BRUSSELS -- The European Commission has unveiled its blueprint for pension reform, calling for liberalized investment rules, improved benefits rights across borders and coordinated tax treatment of pension contributions.
The 44-page document lays the groundwork for future commission work. While the paper has no legal impact, the EC "communication" builds a strong case for regulation to encourage formation of private employer-sponsored and individual pension funds.
The paper also points to the role pension funds could play in developing European capital markets and financing venture capital and infrastructure projects.
"It's an agenda for a directive," said Kees van Rees, chairman of the European Federation for Retirement Provision, and managing director of Shell Pensioenfonds Beheer BV, Rijswijk, the Netherlands.
The document's release last week surprised observers. The mid-March mass resignation of all 20 EC commissioners -- stemming from allegations of fraud and mismanagement against some commissioners -- had left the commission in a caretaker role. As a result, the paper, which had been slated for publication on March 24, was not expected to be issued until after new commissioners are appointed in June. Pension experts had feared the paper could be watered down.
But Mario Monti, the commissioner in charge of financial services, decided to push the issue. In a statement, he said, "The creation of a single market for supplemental pensions would mark an important stage in the full integration of financial services in the union, help to consolidate the European social model and be of major benefit to future pensioners."
Some observers believe Mr. Monti is angling for reappointment, although there is speculation a Frenchman might get the post to balance out nationalities among the commissioners.
The document points to the role pension funds could play in solving Europe's pension crisis. With the ratio of active workers to retirees expected to reach 2-to-1 in 2040 from 4-to-1 now, state pay-as-you-go systems will be under a growing financial strain. If no change is made, unfunded pension liabilities could reach 200% of gross domestic product in some European Union states, the paper said.
'Anglo-Saxon approach' prevails
New pension flows also would bolster EU capital markets, particularly its underdeveloped stock and corporate bonds, the paper said.
Mr. Monti rejected retention of investment requirements for specific asset classes, moving heavily toward a "prudent-person" standard. "So it looks like the Anglo-Saxon approach to investment is going to prevail," said Robin Ellison, head of the pensions practice at the London law firm of Eversheds.
Commission officials also are looking toward pension funds to finance European venture capital and infrastructure. The paper said pension funds "should also play an important role" in financing "smaller and more innovative companies" in areas such as telecommunications, biotechnology, health care, financial services and energy. In addition, pension funds could help finance European infrastructure projects, the paper said.
Noting pension funds could invest only a limited portion of assets in risk capital, the paper said even a 2% allocation would have a significant impact on the growth of small and midsize companies.
The pension communication advocates dramatic changes in Europe's fragmented pension system. Drawing on broad support from comments on the commission's 1997 green paper on pensions, the new paper would create a degree of uniformity within the European Union, encouraging the free movement of capital and workers and safeguarding pension rights.
Among the key issues discussed:
* Liberalized investment rules would abolish mandatory minimum and maximum requirements for specific asset classes and would allow pension funds to use any service provider located in the EU.
* Investment policies would be tied to a pension fund's liabilities; whether investments should be tied to the domestic currency has yet to be decided. "Absolute investment freedom for pension funds is not desirable," the document said.
* Investments would be evaluated by a recognized actuarial method and signed off by an independent actuary. An external auditor would check internal controls.
* Minimum funding levels -- perhaps involving a buffer of 5%of assets -- also would be required. Any buffer would be kept low to minimize the effect on tax revenues.
* Pension funds would need to be approved by competent regulators. A shift to asset-liability management techniques would challenge regulators used to applying strict investment maximums and minimums.
* Some type of insurance against insolvency of the employer and insufficient plan assets -- such as a third-party guarantee, a guarantee fund or state guarantee -- should be considered by member states, especially in cases involving fraud.
And, in an apparent victory for pension lobbyists, the commission rejected insurance industry attempts to apply a common set of rules same regulatory framework to pension funds and insurers.
Some concerns voiced
Reactions to the overall paper were positive, although some experts expressed concern over the possibility of matching assets to domestic currencies, funding rules and guarantees.
Rhoslyn Roberts, benefits director for the U.K.'s National Association of Pension Funds, London, questioned the need for currency-matching rules. "We wouldn't expect a prudent man to put 80%of assets in a foreign currency."
Ms. Roberts and others also warned of problems similar to those already caused by minimum funding standards in the United Kingdom, saying flexibility would be required.
"As we've seen in the U.K., guessing a reasonable measure of solvency is just fraught with difficulties," said Simon Gilliat, a partner with Watson Wyatt Worldwide, Reigate, England.
Split over merits
Experts split over the merits of mandating asset-liability modeling. "What's really positive is adoption of asset-liability modeling and the right of kind of assets for the nature of the liabilities," Mr. Gilliat said.
Mr. van Rees said the requirement is not strictly within the legal scope of the commission. "On the side of the European Federation, we would like to concentrate on the asset side," he said.
In addition, the commission raised the critical issue of labor mobility within the EU, saying the ability to relocate within the EU must not be restricted by pension rules. Key points to be resolved on this issue include:
* Overly long vesting periods --a swipe at Germany's 10-year vesting requirement -- can hinder movement of personnel and indirectly discriminates against women. The commission would like to open a debate on the issue.
* A standard actuarial method for calculating values of pensions of workers who move across borders should be adopted.
* Cross-border membership of pension funds should be allowed, requiring mutual recognition of supervisory systems and coordination of tax systems.
Also, a pensions forum, suggested previously by a separate EC panel, will be formed to discuss labor mobility issues among officials of member states, pension funds and employer and employee representatives.
The commission also addressed problems caused by differing national tax systems. The biggest occur on how to treat cross-border payments to pension funds or insurers, and that workers who move across borders are faced with multiple pension and tax systems that might not be compatible.
The paper largely left resolution of these complex issues to the EC's Taxation Policy Group, which Mr. Monti chairs. Last July the group adopted an approach of coordinating tax systems instead of integrating them.
Mr. Ellison said recognition of tax-deductibility of pension contributions and premiums is "the $100,000 question." Once that issue is resolved, it paves the way for pan-European pension funds, he said.
Mutual recognition of pension funds across borders will drive the tax issue further, he said.
The proposals would be broken into several sections. A directive regulating investment by pension funds is slated for the end of 1999 or early 2000. Coordination of tax policies will be discussed this year, with the possibility of a draft directive by the end of 1999 or early 2000.
Discussions on pension vesting, a feasibility study on cross-border membership, creation of a pensions forum, and technical work on transferring pension rights would occur this year or next year.