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EU Backs Rules to Free Up Cross-Border Pensions

By Jeremy Smith and Lisa Jucca, Reuters

March 12, 2003

The European Parliament on Wednesday backed plans to allow the multi-trillion euro pension fund industry to operate across borders, a move aimed at boosting stock market capitalisation in the 15-nation EU.

The law, part of the European Union's plan to build a single financial services market by 2005, should make it easier for fund managers to sell their products abroad and help large firms cut costs by offering employees a single pan-EU pension scheme.

The rules, put forward by the European Commission in 2000, come as governments face increasing pressure to defuse a pension time bomb caused by an ageing population.

"This is a great breakthrough for a single market in financial services," Chris Huhne, a British member of the EU assembly, said in a statement.

"It puts in place a key building block of integrated european markets, will help pensioners to a better retirement and will cut companies' administration costs."

The Parliament's vote paves the way for formal adoption by European Union member states, expected within three months.

Huhne said the value of occupational retirement schemes in the EU was expected to rise to above 7,000 billion euros in 2010 from 2,000 billion euros currently.

NEED FOR CHANGE

Analysts expect the EU rules to pressure certain EU states, Italy for example, to reform their pension system.

"This vote opened the way for an era of true reforms rather than simple rhetoric. If endorsed by the Council (of EU member states) it would open the way to a much deeper and integrated financial market in Europe," said Leonardo Sforza, head of research and EU affairs at HR outsourcing and consulting firm Hewitt.

"It will also be an opportunity for countries reticent to develop complementary pension funds to do so. They will be put unter greater pressure from the other member sates."

Complementary, capital-based pension schemes are becoming more important as rising life expectancy is seen forcing EU states to abandon traditional pay-as-you-go schemes.

Under pay-as-you-go systems, workers pay for those in retirement, while private pension schemes rely on the capital a worker accumulates throughout the worker's active life.

The European Financial Services Round Table (EFR) estimates EU citizens would need to save around 450 billion euros a year to keep their current level of retirement benefits.

Although welcoming the EU plan, some experts warned that national governments would still have much scope to impose additional requirements on pension products in their domestic legislation, risking fragmentation.

"In principle this is a step in the right direction. But it is a very small step in solving the pension crisis," EFR chairman Pehr Gyllenhammar told Reuters.

Sforza said for the new rules to work it was also essential that the Commission pushed member states to remove existing tax barriers to making pensions portable in the bloc.

The British pension funds industry, the EU's largest and most developed, had pushed for rapid adoption of the law.

The planned law had originally sparked concern in Britain as it threatened tax-free lump sums that British workers receive from pension funds when they retire. Last-minute amendments removed the concern, said Christine Farnish, chief executive of the National Association of Pension Funds (NAFP).