It would be possible for the accrued liabilities due to members under the Additional Voluntary Pension Scheme, and the assets of the fund, to be incorporated into any new pension arrangements under a member's statute. This possibility offered considerable advantages to members and parliament alike. For members advantages would include the benefits of a single funded pension scheme with the same (or similar) rights as the present Additional Scheme. For the parliament there would be major administrative and cost savings."

These opinions have been presented to the general secretary of the parliament Julian Priestley on several occasions over the last few years. Whether or not the "two schemes, one fund" approach will be considered in any future planning for the voluntary pension fund depends on whether or not the parliament's bureau decides on a funded option for the new pension scheme to be set up under the member's statute from 2009.

 

In the meantime, parliament will be issuing a tender for a full actuarial study of the voluntary pension scheme following criticism by the European Court of Auditors. "There should be clear rules established in the scheme to define the liabilities and responsibilities of the parliament and of the members of the scheme in case of a deficit," the court noted in its 2005 annual report, echoing criticism stated in previous annual reports.

Parliament replied that "an open invitation to tender for an independent actuarial study will shortly be issued" and that "the working party responsible for finalising the measures implementing the statute for members has also started work".

The study is being commissioned despite criticism from the chairman of the voluntary pension fund. "My view is that a new full actuarial study at the cost to the parliament of perhaps around €20,000-€25,000 would not be that useful given that all this would do is effectively replicate the work already undertaken by Hewitt, the fund's current actuaries. In recent discussions with Hewitt they suggest that it would be more useful if a new independent actuary prepared for the parliament a ‘second opinion' of their work, ie, reviewing the actuarial methods and assumptions they use and commenting on their conclusions," suggested EPPF chairman Richard Balfe in a letter to Priestley in April.

Priestley stressed in his answer that the new study was also going to focus on the future of the scheme: "In addition to providing a snapshot of the pension fund's current financial situation, the study is intended to assess the outlook for the fund both up until 2009 and after the entry into force of the statute with regard to the potential continuing commitments under the present rules."

Over the past four years the Court of Auditors has repeatedly criticised the voluntary pension fund for MEPs as lacking "a sufficient legal basis". Parliament has refuted these allegations, stating that there is a sufficient legal base. Balfe even invited the court to refer the issue to the ECJ to end the dispute by a court ruling. "The fact that the Court of Auditors has repeatedly failed to refer this issue to the ECJ indicates to me that they accept the weakness of their case," Balfe said.

 

ther pension obligations the parliament will have to look into are the ones accrued in yet another pension scheme, an unfunded arrangement for French and Italian MEPs. "Ever since 1981, the parliament has provided a ‘retirement pension' for those MEPs who received no pension under national arrangements. They get a pension identical to what their national counterparts receive and pay a contribution equal to that payable by their national counterparts. In practice, this arrangement has only been needed for Italian and French MEPs," a parliament spokeswoman explained.

"After 2009, French and Italian members - or at least those who are newly elected or who opt for the new statute - will also come within the scope of the pension scheme provided for in the statute. This will mean that the number of pensions paid to re-elected French and Italian members who opt for the old arrangements will gradually decline, falling to zero on the death of the last beneficiary or any person surviving him or her with a claim to a survivor's pension," Priestley wrote in a letter to Balfe in May.

Balfe had noted that "in 2005 for the first time ever the actual costs of €8,242,551 to the parliament in pension payments under the unfunded French and Italian schemes overtook the costs to the parliament in pension contributions of €8,222,555 to the funded additional voluntary pension scheme."

He pointed out that according to his estimates the number of participants in the funded voluntary pension scheme might well be two to three times that of the membership in the scheme for French and Italian MEPs. Furthermore, he stated that in his opinion "parliaments' future liabilities under the French and Italian schemes could easily exceed €150m".

Balfe also asked parliament to "note that the ‘death of the last beneficiary' of the additional voluntary pension scheme will be at least 50 years from now - sometime around 2060. While the age profile of the members of
the French and Italian schemes may differ slightly from the additional pension scheme they will not be that dissimilar."

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