Supplementary pension funds are the only major financial institution that is exclusively regulated at a national and not European level, a senior EC official told the international conference of the EFPR and NAPF, held in Monte Carlo last month.
John Mogg, director general of DGXV in Brussels, made no bones about the consequences of this for the pensions industry with many states' legislation restricting investment opportunities. “You cannot invest your pension fund in the most efficient and sound way. That redounds to the disadvantage of the employer and the beneficiary, by increasing contribution costs and reducing benefits.”
Also the heterogeneous nature of these investment laws tend to hamper capital markets and slow down the integration essential for the euro's success. “The difficulties our citizens have in joining pension schemes in another member state inhibits labour mobility.”
Looking at the other side of the picture, a number of members states are looking increasingly at the development of supplementary schemes. “They have to rely on a sound, efficient and flexible system that is going safeguard their pension funds into the future.”
The commission was now working on a directive to be issued probably in the first half of next year, he said. “This will cover the investment and prudential applicable to pension funds to protect beneficiaries and to facilitate cross border investment and management. Undoubtedly, this could pave the way to cross border pension funds eventually.” Another strand was a progressive co-ordination of national tax arrangements for pension funds.
Mogg said that the qualitative approach to supervision was likely to be the most contentious area of discussion with member states. “We clearly see that pension funds have to have the flexibility to define an investment policy that is really suitable to the nature and duration of their liabilities.
“But we can't simply apply what we call the prudent person principle. To apply that to all member states saying ‘It makes sense doesn't it?’, because it does not make sense to member states that have for many years relied on quantitative rules to govern their own approach,” he said.
A number of states argue that currency matching requirements between commitments in euros and assets in overseas currencies was still necessary. “They might claim that quantitative investment limits are necessary for certain categories of assets, for example unlisted securities or equities. The countries that are saying this- their supervisory authorities have for the most part of their lifetime relied on that in respect of their own provisions. Some could argue that it has stopped them having supplementary pensions.”
One message he urged on his audience: “Do not underestimate the serious prudential concerns that exist in a number of member states.”
He went on to say that proper prudential frameworks and regulatory conditions would be required to achieve cross border membership of pension schemes. “There needs to be mutual confidence in each others’ supervisory regime, as without such a framework agreed through the legislative process of the EU, there is no possible progress.”
Turning to the tax side, he said in most instances it was impossible for employers or individuals to obtain tax relief on contributions paid to institutions in another member state. “This was probably the main reason stopping cross border transactions as far as pension funds were concerned.”
The double taxation agreements and other EU initiatives might be able to deal with this, but if no solutions were found, “let us be frank, it is likely that most of the obstacles inhibiting cross border initiatives will remain”. He ruled out trying solutions involving individual litigation with the slow procedures laid down in the treaty. Pointing to the work of the policy taxation group, he said that step by step progress may be made, under the no harmonisation principle. “Member states’ systems of pensions taxation should be co-ordinated to neutralise or eliminate the present inconsistencies between them”
Overall Mogg acknowledged that the commission was cautious because “the opportunities for carrying through the necessary legislation must necessarily be confronted in a political environment, with different systems.” Progress would not come by confronting those countries who have “from economic, political and a genuinely supervisory point of view have concerns”. He believed: “We will make progress - we have seen progress by a very gradual process.”
Commenting at the close of the conference on Mogg's address, EFRP chairman Kees van Rees said the overwhelming impression gained regarding progress with pensions reform in the EU is that “we hasten slowly”. “I sense there is less political will behind the follow-up to the pensions communication. It is also less likely to be ‘pure’, as compromises are made on issues like the prudent man and investment restrictions are likely to be incorporated.”
In the new commission he wondered if the issue of pension fund liberalisation might be “relatively low down on the list of priorities”. He pointed out that once the directive was adopted by the commission it would take a year to 18 months to wend its way through the European Parliament and Economic and Social Committee. All in all, it could be five years until it became effective at a national level. “Considering it all started in in 1989, we will have spent some 15 years on it- longer than the life expectancy of someone who retired in 1989.”
There are real political impediments to radical pensions reform in many member states, he said “Electoral considerations are a powerful restraint on steady progress with radical reform of pension systems which have been in place for over 50 years. History shows that real change in the world is brought about by vision and leadership. In the area of pensions, a higher degree of both would be welcome.”
He said that the EFRP and member associations needed to maintain their level of lobbying activities in Brussels and domestically. “Each member association should identify and cultivate the key officials in their own member states ahead of the negotiations in the Council of Ministers.”
He added: “Although progress will be slow, there is a prize to be won, not for us but for the beneficiaries of the pensions system.”
The choice between PAYG and funding was described by NAPF chairman Alan Pickering as a subplot in the major play “ Around Europe, there are brave politicians, who are saying to their electorate that that which is expected can no longer be delivered. “They are saying that if you need a bigger pension it is down to you, the state can no longer provide. As pension professionals we have a role to play in helping governments to get across their message,” He said: “We can no longer kid our selves that retirement will only be for five years. It is going to last ever longer and be much more fulfilling than in the past. It is silly to carry on the myth that one can create sufficient wealth between the age of 25 and 65 and keep us at the standard we are accustomed to.”
Government should be taking a lead and giving their electorates notice now that pensions would not be paid to those under the age of 70. “when governments put out that statement, I would like them back it up with the concept that no longer does it make sense for people to work flat out one week and full time retirement the week after. Modern economies call for much more flexibility than that.”
On the DC/DB issue, he said: “It is not up to governments or regulators to decide whether schemes should be DB or DC. It is up to you and your employees to decide”
In the actual session discussing DB and DC, Eawld Breunesse of the Shell Pension Fund in the Netherlands pointed out in his paper to a tendency for schemes move from the rigorous standard product offering of the past to one in which individuals were given more choice. With this ‘dashboard model’, individual employees could manage their package but within the financial boundaries of actuarial fairness, both between employees themselves and other stakeholders.
Attention would have to be paid, he said, to issues such as adverse selection and risky investment behaviour. The basis of solidarity needed to be redefined possibly on the basis of factors an individual could not influence, such as sex, age and health. “But a collective basis of solidarity remains to profit from the advantages of DB arrangements, such as collective coverage of inflation risks. “In the end: ‘Who can beat the pension fund?’”
His sparring partner for the DB/DC discussion was Santiago Fernandez Valbuena of the Fonditel pension fund in Spain. He saw the issue as not being of one cost efficiency, but as to where the risk ultimately lay.
Comparing DC with a company book reserve method of provision, he said that “DC proponents have a higher opinion of the whole economy balance sheet than of even the strongest companies as the foundation to build pensions on.”
Efficient though DB schemes might be, few employers are interested in them, as companies opt for contributions certainty over agreement with uncertain and undefined costs as with DB. With DC they obtained the defined cost, while their employees obtained “undefined benefit”. In closing, he asked: “Whose hands are better prepared to handle investment certainty?” Fennell Betson

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