Mailing It In: European Union Efforts at Pension Reform

Occupational pension schemes are one pillar of the European pension system; the other pillars are public schemes and individual pension plans. Authoritative sources have noted that the dearth of specific European Union ("EU") rules regarding occupational pension schemes and the stringent requirements upon them, such as workers losing their pension rights should they move between countries, have certain negative consequences, such as impairing labor mobility. On October 11, 2000, the EU issued a Proposal for a Directive of the European Parliament and of the Council on the activities of institutions for occupational retirement provision ("Directive").1 The catalyst to this Directive was to assist the efforts of occupational fund schemes in relieving the impending financial pressures on the Member States' public systems. The Directive is to address various challenges to the overall pension system by strengthening one of its pillars, the occupational pension scheme. The most prevalent challenge to the European (as well as the US) pension system is the prospect of an aging population, represented demographically by the retirement of the "baby boomer" generation with a corresponding low fertility rate today. In fact, the European Commission has noted that "[p]opulation ageing [sic] will be on such a scale that, in the absence of appropriate reforms, it risks undermining the European social model as well as economic growth and stability in the European Union."2 Currently in the EU, four workers support every pensioner; however, that ratio is expected to drop to two workers by 2025, and even to a one-to-one ratio in some states at that time.3 These demographic facts lie in the background of the pension system and any effort to reform it. In addition to these demographic challenges, Member States have various national restrictions and statutory provisions detrimental to economic efficiency.4 In some Member States, pension funds are often restricted in their investment decisions by rigid and uniform quantitative thresholds-for example, a fund can only invest a certain amount of its assets in domestic stocks, foreign stocks, or government bonds. Also, pan-European companies cannot centralize their pension investments and activities in a single fund, but rather are restricted to executing pension funds in accordance with the pension laws of the individual Member States. Workers moving from one Member State to another often lose a part or all of their acquired pension rights when moving, and their cross-border pension contributions do not attract the same tax advantages as purely domestic contributions.5 These national restrictions deter labor mobility, an efficiency requirement absolutely crucial to the success of the single market and common currency.6 It is the sole responsibility of the EU Member States to maintain the legal framework of their respective pension regimes, and thus they have the exclusive power to address these demographic challenges and statutory inefficiencies. France and Spain have emphasized adjustments to the parameters of their existing, mandatory "pay-as-you-go" schemes,7 such as adjustments to the contribution rate, retirement age or benefit payment level. Sweden has favored accumulation of reserves within the existing public scheme, while Italy has opted for an increased reliance on private schemes. The long-term sustainability of pension schemes is most sound in the two countries with the most open and private systems, the United Kingdom and the Netherlands.8 The differing actions taken to meet the challenges to the pension system clearly exemplify the various governing philosophies of the Member States with respect to reforms in this area. The Commission noted its ability to coordinate national regulatory schemes at the supranational level, and its recent Directive addresses directly some of the outlined concerns. Though the Directive maintains qualitative restrictions, it proposes that pension funds be allowed to invest up to 70 percent of their assets in shares, far more than is allowed in most EU states. …