EU Pension Plans Fail To Address Tax Issue

by Ulrika Lomas, Tax-News.com, Brussels

14 June 2002

Although last week's ECOFIN meeting in Luxembourg agreed a plan which will allow pension and retirement funds from one Member State to operate in another, to the probable advantage of Luxembourg, which has developed legislation to give EU-wide pension funds a tax-efficient base in the Duchy, the plans do nothing for what is arguably the most serious barrier to worker mobility in the Union, which is the absence of any trans-national agreement for the portability of pensions when a worker moves jobs from one country to another.

Much EU legislation is producer-driven, rather than consumer-driven, and the pension plan is no exception. According to the European Commission, "the aim here is to ensure a high level of protection of the rights of those who retire in the future, and give retirement provision institutions the freedom they need to develop an effective investment policy." The new rules will make it possible for companies which manage retirement plans to operate in several Community States, and to that end a mechanism is set up for cooperation and notification among the supervisory authorities of the country in which the company is based and those of the country of the company whose investments it is looking after.

The text will affect institutions which manage retirement pensions which are linked to employment and operate on the principle of contributions, such as pension funds and life assurance companies.

Internal Market Commissioner Frits Bolkestein said: "I am pleased that the text on which the Council has agreed preserves the Commission's twin objectives of security and affordability of occupational pensions, without interfering with the organisation and efficiency of Member States' pension systems."

Unfortunately, it is exactly that 'organisation and efficiency' which places heavy tax and investment penalties on any employee who is rash enough to leave pensionable employment in one member state and go to another one. Although senior employees can mitigate these problems by using offshore pension schemes (which may be tax-efficient on take-up of benefits but are nothing of the sort as regards contributions) the great majority of employees are bound into employer-defined arrangements which are strictly national in scope due to national tax rules framed specifically to punish people who leave the jurisdiction.

These are the main points agreed by the Council:

• Book reserves schemes where benefits are paid by the employer directly to the employee from company funds continue to be excluded, as are Pay-As-You-Go schemes.
• The global prudential framework proposed imposes ongoing prudential control and requires that funds hold sufficient assets to cover their commitments. The text agreed by the Council reflects a qualitative approach to the calculation of technical provisions and would introduce two alternative bases for the definition of the maximum interest rate. It would require the Commission to report every two years on developments.
• The proposal establishes a mechanism for co-operation and notification between supervisory authorities of the Member State where the pension fund is located and the host Member State where enterprise and members are located.
• A qualitative approach to investment rules is proposed. Allocation of assets must be prudent and decided in the light of the liabilities entered into by each fund and not in the light of a single set of quantitative rules ("prudent person rule"). The Council text confirms the prudent person rules as the main principle and introduces some general qualitative principles that explain what is meant by prudence in asset allocation. It allows Member States to have more detailed requirements at national level within certain limits.

The Commission at least understands that the new plan is at best a partial solution to the problem of worker mobility, and on Wednesday this week announced that it would launch a consultation process on the wider problem. The trouble is that any comprehensive solution must inevitably involve the giving up of some tax sovereignty by member states; and that seems about as likely as Baroness Thatcher's conversion to the euro.

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