European pension execs uneasy over transaction tax outlook

Pension funds in Europe remain in limbo over the potentially damaging effects that a European financial transaction tax could have on their investments and participants' savings.

Fund executives had hoped that on May 6, when members of the Economic and Financial Affairs Council — part of the Council of the European Union — met to discuss progress on the effort, the result would be an exemption for pension funds from the tax. What they got instead was more uncertainty, sources say, and evidence of a dislocation within a group of 11 member states that have agreed to design, develop and implement the tax.

“The plan all along was that this ECOFIN (meeting) would be the occasion on which a revised (financial transaction tax) plan would be agreed,” said James Walsh, London-based policy lead, EU and international, at the National Association of Pension Funds. The May 6 meeting “was actually pretty illuminating. No such agreement has been reached, so it's clear that the 11 participating countries are still some way apart. (Our) view remains unchanged — the FTT is not the way to improve market behavior ... the (financial transaction tax) remains a threat to savers and pension scheme members,” he said.

First proposed by the European Commission in September 2011, the European FTT aims to “discourage financial transactions which do not contribute to the efficiency of financial markets or of the real economy,” according to the original text.

The proposal has been taken on by 11 member states under an “enhanced cooperation” agreement, under which Belgium, Germany, Estonia, Greece, Spain, France, Italy, Austria, Portugal, Slovakia and Slovenia are now working to decide on the final details and implement the tax by Jan. 1, 2016.

As it stands, equities transactions will have a 0.1% charge, while derivatives will be subject to a 0.01% fee.

The effect on pension funds could be huge. With a tax on every part of an equity or derivatives trade that touches one of the cooperating European countries, the NAPF has in the past estimated the tax could cost European pension funds €4 billion ($5.6 billion) every year.

The hope had been that the group would decide to make pension funds exempt from the tax, as they have been in Italy and France, where FTTs were introduced in the past year.

But exemptions were not on the agenda.

“(The member states) are not discussing the issue yet,” said Julian Arevalo, Brussels-based legal adviser at PensionsEurope, which represents national associations of pension funds and similar institutions for workplace pensions, and about e3.5 trillion of assets.

The topic of an exemption for pension funds is a political issue, he said. The Netherlands government has made it clear that it would consider joining the FTT member states, should an exemption for pension funds be made. The potential for Dutch participation - and the frustration at the lack of decision-making by the group — was reinforced at the ECOFIN meeting last week, when Jeroen Dijsselbloem, the Dutch finance minister, addressed the participating member states: “The impression I get is you have found a very, very small common ground, that is still vague on the basis of the tax (and the products affected), but you have decided you must come out with something before the (European) elections. We need to know more — I would like to know more (with the view) for us to join.”

However, the possibility for an exemption is slight, said Mr. Arevalo. “The fact that the U.K. is not part of (the group), nor the Netherlands, means the interest to exempt pension funds is lower among the group, since these (are the) countries with the biggest pension fund sectors,” he said.

But while an exemption would be welcomed, it seems there is no escape for pension funds from the charges.

“There is a big question mark over how in practice the group could design a tax so that pension funds would not be affected at all - when pension funds buy a security it goes through a broker and other intermediaries, each step attracting the FTT, and pension funds would bear the cost of the FTT in any execution chain,” said Jorge Morley-Smith, London-based director of tax at the Investment Management Association, which represents money managers with a combined £4.5 trillion ($7.6 trillion) of assets under management.

An exemption, said Mr. Arevalo, would “reduce the burden for European pensioners,” although it would not completely relieve it.

Pension plan providers and money managers also have been vocal on the potentially damaging effects of the FTT, including Dutch manager APG Asset Management. APG has estimated Dutch pension funds would lose billions of euros to a transaction tax, but declined to comment for this article.

The U.S. also has recognized the damage a European FTT would cause to its own financial industry. In April last year, the Investment Company Institute conducted a quantitative analysis of the effect Europe's FTT would have on U.S. money market funds. Studying 2012 figures for U.S. money market fund holdings in covered repurchase agreements with seven-day maturities — which amounted to $139 billion, and was all with financial institutions in FTT member states Germany and France — ICI found the FTT would cost more than $7 billion in taxes. If all covered repo had overnight maturities the tax would cost the U.S. money market fund industry almost $35 billion in taxes every year.

In the meantime, the U.S. still has the threat of its own FTT, in the shape of the Wall Street Trading and Speculators Tax. That tax — proposed by Sen. Thomas Harkin in February 2013 and stalled in committee since last year — would apply a 0.03% charge on equities, fixed income and derivatives trades.

Despite lobbying in Europe, executives at associations say they are disappointed with the outcome of the May 6 meeting. “We are back to where we were,” said Mr. Morley-Smith. “Any kind of FTT is a tax on savers and investors, and we have no clearer picture on what the 11 states are likely to do.”

One of the agreements that was reached, however, is that the tax will be implemented on a step-by-step basis, phasing in over time and beginning with some aspect of the tax on equities and certain derivatives — although which fall under that is unclear — rather than on stocks and bonds as first proposed.

“We might take the view that governments will end up with a scaled-down FTT as a first step, which may be seen as a good result for the financial industry, said Mr. Morley-Smith. “But nevertheless, once the tax is there, there will always be the temptation to look at it and increase the scope, and make it a more harmful tax.”

While many in the financial industry agree that those responsible for the 2008 financial crisis should be punished, they do not agree with the way punishment is being dealt out.

“Our view has been that the FTT that people have talked about is not a tax on bankers as people present it as: It is a tax on jobs, a tax on investment, on people's pensions and on pensioners, and that is why the U.K. does not want to be part of it,” said George Osborne, the U.K. Chancellor of the Exchequer, at the meeting last week.

The next stage, sources say, is for a revised text with more detail — although even the timing over that is uncertain. “The group of member states think the text will be finalized by the end of this year,” said Mr. Morley-Smith. “That remains quite ambitious.”