As with abstract paintings, there are different views and ways to look at the likely impact and shortcomings of the European Union directive on pension fund, which was adopted last May by the European Parliament, and by the EU Council of Ministers.
The most skeptical approach could see it just as a ‘surrealistic’ picture. It could be nice to have it but not really useful. This view has its line of reasoning grounded in the fact that the directive does not solve many critical issues in relation to pan-European pension arrangements, namely taxation and pension plan rules which will remain country specific. Even on the front of the liberalisation of the financial services, member states will still have the freedom to maintain some levels of restriction on the investment management of pension fund assets. In addition to these limits, the more pessimistic consider that the unpredictable outcome of the transposition process of the EU directive into national laws, due to last until 2005 will not encourage any significant change in the European pension landscape over the near future.

The more enthusiastic about the EU law could see it as ‘cubist’ architecture. Certainly not simple, for the superimposition of the European and national layers in relation to financial and labour laws, but still workable because the building blocks for a European pension fund are now there. They consider the final text, adopted after laborious and late night negotiations involving opposite European political group leaders and the different institutions, a victory of the good sense which create the conditions for establishing pan-European pension funds. The directive is seen as an acceptable and balanced compromise that fulfills a gap in the European single market framework, which until now has had barriers to having a level playing field among financial service providers in relation to occupational pensions. The more optimistic already took an active role during the decision making process and, with a certain amount of patience, helped the European legislator to understand the negative impact of many national loopholes. In a spirit of pragmatism they have assessed the cost for business and the economy in general of the European inconsistencies in this area. Also they have achieved the direct and indirect benefit that a sound EU legal instrument on the activities and supervision of pension funds would bring explicitly.
I personally sympathise more with the cubist rather than with the surrealistic vision, although one should recognise important element of reality in the latter. But the skeptical view misses some substantial points of merit. We will examine these by also looking at what is likely to come next to profit from the opportunities that the EU pension fund directive is opening.
Firstly, on the method of assessing the EU directive: this, as any other EU law, cannot be judged with the same parameters that we judge national laws. It is like having a FIAT and expecting the speed of a Ferrari: impossible, because each is conceived to do different things, and with a different mission.
In fact, and contrary to some pre-conceived ideas, apart from a few policy areas such as agriculture and external trade, the EU has limited exclusive competence. In most of the policy areas the EU shares its competences with the member states. In some very crucial areas such as harmonisation of direct taxation, social security and pension plan conditions, the EU has a very narrow corridor for pan-European action and limited scope to overrule member states primacy. In the field of occupation pension we are in between these two last levels. European arrangements for occupational pension depend strongly on the smooth interplay between at least five different policy areas of rules: on one side, the single European market policy, where there is full (and effective) freedom to provide and access financial services cross-border and expect non-discriminatory treatment through-out the European economic area; on the other side the national statutory requirements governing social security, labour law, taxation and financial supervisory rules. That is why the directive does not address the issues under the national competence. When in the early 1990s the EU tried to have a comprehensive legal instrument on occupational pensions it failed miserably and had to withdraw its proposal. This time, the 2000 strategy put forward by Commissioner Bolkestein has paid off at least for one side of the problem: the delivery of a pan-European legal vehicle for pension funds. Until now, through the third life directive (which has also been revised and improved recently), it was possible to set up a pan-European company pension plan only through an insurance-based vehicle.
The climate of true cooperation, without arrogance or complacency, among the legislators and with the involvement of other stakeholders concerned, has won over at the end even the most recalcitrant among the political group leaders and national council experts. It has avoided the worst: namely the rejection of the draft law and the then definitely lost hope of having any European legal instrument on occupational pension in place.
Second, from a business perspective, to fully understand the scope of the EU directive on pension funds and overcome its true limit, one should not look at this in isolation. Due consideration should be given to other pension-related actions taken at the EU levels in the last two years, in, particular on the front of taxation.
In the first half of 2003 we have seen a strong and effective move by the European Commission (EC) and by the European Court of Justice (ECJ) against discriminatory tax practices used by some member states in relation to pension plan subscribed with a service provider established abroad in another EU country.
The last and more definitive action in time is the ruling of the European Court of Justice of 26 June on the Skandia case where the court says without ambiguity that these national tax practices are illegal and breach the EU treaty. In particular the court maintains that tax rules such as those in force in Sweden restrict freedom to provide services. Those rules can deter Swedish employers from taking out occupational pension insurance with institutions established in a member state other than Sweden and to deter those institutions from offering their services on the Swedish market.
The court also gave a very articulated motivation that dismissed all the arguments put forward by Sweden to justify the different tax treatment of occupational pension contributions paid to a pension provider not based in Sweden. For the court, the argument of ensuring the ‘fiscal cohesion’ of the national system can be valid only if there is a direct correlation between the deductibility of contributions and the liability to tax on sums payable by the insurer. The lack of such correlation in the Swedish system and of any compensatory measure which would offset the disadvantage suffered by the employer who chooses a foreign insurer do not permit to accept this justification.
The court, as in earlier cases, also dismissed the argument of the effectiveness of fiscal controls, because such control could be ensured by alternative measures, which do not restrict the freedom to provide services. The court also rejected the third justification used by Sweden, namely the need to preserve the tax base of the member state. The court argued that any tax advantage for providers of services resulting from the low taxation to which they are subject in the member state of establishment cannot be used by another member state to justify less favourable tax treatment. And finally, the need to prevent the reduction of tax revenue was not considered as a receivable argument by the court to justify a restriction on the freedom to provide services.
After this last judgement it will be difficult for Sweden, but also for other countries under infringement procedure scrutiny such as Denmark, Spain, Italy, France, Belgium and Portugal to maintain their current discriminatory practices. As usual, they will try to take time before modifying the relevant laws. The pace of change will depend very much on the continuing level of pressure that the EC and business will maintain on them. It is worthwhile remembering that in case of non-compliance with an ECJ judgement, the EC can now even request a substantial fine against the most reluctant countries.
Although we can expect that the most brutal discriminatory practices will be removed soon, certainly this does not solve the question of the harmonisation of the tax rates and of the different tax systems in the member states in relation to occupational pension. Without changes in the EU treaty and the way the EU can take decision on tax related issues, this is likely to last for a long time still.
Thirdly, there is a crucial aspect related to pension fund governance and employees’ involvement in the management and supervision of the fund, which has been given little or no attention at all. It is not clear how national authorities will consider the national rules on employee representation into the management of the fund. Will they consider these rules as labour law or as financial service law given the fact that they affect the governance of the fund? The answer to this question will influence also the choice of the location of the fund.
On this as with some other hermetic issues, it would be advisable that the EU legislator, in particular the EC that has the first responsibility to check the compliance of national law with the EU law, to start working at a ‘user’s guide’ for the pension fund directive and related instrument. This will certainly help member states to implement correctly the directive into national law and ensure greater transparency and predictability to the benefit of corporations, employees and financial service providers. The risk is that the guide could be more complex than an airplane tool kit manual but it would not make easier for a pan-European pension fund ‘to fly’.
Leonardo Sforza is head of research and EU Affairs at Hewitt Associates in Brussels