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Green Paper on supplementary pensions

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1) OBJECTIVE

To ensure that whatever role Member States decide for funded supplementary pension schemes, they can grow efficiently in the context of the Single Market and the free movement of workers.

2) COMMUNITY MEASURE

Commission Green Paper of 10 June 1997: Supplementary pensions in the Single Market.

3) CONTENTS

The provision of pensions is a fundamental aspect of social protection in the European Union.

Over the last few decades, there have been two major demographic trends:

  • a decline in birth rates;
  • greater longevity.

These developments entail a greater degree of dependence: currently there are five people of working age to support one pensioner by means of their social insurance contributions. By 2040, it is estimated that five people will have to support two pensioners.

At the moment, State pensions account for about 10% of GDP. Without changes in policy, this will increase significantly by 2030, and it will be difficult for Member States to meet these demands in view of the already high level of public spending in the EU and their commitment to budgetary rigour.

State pensions (pillar 1) currently account for 88% of all pension payouts, which is well in excess of pension schemes linked to employment (pillar 2: 7%) and schemes taken out by individuals (pillar 3: 0.9%).

Several Member States have introduced reforms to reduce the impact of demographic change on public pension provision: increased social security contributions and/or reduced benefits. A different approach is for a funded State pension scheme to run parallel to the State pay-as-you-go scheme. One option that is being considered, and indeed the process has already begun, is that Member States might gradually introduce conditions which are more conducive to the development of private funded supplementary schemes.

The development of funded schemes will not in itself provide a solution to the current problems, but it may facilitate the reform of pay-as-you-go schemes by offering compensation for reductions in benefits under such schemes.

The funds invested to meet pension liabilities are enormous:

  • ECU 1 200 billion invested on behalf of supplementary schemes (with the United Kingdom and the Netherlands accounting for 89% of these);
  • ECU 1 600 billion of life insurance assets, a small but significant proportion of which represents pension provision.

These funds are likely to continue to grow.

Supplementary pension schemes currently rely to a considerable extent on fixed income securities, especially government bonds; the percentage of assets in equities is much lower. Some pension funds have scope to increase their current rate of return by diversifying their investment portfolios and taking advantage of a Single Market for investment.

The creation of funded supplementary pension schemes will swell the volume of assets to be invested. It is unlikely that the supply of government bonds will increase in the same proportions. The capital markets will have to adapt to take up this increase in funds. The single currency, competition between institutions and financial centres, and the increase in available funds should allow improvements in the way European capital markets work.

Apart from the general rules concerning the free movement of capital, there are no specific EU harmonisation rules relating to the investment by pension funds of their assets. The Treaty only permits investment restrictions to be imposed if these are justified on prudential grounds. It seems that the rules imposed by Member States as part of their prudential supervision go beyond what is objectively necessary and hamper the development of the Single Market.

Alternative methods of supervision can provide equivalent security while being compatible with the Single Market and allowing pension funds to increase their returns on investments.

Whilst arrangements relating to statutory pensions exist to facilitate free movement of workers, there is no Community legislation on mobility in the context of supplementary schemes. The High Level Group on freedom of movement for workers chaired by Mrs Simone Veil, which was consulted with regard to this question, concluded that Community legislation was needed which encompasses at least the following three elements:

  • preservation of acquired rights for members who cease active membership of a supplementary scheme as a consequence of moving from one Member State to another;
  • the measures necessary to ensure payment in other Member States of all benefits due under supplementary schemes;
  • elimination of all obstacles to cross-border affiliation in order to allow workers temporarily seconded by their employer in another Member State to remain affiliated to the supplementary scheme in the country in which they were previously working.

The Commission intends very soon to present a proposal for a Directive concerning these aspects.

Other obstacles still remain, however:

  • burdensome qualifying conditions for acquiring supplementary pension rights, in particular long vesting periods;
  • difficulties with transferability of vested pension rights from one Member State to another, including the absence of any agreement on the mechanisms for recognising vested rights acquired under other pension schemes (calculation of transfer values which penalise members, inadequate preservation of dormant rights);
  • tax difficulties linked to acquiring pension rights in more than one Member State;
  • the disadvantage of changing schemes arising in the specific case of persons going to work temporarily in a Member State other than that in which he/she has been building up pension rights.

The creation of a Community Pension Forum could make a useful contribution towards solving the technical problems relating to the transferability of pension rights.

The extreme diversity of tax rules relating to pension arrangements may constitute a barrier to the free movement of people and the free provision of services. Generally speaking, tax privileges are only granted to schemes meeting a number of very detailed rules and, as a consequence, a scheme that is approved in one Member State is unlikely to meet the tax requirements for schemes in another. Bilateral agreements have the considerable advantage that they can tailored to given requirements, although a system of such treaties is relatively cumbersome (105 agreements have apparently been entered into up to now in the EU) and raises the problem of inequality of treatment. It may prove useful to improve the coordination and scope at Community level of tax rules relating to the funding of pensions while observing the principle of subsidiarity.

The Commission invites comments from the Member States, the European Parliament, the Economic and Social Committee, the Committee of the Regions, the social partners, economic operators, representative organisations, consumers and all other interested parties, which should be submitted by 31 December 1997 at the latest.

4) DEADLINE FOR IMPLEMENTATION OF THE LEGISLATION IN THE MEMBER STATES

Not applicable.

5) DATE OF ENTRY INTO FORCE (if different from the above)

6) REFERENCES

Commission Green Paper COM(97) 283 final
Not published in the Official Journal

7) FOLLOW-UP WORK

8) COMMISSION IMPLEMENTING MEASURES

 
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