EU Commission Wants Rules On Pension Contributions Eased

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EU Commission Wants Rules On Pension Contributions Eased

By MATTHEW NEWMAN, DOW JONES NEWSWIRES,

February 5, 2003

BRUSSELS -- The E.U. Commission Wednesday warned six member states to change their pension fund taxes in an attempt to jump start the creation of cross-border European pension plans.

Denmark, Belgium, Spain, France, Italy and Portugal allow tax deductions for contributions to domestic pensions, but not for foreign funds. The Commission's legal action against these governments aims to stop the discrimination .

"Workers should not be forced for tax reasons to take out new pension insurance when they take up a job in another member state and employers should be able to set up pan-European pension funds," says E.U. Internal Markets Commissioner Frits Bolkestein.

The different rules discourage Europeans from moving around the 15-member E.U. Only 225,000 people or 0.1% of Europe's workers moved between countries in 2000.

The court action is the latest E.U. move to increase pension mobility. Next month, the European Parliament will vote on a law that would allow pension fund managers from one E.U. member nation to manage funds in another country, and even pool them. Companies would no longer need to set up separate pension systems in different countries.

But differences over taxing pension contributions could trip up the legislation.

"Unless member states stop discriminating against foreign pension funds, we won't have a fully functioning internal market," Bolkestein says.

On Wednesday, the Commission sent formal notices to the six governments in the first step in legal proceedings. If they fail to respond, the Commission could file a suit at the European Court of Justice.

Even so, pension experts say it won't be easy to convince governments, fearful of losing tax revenue and undermining their own pension systems. A court case takes up to three years for a decision.

"Governments say, 'why give a Belgian a tax break for putting money into a German pension?" says Ed Cutting of Fulcra International Financial Planning in Brussels.

Another problem is that each country treats private pension funds differently. Some tax contributions when they're put in. Others give substantial tax breaks. The tax on pensions being paid out also vary from country to country.

Insurance and investment companies are eager for change.

If all European employers pooled their pension plans, they could save up to EUR40 million a year, according to the European Federation for Retirement Provision, or EFRP. These savings can add up, since the money is invested over 30 or 40 years. A 0.5% drop in administrative charges means a 20% increase in final benefits.