This month’s Off The Record looks at the European directive on the activities and supervision of institutions for occupational retirement provision (IORPs) – the pensions directive – and asks what has really been achieved?
The directive, recently approved by the Council of Ministers (Ecofin), is a key element of the Commission’s Financial Services Action Plan that is to be implemented by 2005.
Its adoption has been hailed as a major step towards the creation of an internal market for occupational pensions. However, others have been less impressed with the progress of the directive from concept to execution and have dismissed the current directive as “a compromise of a compromise”.
Clearly, a number of contentious issues remain to be resolved, notably the harmonisation of tax regimes. There are strong doubts that Europe-wide tax harmonisation can ever be achieved. But will this ultimately frustrate the achievement of effective cross-border pension provision? Or is the progress towards pan-European pensions, once begun, irreversible?
We asked for your views. Overall, the response was a ‘thumbs up’ for the directive, but with plenty of reservations. A substantial majority (75%) of the pension fund managers and administrators who responded to our survey agreed with the statement that “the adoption of the pan-European pensions directive is an important step towards the achievement of effective cross-border pension provision.”
However, there are serious doubts about how many further steps the directive is likely to take. There is a strong feeling that its effectiveness has been diluted by concessions to national interests. A majority (62%) concur with the proposition that “the directive is too much of a political compromise to be effective”.
There is also acceptance that the subsidiarity principle means that the directive will have no influence on the organisation of social protection and pension schemes in the member states. It is for member states, not the European Union, to choose between pay - as-you-go (PAYG) and funded schemes for example.
For this reason, a majority (71%) agree that the directive cannot be more than framework regulation. However, some feel that change is possible. The manager of a Dutch pension fund says bluntly: “Southern countries should replace PAYG by funding and at the same time stimulate the establishment of IORPs.”
Koen de Ryck, the head of Pragma Consulting in Brussels, has suggested that over the past eight or nine years the view “better no directive than a bad one” has been replaced by the view “better a directive than none”.
We decided to test this and found that opinion was evenly divided. One half of the managers we questioned (50%) agree with the statement that “it is better to not to have a pan-European pensions directive at all than to have a bad one”, while the other half feel that “it is better to have any pan-European pensions – good or bad – than none at all”.
However, the manager of one German pension fund is clearly nervous about the prospect of a really bad directive and qualifies his agreement with the proviso “so long as it is not too bad”.
We then asked what needed to happen if the pensions directive was to achieve its objectives. One of the biggest obstacles is the different tax regimes of member states. A large majority of pension fund managers in our survey (87%) agree that tax harmonisation is necessary if the directive is to succeed.
Pension fund managers are surprisingly optimistic that this can be achieved. Almost 70% believe that full tax harmonisation affecting cross border pensions is possible in the EU. They are also confident that The largest proportion (63%) suggest that tax harmonisation could happen within five years. Only 6% believe it will be possible within three years.
Most (75%) agree that a common approach to regulation of pensions is desirable in Europe. However, some add the rider that regulation should be pan-European only as far as basic principles were concerned. Member states would continue to deal with the detail. A smaller majority (62%) say that harmonisation of pensions supervision will be necessary if the pensions directive is to work.
However, tax harmonisation takes precedence over harmonised regulation, according to some managers. The manager of one Dutch pension fund points out that “both issues are important, but a minimum harmonisation of tax treatment of pensions in the form of mutual recognition carries a significantly higher degree of urgency than the harmonisation of supervision”.
A German fund manager suggests that the harmonising the portability of pension rights would increase the effectiveness of the pensions directive. Currently, the directive does not deal with the portability of pension rights, which is still matter for national legislation.
Another suggestion respondents to the survey put forward for strengthening the directive is “more investment freedom”. As it stands, the directive provides a set of principles to guide IORPs in their asset allocation strategy, in line with the “prudent person principle”. However, member states can still issue their own investment restrictions if they wish.
The manager of a Swedish pension fund argues that broader issues need to be resolved if the directive is to be effective – in particular, the different attitudes of member states to funded pensions: “Harmonisation of tax and supervision is, of course, important but there are a number of other problems relating to different practices in member states,” he says. “It is my belief that very little change will take place before a lot more has happened in the fields where politicians have influence. The difference in attitude towards the Anglo-Saxon method of funding and Swedish and German practices will not disappear if a pan-European plan is introduced.”
Another point of contention has been the scope of the directive. argued that the directive should be applied to all institutions which provide occupational retirement provision – including asset managers - rather than only pension funds, superannuation schemes and life insurance companies This suggestion wind the approval of the majority (69%) of the managers in the survey, although there are some qualifications. For example, one manager of a German pension fund insists that “a pensions directive should only regulate institutions offering the pension product.”
In the long run, the success of the pensions directive will depend on the willingness of people to make it work. But who in particular? We asked who you think will play the most important part in implementing the directive – member states’ governments, member states’ pensions regulators and supervisors, or pension providers.
Most managers (66%) think the primary responsibility for implementing the directive lies with EU member states’ government. About half (53%) think it lies with the member states’ pension fund regulators/ supervisors. But only a relatively small proportion (20%) feel that pension funds and their providers will have a role to play.
This is somewhat at odds with the expectations of the European Commission. The internal market commissioner, Frits Bolkestein, expects pension funds to play an important part in promoting the directive.
What if the pensions directive failed to achieve its objectives? Would it matter if the pensions directive proved to be ineffective? One pension fund manager in our survey suggests that pensions industry may be taking itself too seriously, and that people in the future may choose products other than pension plans to provide for their retirement. “A pension is deferred compensation,” he says. “If saving for a pension is not favoured by politicians due to taxes and other obstacles, ordinary people will find other forms of saving for old age. Let us not believe that what we are doing is so important that other ways cannot be found to finance longevity.”
So perhaps the question people should be asking, rather than how effective will the European pensions directive be, is how effective will pensions be?