The politics of portability

Time seems to be running out for the European Commission’s controversial proposed directive on pensions portability.

The Commission’s Employment and Social Affairs directorate under Vladimir Spidla tabled the proposal in October last year and almost immediately set off a wave of protests.

It’s feared that the proposal lacks clarity on key points, is too complex and could lead to much higher costs. It’s the law of unintended consequences, all over again. What’s more is the argument that it’s not consistent with the existing occupational pension fund directive, Institutions for Occupational Retirement Provision (IORP). The Dutch in particular have fears for the impact on their pension system.

The 10-article portability proposal has now reached the European Parliament. The number of amendments tabled, 219 at the last count, attest to the backlash that has erupted.

A plenary vote on the proposal has been mooted for February next year, which, given the current state of play, would seem at best optimistic.

The Parliamentary ‘rapporteur’, Dutch MEP Ria Oomen-Ruijten of the Employment and Social Affairs Committee, told an exchange-of-views-meeting at the European Parliamentary Pensions Forum last month [October] that she has until the end of December to look for solutions. She will be talking with all stakeholders.

But with positions so entrenched now it will be an uphill struggle to agree any wording by February, especially with the Christmas break looming.

While there appears to be broad and genuine support for the principle of pensions portability, the devil is in the detail and people are worried about the long-term consequences of a measure that appears to be a directive “too far” given the current state of development of European pensions.

All the wrangling comes while the ‘first’ pension directive is still far from bedded in. Three member states - the UK, Italy and Slovenia are already being taken to the European Court of Justice for non-implementation - with further action initiated against several other member states, the Czech Republic, Hungary and Poland.

The prospect of a botched portability directive coming on the heels of the incompletely transposed IORP is something that all parties would want to avoid.

Despite the barrage of criticism, it’s not clear if the Commission would consider withdrawing the proposal and going back to the drawing board to take account of all the objections. To do so would be an admission of defeat it wouldn’t want to make, critics say. “It’s all about power,” says one Brussels insider.

Bolting on the portability directive - which critics argue does not dovetail with the IORP directive - is “building on shifting sand”, says Chris Verhaegen, secretary general of the European Federation for Retirement Provision.

She points to the fact that there is no commonly acknowledged European pension system as yet. “The diversity is there and we cannot ignore it,” she says. There have been noises from the Dutch that they would veto the directive. Given this, people say that rappporteur Oomen-Ruijten is under pressure, tacit or not, from her home government.

Still, all is not lost. Speaking at the European Parliamentary Pensions Forum meeting, where it was, incidentally, standing room only, Commission representative Raymond Maes appeared to take heed of some of the criticism. But some grumbled the executive always appears amenable - then does something else completely.

And it’s not as if there’s consensus at Parliament either. “No clarifying debate has yet emerged there,” says Verhaegen.

John Bowman, speaking for the CEA, the European insurance and reinsurance federation, argued at the meeting that the CEA “believes that the current wording of the directive proposal will pose new problems, thus worsening the existing situation”.

“An increase in costs will almost certainly derive from t his proposal as well as administrative difficulties for its executive. The proposal will lead to more expensive and more complex employer financed occupational retirement provisions: such circumstances could result in employers withdrawing from employer-financed schemes.” He cited as more expensive rules on preservation of dormant pension rights and adjustment of transferred rights. More complexity would be introduced via rules on the acquisition of pension rights. “We’ve got to work together here.”

There is disagreement on the scope of the directive. For example, does it cover just employed workers, or are the self-employed included? The EFRP argues that, with new career structures, it needs to be flexible. But Luxembourg MEP Astrid Lulling says it should just apply to “workers”.

One requirement is for information to be given to all eligible workers, not just members, which some say would also increase costs.

The message that came out of the EPPF meeting in October was that most stakeholders would like the directive to adhere to the principle of subsidiarity - that’s to say the key decisions should be taken at the member state level. At root that’s because there is no European pensions system as such, so the directive as it currently stands is not appropriate. There were calls for the directive to be phased in over a period of up to 20 years.

Watson Wyatt consultant Mark Dowsey made a technical presentation to the meeting where he explained the difficulty of estimating the costs involved in the proposals. He argued there was a “lack of certainty” as to what is a ‘supplementary pension scheme’ and inconsistency with the IORP directive. There was no understating of the detailed effects in member states, he said. The potential costs ranged from minimal to “very significant”.

The backdrop, he pointed out, was the shift of defined benefit to defined contribution (DC) and demographic change. He said it would be a shame if the directive accelerated the shift to DC.

He pointed to the difficulties in acquiring, preserving and transferring pension rights. He alluded to, for example, how longevity risks differ from scheme to scheme, sector to sector and region to region. There was also the issue that investment strategy differs from scheme to scheme.

“Compulsion, or imprecise wording, could hasten the move to arrangements where the worker takes longevity as well as investment risks,” he said. “Above all, the directive should be clear and limited in scope.” There was a possibility of far-reaching impact on investment markets, Dowsey added.

Othmar Karas, the Austrian MEP who was the rapporteur for the IORP directive, asked about the scope of the planned directive. Was it necessary to regulate social partners’ schemes? Did it cover funded and/or non-funded schemes? He made the point that supplementary schemes were unknown in some member states. Karas, vice chairman of the EPPF, also raised the issue of taxation. And did the acquisition of rights requirement contradict subsidiarity? “There are more questions than answers,” he said.

The Commission’s Maes stressed that the proposal did not come “out of the blue” - that it was part of the Lisbon agenda. The issue of taxation was not within the remit. He acknowledged there was some confusion about the definition of the word ‘portability’. Pointing out that the idea had been around a long time, he said: “The Commission felt it was time to get something on the table of a more legal nature.”

As Oomen-Ruijten said: “If there’s something on the table, the European Parliament has to treat it.”

It was “crucial” that the directive does not hurt the development of second-pillar pension schemes, said Steven D’Haeseleer of UNICE, the Confederation of European Business. Imposing indexation was “unacceptable” as it would interfere with the autonomy of national social partners and seriously disrupt the organisation of national pension schemes.

As so often, it is Astrid Lulling who says it like it is. She advocates getting back to basics, saying: “We should agree on the big principles.” But the problem is, that debate has not been had and the focus is now on the details without any agreement on broad issues.

The concept of pensions portability has been in the air for decades. Given that the fact that the IORP directive itself was a “compromise of a compromise” that may well prove not workable on the ground, Europe’s working population won’t thank policymakers if they get an ill-conceived portability measure opposed by virtually all stakeholders.