Fennell Betson reports on 'The Future of European Pensions'

A call for the European Commission to act against EU member states that are violating pension schemes' freedom to invest in the capital markets has been made by Kees van Rees, head of the Shell Pension Fund in the Netherlands.

Van Rees, who is also chairman of the European Federation of Retirement Provision, put the question: When is the EC going to get its act together and take some of these countries to court as they are clearly violating treaty freedoms?" to John Mogg, director general of the EC's DGXV, which is responsible for the pensions green paper. This followed Mogg's address (see page 2) to the conference on 'The future of European pensions' held by the Royal Institute of International Affairs in London recently.

Van Rees pointed out that the Shell Pension Funds in the Netherlands and UK benefited from substantial returns in the 1990s because of their investment freedom. "We have not had these benefits in other EU countries which means those pension funds continue to charge very high premiums to their companies, with detrimental effects on labour costs."

Mogg pointed out that taking member states to court was an extremely slow process. "It takes years to reach the final point, so that any intention to proceed would be consigning a position to a situation of years." But thecommission was prepared to use court proceedings as a threat. "We have made it quite clear in the present round of discussions that we have not put on the back burner for ever the question of taking countries to court." The commission was considering a number of cases on the issue of the free movement of capital. He also stressed the need to put pressure on the governments concerned.

From a US perspective, Marshall Carter, chairman of State Street Bank in Boston, who has been promoting the debate on social security and pension funding in the US, pointed to the change in attitudes in the US, with President Clinton calling for a discussion on social security. "He has even hinted at investing some of the system's current surplus in our financial markets." Carter thought there was an emerging consensus "that in rescuing social security we should find a fair, a practical way to take advantage of the higher returns that can be achieved through market-based investments." One route was the 'individual investment account' with a portion of social security taxes diverted to market investment. On a global scale, Carter foresaw "well-regulated hybrid systems" that would tap into market-based investments. "There may well be a strong correlation between the growth of better funded pension systems and overall economic performance." This he stressed was not a "rigid causal relationship".

The conference also considered a range of investment issues. Looking at the European debt markets under a single currency, John Langton, chairman of the International Securities Market Association, said: "A broadly based Emu will bring about a unified market for government and corporate debt which may eventually rival the US market in depth and liquidity." Within five years "a fledgling but robust high-yield bond market may well be in bloom".

Helmut Reisen head of research at the OECD Development Centre in Paris, in his paper, feared that repeated currency crises risked "reigniting protectionism in the OECD to ward off imports from super-competitive emerging markets whose real exchange rates become grossly undervalued". He concluded: "Emerging markets will only then be able to improve OECD pension returns if they catch up with OECD levels of corporate profitability and if they reduce their vulnerability to the currency crises witnessed in the 1990s."

Looking at developments in central and eastern europe, Michal Rutkowski of the World Bank, considered the reforms being carried on in most countries. He queried whether some "reforms" were no more than a rationalisation of the old social welfare pension system, as against adoption of real changes. Looking at how countries adopted models, he described Hungary as following the Argentine example of a multipillar scheme, with a mandatory funded pillar. The Swedish model was being followed in Latvia, and perhaps in Russia, with notional accounts for the pay-as-you-go element and the introduction of funded accounts. He considered Poland's reform plan was a mix of Sweden plus Argentina, while Kazakhstan had gone for the Chilean model."

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