Caution on pension reform

Date: 27/03/1997

By Chris Johnstone

FINANCIAL Services Commissioner Mario Monti is set to duck political controversy in the sensitive area of pensions reform by producing a low-action, high-analysis Green Paper next month.

Monti's caution has been attacked by some within the industry, but others say he is right to keep the issue on the agenda by avoiding outright confrontation with countries such as France and Germany.

The Commissioner will produce a raft of arguments as to why most member states should rethink their current state-run pensions systems and encourage changes which would make alternative supplementary schemes more attractive.

But his paper will avoid tackling some of the problems which have suffocated supplementary pensions in most EU countries, such as onerous national rules governing where the money in funds can be invested and creating an unfavourable tax regime for investors.

Monti's aim is to launch a consultation process with national governments which could result in firmer proposals by the end of the year.

“The Commission is proceeding extremely carefully. There are one or two areas where proposals would not upset too many people. It would be encouraging to see some more firm proposals on the table,” said Richard Malone, president of the British Pensions Management Institute.

The UK, Ireland and the Netherlands have led the way in liberalising their pensions industries and encouraging citizens to take out supplementary cover. But other member states, such as Belgium, have rules which appear almost designed to make private funds unattractive by taxing contributions before they can be invested.

Monti's cautious approach is similar to that adopted in his efforts to encourage member states to transfer the tax burden from labour to capital, scarce resources and pollutants.

But his aides dismiss suggestions that this caution stems from last week's defeat for the Commission in the European Court of Justice, which upheld a French protest over the Commission's power to issue a memorandum attacking national government restrictions on pensions investments.

Monti raised expectations that the Green Paper might go further last summer when he warned Belgium and Finland that they had overstepped the mark in forcing pension funds to invest domestically.

But pensions reform has long been a minefield for the Commission. In 1995, France and seven other countries savaged a proposed directive so badly that the institution withdrew it.

Then, the key issue was the insistence by France and other countries on high levels of currency matching (the principle that fund investments be denominated in the same currency as the eventual pay-outs).

France and its allies demanded an 80&percent; minimum of investments in the matching currency, but the Commission held out for 60&percent;. It argued an 80&percent; level of currency matching would be a backward step, enshrining in EU law one of the main obstacles to investment freedom which the Commission was trying to demolish.