Bid to speed opening of EU pension fund market

Date: 18/07/1996

By Chris Johnstone

EUROPE'S patchwork of pension funds is poised for a shake-up that could push the fragmented multi-billion-ecu industry into the single market.

Internal Market Commissioner Mario Monti broke cover on one of his most problematic and politically sensitive dossiers last month by threatening legal action against countries which have overstepped the mark in frustrating pension fund freedom.

Belgium and Finland have been targeted with infringement procedures in Monti's first salvo, with Austria, Denmark and Germany likely candidates for follow-up measures.

Europe's pension funds have applauded the move, but are wary about the scope and speed with which Monti's initiative will bring results.

For them, the immediate question is whether Belgium and Finland will admit defeat - and thus encourage other offending countries to amend their laws - or force a long battle in the European Court of Justice.

Both options offer pension funds the hope of obtaining their primary goal - a degree of clarity on what legitimate, or prudential, restrictions governments can impose on pension funds.

However, a court case could result in the battle for pension reform growing old alongside the rest of Europe's greying population.

Further delays would be a disastrous scenario for those in favour of moves to boost pension funds and give them a bigger role in relieving the crisis facing overburdened state pension schemes - without change, many national pension schemes may not be able to deliver more than meagre payments to today's worker contributors when they reach retirement age.

By their very nature, new pension funds take many years to build up the sort of capital needed to invest and provide returns from scratch.

Pension funds have traditionally preferred to invest in assets denominated in their local currency, if only to limit the risks from currency fluctuations.

For established funds, the approaching single European currency should be a signal for them to break out of their domestic markets and invest abroad. But that will be impossible if restrictions stay in place.

Past experience is not encouraging for believers in a quick Commission fix.

European governments have a record of fighting off the Commission on pensions issues. Most EU countries, with the exception of the UK, Ireland and the Netherlands, were in the execution squad which killed off a 1993 draft directive aimed at freeing up the market only one year after it was born.

Governments can still put up a strong case that pensions, like tax, are a hands-off area for the Commission.

For most member states, pension funds are far from simply being machines which cough up invested cash when the jackpot year comes up. They can also be useful government instruments and cash cows which must be hemmed in by rules, taxed and highly regulated.

How far this traditional government view is being changed by the realisation that pension funds could play a part in paying for the greying of Europe's population and boosting investment and economic growth through easier and cheaper investment capital, is unclear.

It is the blatant abuse of pension funds as government instruments which is being targeted by Monti's initial attack.

Amid a raft of other pension fund restrictions, Monti's services have singled out Belgian demands that at least 15&percent; of assets must be in government bonds. Finland is being pursued for setting limits on how much its pension funds can invest in foreign assets.

Monti's argument is that these demands conflict with Treaty of Rome rules on the freedom of capital and overstep the 'prudential' demands that countries can impose on pension funds.

Belgium no doubt finds it very prudential to have rules in place which encourage cheaper cash to service its massive public sector debt. Other countries also prefer a cosy arrangement which provides easy money to finance government debt, according to the European pensions fund lobby, the European Federation for Retirement Provision (EFRP).

Governments are not the only problem. Insurance companies in many European countries are a powerful lobby against pension funds being offered greater freedom while they are still bound by investment restrictions under the Union's third life insurance directive.

Whether pension funds should be subject to an EU regulatory framework which sweeps away national distortions, and whether this framework should be different to current life insurance rules, are two key questions to be answered by a Commission policy document due out in September.

The document is also expected to address the different national tax regimes facing European pension funds and individual fund contributors.

These differences have contributed to making the European ideal of free movement of workers largely that - an ideal.

A worker moving between the UK and Germany will currently find that British pension fund contributors get rebates on their contributions but are taxed on their final benefits, while the reverse holds true in Germany. Belgium taxes almost everything in sight from final fund benefits to a tax related to the size of the pension fund itself.

On taxation issues, the EFRP is sceptical of fast progress from Commission initiatives or elsewhere.

“As a first step, all we would like to see is a halt to fresh taxes on pension funds,” said federation chairman Alan Broxon.

There are signs that some countries, such as Spain, are keen to start taxing pension funds. Broxon warns that could set off a bandwagon effect, with other abstaining countries such as the UK joining in.

He believes bilateral agreements might be the only way to bring in pensions which can truly cross borders, but adds: “You would be talking about 15 times 15 bilateral agreements between EU countries. It is a hugely complex problem.”