Cautious optimism over pension reform

Date: 24/06/1999

By Renée Cordes
IN MARCH, the European Commission unveiled a wide-ranging five-year reform programme for the EU's banking, insurance and securities sectors to help them take advantage of the fledgling single currency.

At the same time, Acting Internal Market Commissioner Mario Monti quietly snuck through a separate communication outlining plans to forge a single market for private pension schemes, much to the delight and surprise of many in the industry who had been growing impatient.

"The chances are better than even that this will go forward," said Robin Ellison, a pensions lawyer with Eversheds in London. "Monti has finally got the consensus of all the member states to do something."

In his communication, Monti made several suggestions for creating an EU framework for supplementary pensions, although it will be up to the new Commission team under Romano Prodi to follow up with specific proposals for new legislation.

First, Monti called for employer-run pension schemes to be allowed greater leeway in determining where to invest their assets and not to be restricted to putting the bulk of their funds into government bonds.

Secondly, he stressed the need to remove obstacles to labour mobility, which he argued was severely hampered by the current system under which employees lose their pension benefits when they relocate to another country.

Finally, he called for better coordination of member states' tax systems. This would involve, among other measures, abolishing discriminatory tax treatment by EU governments of those no longer residing in the member state.

But the road towards a fully harmonised tax system for pensions will be a long and difficult one. It will entail disentangling more than 100 bilateral tax accords between member states which are designed to prevent EU citizens and companies from being taxed twice if they, or their business activities, cross borders.

"It is good news that Monti flagged tax as a problem, but it is sticking out like a sore thumb," said Ellison.

His firm has put on hold plans to take legal action to try to force the EU to introduce a common Union-wide pensions tax, but he warns that a large employer with much to gain financially could launch a lawsuit later if the new Commission does not tackle the problem.

Some member states have long expressed concern that allowing people to keep their pension benefits when relocating to another EU country and either retain a home-state supplementary pension with its tax breaks or obtain the same perks in their temporary country of residence would threaten government revenues.

Monti has said that the Commission would seek to establish a "robust" system under which citizens would be in no doubt that internal revenue services would crack down on any attempts to avoid their tax obligations.

He has repeatedly voiced concern about the problems faced by migrant workers in keeping tax breaks on contributions paid to an insurance company or a pension scheme in their home country when they cross borders. He argues that this thwarts mobility in the labour market.

The European Court of Justice stepped in to fill that gap last April, ruling in the Safir case that a law obliging Swedish residents to pay 15% tax on premiums for savings schemes with a foreign-based company breached EU rules on the free movement of services.

Private pensions are taking on an increasingly important role as the proportion of elderly people in Europe grows and state coffers find it difficult to meet the full cost of retirement benefits. It is estimated that in 2025, about 40% of the population will be aged 65 or over, compared with only 23% now.

Some experts said that while it is just a matter of time before pension funds are able to invest anywhere in the EU, there are still obstacles to a true single market.

"Pensions represent an obvious major challenge," said Allison Cottrell, an economist at PaineWebber in London. "The next step - cross-border membership of the same pension fund - is seen as too ambitious for the five-year horizon."

This would, for example, require member states to recognise one another's rules on investment requirements and agreement on insurance in case a pension fund went out of business. Currently, individual member states bear sole responsibility for ensuring the soundness of financial institutions operating on their territory.

Article forms part of a survey 'Financial Services'.