European Commission (EC) attempts to create a ‘broad church’ of providers to fit within the framework for supplementary pension provision – anticipating September’s directive – has tested both the remit of the EC in national affairs and the boundaries of what constitutes a pension product at the European level.
Politics has, as ever, played its part.
Observers of the EU process believe that Germany – with its vigorous domestic life insurance business – has said it could agree to the broad thrust of the directive outlined thus far, provided that it can apply the regulation to the group life business of life insurance companies.
In essence, this would mean that life insurers would have to set up a subsidiary doing solely group life occupational business and that the directive would apply to this subsidiary only. The option will also be given to other member states, under which some of the provisions of the present EU life insurance directive would not apply – such as investment restrictions and rules on liabilities.
Germany appears to believe that the proposed new directive rules are acceptable, despite the fact that they are less stringent than those laid down in the EU life directive.
And for the sake of total equality of treatment, it is expected that these rules may be incorporated in the proposed directive of the Commission on pensions.
The ‘biometric debate’ concerning issues of spouse/children benefits, solidarity and longevity questions has also raised political hackles, with a balance being sought between the commercial drive to participate in pension fund management and the need for proper retirement cover. However, it is believed that this has not been a primary issue in discussions between the European Commission and member states.
If anything, the Commission considers this to be a European parliamentary issue at best.
In reality though, the question of whether ‘institutions for retirement provision’, as the European Commission has labelled the European supplementary pensions vehicle, should cover biometric risk or not, is considered to be an issue for member states – bearing in mind the enormous discrepancies between, say, Luxembourg with its high first pillar cover and the Netherlands with its socially oriented second pillar.
The general consensus indicated by the Commission is that any EU directive should not hamper the development of pure defined contribution (DC) schemes where this is taking place and where companies are implementing such plans.
The ‘broad church’ approach then, really is an attempt to get a comprehensive range of practices into the supplementary pensions arena.
One dogma which it seems will not be tolerated at the directive level is the pure savings product – whether given a pensions slant or not.
The key phrase being banded around is ‘asset redemption’ – in so much that if assets can’t be redeemed at any time before retirement age then this qualifies as a pensions product. Anything else, such as France’s Plan d’Epargne Salariale with its 15-year savings horizon, would not fit the retirement remit.
Fundamentally, the European Union has to focus on its core concern – regulatory and tax treatment at the European level which permits both the freedom of capital movement and the freedom of services as enshrined in the Treaty of Rome.
As yet though, nothing is carved in stone.
It remains to be seen what will in fact cut the mustard and be included in the Commission’s directive on its release in mid-September – and holding of breath has never been the optimal way forward with European policy.
Speaking at the southern European leg of the Rebuilding Pensions European tour in Rome on June 22, Martin Merlin of the Commission nevertheless signalled the intention to bring as many pension providers as possible under the directive umbrella. This followed questioning over the possible inclusion of Italy’s ‘open’ pension funds – predominantly managed by insurers – under the directive.
“The essential issue is that our definition of a pension fund is one where savings cannot legally be touched until retirement age,” he said. “We don’t want to prejudice any provider – thus the reason for the generic concept of the ‘institute for retirement provision’, which can incorporate the different bodies used for pension provision in each country. We would like to have third pillar schemes brought under the directive, but it is not going to be easy. The European parliament agrees with us on the majority of points, but it is true that on the idea of biometric risk they have shown themselves to be in favour of this. Can we incorporate life insurance into the directive? This is an issue we are considering at the moment.”
Of course, at the national level the cross- border debates on life insurance products themselves have raged for years in the European courts. European case law has swayed between ‘Bachmann’ – concerning public interest exclusion and cohesion of national tax systems, and ‘Safir’ – concerning discriminatory burdens against fiscal neutrality.
The case of the European Commission versus the French Republic also found that discriminatory information requirements were not acceptable at the European level.
A Dutch case – ‘Staatssecretaris van Financien v BGM Verkooijen’ – declared that the protection of the national tax base does not override EU principles.
Add to this the pure insurance discussions at the EU level and national levels on product, distance selling and e-commerce and you have a hornet’s nest of topics.
And this is without the debates on taxation of service providers, the ‘permanent establishment’ issue and questions on withholding and indirect taxes. Harmonisation across the board on all of these fundamental principles for insurers is expected to be a slow process.
At the country level, clarification on where insurance companies fit within the pensions equation has proved equally tricky – particularly in recent months.
Ratification by the Luxembourg parliament, for example, on legislation to allow insurance companies to compete with banks and investment funds for management of pension fund assets has been delayed due to the need to tread carefully.
Luxembourg’s Association of Bankers promoted legislation in 1999 that created bespoke SEPCAV and ASSEP vehicles to get into the pensions business.
However, with the ASSEP product fitting into an insured benefit type construct, insurance companies saw the potential to compete with investment managers – a fact which has received opposition from bankers keen to protect their market.
In other countries, such as Belgium, tax is the root of ire between insurance groups and pension funds. Belgian pension funds are covered under legislation for ASBL (Association Sans But Lucratif) – charitable status, meaning they have to pay a withholding tax as well as an overall tax on assets. Insurance companies in Belgium, however, are legislated under company law where the same rules do not apply.
While pension funds can avoid such tax by investing in mutual funds, the argument has been that this may not be the most appropriate formula for the scheme in terms of asset/liability management .
Discussion is already taking place in Belgium to render the present situation more homogenous.
Nonetheless, the difficulties arising around Europe are indicative of the work the Commission has in asserting its own role in the legislative sphere.
Tellingly, though, in the short term, the defining factor concerning insurance companies’ ‘fit’ into the European pensions scene may be more a question of whether they belong to a multi-faceted ‘financial’ group than the difference between insurance company/bank or investment manager. IPE