​Jeremy Woolfe: Enthusiasm for PEPPs must face up to taxation challenge

IPE’s man in Brussels considers the European Commission’s plans for pan-European pensions

The inherent problems resulting from the complexities of national taxation cast a shadow against any enthusiasm for European Commission plans for a pan-European private pensions initiative, as expressed at a public hearing organised in Brussels.

At the session opening, Valdis Dombrovskis, the European commissioner in charge of the flagship Capital Markets Union project, said there was certainly a need for more pensions opportunities, as there were simply “not enough [types of pension schemes]on the market”. And consumers whose careers take them across internal EU borders are often “unable to take their investments with them,” the former prime minister of Latvia complained. Clearly, there should be more options that provide transparency and fair returns, he said.

Harsher words on the status quo came from Monique Goyens, director general of the consumer interest institution, the Bureau Européen des Unions de Consomateurs (BEUC). She argued that 50% of the products are currently not fit for purpose and that management costs can “eat up” as much as one-quarter of returns.

Although billed as a “hearing”, the event included the brain-picking of session panellists on technical aspects to be planned into future legislation. Commission official Georg Fischer, a session moderator, tabled question after question on, for example, how to ensure quality control. Here, Gabriel Bernardino sought strong supervision to ensure high standards – and it should focus on the needs of the citizen. Let the interests of the Capital Markets Union “come later”, argued the chairman of the European Insurance and Occupational Pensions Authority. 

On “participation”, Fischer, Commission director of social affairs, heard from Peter Blake at Sanofi. The international benefits director explained that, when a firm leaves the joining process as voluntary, perhaps 60% of potential savers will enter a scheme. But when a default system is applied, participation went “way up – perhaps to 90%”.

While tailoring the sales process to “induce” potential pension savers to sign in, the question was, should there be an element of personal advice? Most delegates were against, simply relying on sales via the internet. “Robo advice” is “not a good idea”, said Josina Kamerling of the CFA Institute.

On the “employers’ perspective”, according to Indi Seehra, while the employers would not be the sales agent, they could nonetheless provide an efficient communications channel, plus an effective sales distribution system, to their own employees. The director of human resources at the London School of Economics judged that, under present plans, employers would lack incentive to take part. Could there be measures, he asked, to encourage them to be brought into the picture?

The question of fixing a guaranteed level at the payback stage was tackled by Bernard Delbecque, senior director at the European Fund and Asset Management Association (EFAMA). He took the line, that, certainly, this was something to consider. He emphasised there would be a cost. Against the fact that there now exists €14trn in sovereign debt giving negative returns, the big question is – is it worth paying this cost? In countries where pillar-one payouts are very low, perhaps guarantees could be suitable. In general, the majority of providers would do best to restrict their offers to the “life cycle” approach, he reckoned. Delbecque also suggested that a regulation rather than a directive should be the way forward.

The most difficult of all facets of setting up a pan-EU private pensions systems is the taxation bugbear, according to Nathalie Berger, who compeered the day’s event. Consensus “has to arrive here”, said the Commission’s insurance and pensions head of unit in the FISMA DG.

Support for this – the knottiest of hurdles – came from a number of sources. For example, Carolyn Jones, head of pension products at Fidelity International, set the tone with: “It would be reasonable to think that waiting for harmonising of taxation would be like waiting for a miracle”. She added: “We would have to take in rules that cover different taxation systems in all the EU member states. How much integration of the market would that take?” There could be complications, including dealing with where the subject lives, or where the product is based. She concluded that, “if providers are to offer the PEPP cross border, then it needs to be a simple product in terms of tax”. She added: “TEE, as opposed to EET, lends itself to this without the need for the same tax system.”

More on the same subject came from Ignacio Izquierdo Sauger, chief executive at Aviva Spain. “When we talk about pensions,” he said, “we talk about the barrier of taxation.” And Mick McAteer, chair of the financial services user group (FSUG at EIOPA), talked of the need to “separate out national pension policy and national taxation systems”.

The Commission currently happens to be tackling unfair practice in the corporate sector with its common corporate tax base proposal. This is against a background that taxation, including that of individuals, remains a mandate of EU member state governments under treaty obligations.

But, so far, there is no “infection” from corporate issues into the zone of personal taxation. A Commission source commented: “Although we are in a preliminary stage, at present, we have no plans to apply the principles from the CCTB to a personal pensions plan.”

Taxation aside, the hearing indicates a widespread will for the Commission to advance with its private pension legislative step forward. The spirit was summed up by Kamerling on Shakespeare: “There is a tide in the affairs of men, which, taken at the flood, leads on to fortune.” She continued, urging that we must “take the current when it serves or lose our ventures”. She could have added that Marc Antony, in Julius Caesar, would have been spared from facing the horrors of EU taxation.