The reform of state pension systems and creating or reinforcing corporate and individual pension provision is a high priority for most European governments. The European Union will not dictate how governments make their state pension systems more sustainable, so benefit cuts and attempts to reduce reliance on pay-as-you-go systems are taking place on a country-by-country basis. The EU remains focused on laying the basis for cross-border corporate pension plans in order to fulfill its chief priority of allowing free movement of capital across member nations.
The long-awaited directive allowing cross-border corporate pension plans is due for final approval at the end of the year. But major stumbling blocks remain, particularly concerning the investment rules under which these cross-border plans would operate.
After being approved by the European Parliament last year, the directive remains with the EU council, the upper chamber, where there is believed to be considerable disagreement over the use of the prudent man principle to govern investments by cross-border pension plans.
The Spanish government, which holds the presidency of the EU until June, is believed to support investment rules that follow the prudent man principle but include additional sanctions limiting the use of private equity, derivative instruments and investments in countries that aren't members of the Organization for Economic Cooperation and Development. This move is likely to find favor among representatives from Italy and France, who are keen to see these funds operate with quantitative restrictions.
But representatives from the United Kingdom, Netherlands and Belgium are likely to oppose such a proposal, as their domestic pension plans work already follow the more liberal prudent man principle.
Reform efforts in Spain are focused on establishing a funded corporate pension system rather than restructuring the generous state pension system.
Corporations have until the end of the year to take their pension liabilities off the balance sheet and put them into funded vehicles. Later this year, new regulations will be published allowing corporate plans to pick multiple money managers. The corporate pension market is around e19 billion ($16.6 billion) at the end of 2001.
Collective bargaining between employer and trade unions later this year, however, would mark the start attempts to restructure the state pension system. Negotiations are likely to address the possibility of increasing labor and employer contributions to the corporate pension plans by channeling a portion of wage increases into the company-sponsored arrangements.
Luis Buey, director general of consultants BBVA Consultores, Madrid, also expects the negotiations to tackle cuts in social security benefits and introduce the idea of the state paying career-average pensions. The current state pension is calculated according to the average salary for the last 15 years prior to retirement.
In the next few months, the Belgian Parliament will debate a new pensions law that would allow for the creation of industrywide pension plans and streamline the tax treatment of corporate pension plans.
The new law is designed to extend the provision of corporate pension plans, which to date have been restricted to covering around 40% of the country's working population. The corporate pension market was around $29.7 billion at mid-2000, the latest available, according to William M. Mercer.
The new law also might include a provision requiring plan sponsors to provide a minimum guaranteed return on their contributions to defined contribution plans.
It also requires pension plan boards to be made up of equal representation between plan sponsors and plan members, a proposal that has proved unpopular with corporate sponsors of defined benefit plans.
The law is expected to come into force next January.
The Belgian government also is working on building up a reserve fund to meet the government's future pension obligations. The fund is expected to reach e50 billion ($44 billion) between 2010 and 2015 but may only invest in government bonds.
Anything can happen in an election year, but Prime Minister Lionel Jospin intends to maintain his current pensions reform program if elected for a second term after a two-round vote April 21 and May 5.
Early last year, the French government under Mr. Jospin allowed the creation of company savings plans called epargne salariale. Provision of these plans is voluntary, but they have a lock-in period of 10 years.
The countries largest compulsory pension plans - ARRCO for private-sector salaried workers and ARGIC for executives - are continuing the talks that could see them combine some administrative functions. Separately each system is attempting to combine its underlying pension schemes to cut costs.
The French corporate savings plans at year-end 2001 totaled e52 billion, while ARRCO and ARGIC had e13 billion and e2.9 billion, respectively at year-end 2000, according to Arnauld d'Yvoire, secretary general of Observatoire des Retraites, an organization representing supplementary pension plans.
The French government also set up a pension reserve fund to use proceeds from privatization to cover future pension liabilities. Assets in the fund are estimated at e7 billion and are expected to grow to e152 billion by 2020, after which time the government may begin drawing down assets.
Tenders to manage the assets of the fund are expected after the presidential elections, but as yet no guidelines have been published on how the assets will be invested.
This is the first year of new pension reforms that went into effect in January and gave German citizens tax breaks on contributions to private, industrywide and company-sponsored pension plans. The tax breaks start at 1% of salary for this year and will increase to 4% by 2008.
A number of trade unions including those in the chemicals and metal industries have teamed up with domestic money managers and insurers to offer industrywide pension plans to their members. But so far most individuals have opted for insurance arrangements.
Mercer estimates the size of the German market at $311 billion.