COMMISSION OF THE EUROPEAN COMMUNITIES 
Brussels, 11.05.1999 
COM(1999) 134 final 
COMMUNICATION FROM THE COMMISSION 
TOWARDS A SINGLE MARKET FOR 
SUPPLEMENTARY PENSIONS 
Results of the consultations on the Green Paper on supplementary 
pensions in the single market 
Contents 
SUMMARY 
Prudential rules for pension funds 
The removal of obstacles to labour mobility in the Union 
Coordination of Member States' tax systems 
1. INTRODUCTION 
1.1 Need for a single market in supplementary pensions 
1.2 Consultations on the Green Paper on supplementary pensions in the single 
market 
2. PRUDENTIAL RULES FOR PENSION FUNDS COMPATIBLE WITH THE SINGLE 
MARKET AND THE EURO 
2.1 Pension funds in the euro zone 
2.1.1 Increased security of investment portfolios 
2.1.2 Increased efficiency of investment portfolios 
2.1.3 A qualitative approach to prudential supervision 
2.2 Prudential rules for pension funds 
2.2.1 Appropriateness of a directive 
2.2.2 Scope and content 
2.2.3 Insurance against system failures 
2.2.4 Means of ensuring equal treatment of operators 
2.2.5 A new context 
3. FACILITATING THE FREE MOVEMENT OF WORKERS 
3.1 General remarks 
3.2 Results of the Green Paper consultations 
3.3 Possible actions 
4. TOWARDS A BETTER COORDINATION OF NATIONAL TAX SYSTEMS 
4.1 Results of the Green Paper consultations 
4.2 Possible actions 
SUMMARY 
The objective of maintaining a high standard of welfare protection is shared by all 
Member States of the European Union. 
Controlling the cost of this protection presents a constant challenge: the protection must 
continue to underpin social cohesion while making a positive contribution to economic 
growth. 
Pension benefits are a key component of Member States' welfare protection systems. 
Expenditure by state pension schemes accounts for nearly half of all welfare spending 
and is equivalent to between 9% and 15% of gross domestic product (GDP) in the 
Member States.1 This proportion is likely to rise steeply as a result of the ageing of the 
EU population: in 1995, 23% of the population was 65 years of age or over; this figure 
will rise to 40% in 2025.2 
Coping with these developments is mainly a matter for the Member States, which bear 
responsibility for the organisation of their retirement systems. Generally speaking, these 
systems are based on three pillars: 
- the first pillar consists of social security schemes ; 
- the second occupational schemes ; 
-the third personal pension plans. 
Schemes coming under pillars 2 and 3 are supplementary schemes in that they are there 
to supplement public schemes. 
It is with such supplementary schemes that this communication is concerned. And of 
particular concern here are pillar 2 occupational schemes, for which there is as yet no 
proper Community legal framework. Due regard being had to the application in this area 
of the subsidiarity principle, the Commission's role is one of proposing reforms that 
might enable such schemes to benefit from the freedoms of the single market and the new 
vistas opened up by the euro, thereby increasing their security and efficiency and 
participating in the development of EU capital market. 
This was one of the points made by the Commission communication of 28 October 1998, 
"Financial services : Building a framework for action".3 The framework, drawn up in 
close cooperation with industry and Member States, contains proposals to complete the 
integration of financial markets in the Union. More open retail financial markets will 
provide more choice and flexibility for future pensioners. A more efficient capital market 
will help pension funds by increasing the return on their investments, thus helping to 
limit the indirect cost of labour and create jobs. The effect of this might be to strengthen 
the economic foundation to our social welfare. 
To this end, it is desirable that supplementary schemes should themselves be adapted in 
order to take account of the single market and the euro. Investment rules should not 
unnecessarily restrict the investment strategy of pension funds. For the management of 
their assets, pension funds should be able to call upon the services of approved asset 
1 European Economy, The Welfare State in Europe, Challenges and Reforms (No 4,1997). 
2 European Economy, Ageing and Pension Expenditure Prospects in the Western World (No 3,1996). 
3 Financial services: Building a framework for action (COM(1998) 625). 
managers, wherever these are located in the Union. Service providers of supplementary 
pension products should be able to operate in all Member States. 
At the same time, beneficiary protection must remain the cornerstone of the regulation 
and control of retirement benefit institutions. All conceivable steps must be taken to 
guarantee the payment of contractual benefits to future pensioners. However, these steps 
must not go beyond what is objectively necessary to ensure that scheme members are 
properly protected. 
This view was shared by the vast majority of the Member States and representative 
bodies that took part in the consultations on the Green Paper on supplementary pensions 
in the single market,4 launched by the Commission in June 1997. Although opinions still 
differ on some points, e.g. investment rules, a broad consensus has been reached on the 
need to begin introducing a Community framework which might revolve around three 
main principles: the laying-down of prudential rules for pension funds; the removal of 
obstacles to the free movement of workers; and coordination of Member States' tax 
systems. 
Prudential rules for pension funds 
At present, although the value of assets held by pillar 2 pension funds5 established in the 
Member States is equivalent to approximately 23% of the Union's annual GDP,6 there are 
still no specific Community rules guaranteeing application of the principles of free 
movement of capital and freedom to provide services. 
This is all the more regrettable since the euro has created for investors a broader capital 
market that is more liquid and devoid of exchange risk. In some Member States, 
regulation is sufficiently flexible to allow pension funds to develop and adapt investment 
policy to the new environment whilst maintaining pension security. Consequently, these 
funds could better diversify their investment portfolio and achieve, to the benefit of both 
employers and members, a better balance between risk and investment yield. If we are to 
facilitate the financing of retirement pensions, it is clearly highly desirable to extend this 
opportunity to all pension funds established in the European Union. 
Experience has shown that over-restrictive investment rules have considerably harmed 
the yields of pension funds without any gains in security. This has resulted either in 
reduced benefits or in higher contributions to the detriment of labour costs. Moreover, by 
especially targeting equity investment, these restrictions limited the capacity to finance 
the private-sector part of the economy; they also blocked the opening and integration of 
capital markets in the Union. A more efficient capital market, with liquid and well 
developed equity and private sector debt instruments, could contribute to strengthening 
economic growth and job creation in the Union, and thus indirectly to facilitating the 
financing of social welfare in the decades to come. 
The adoption of a directive seems desirable in order to achieve this aim. The directive 
should, in the opinion of the vast majority of the parties canvassed during the 
consultations on the Green Paper and the drawing-up of the financial services action 
framework, seek to attain the following four objectives: 
COM(97) 283. The responses to the Green Paper have been summarised in a working document 
(CAB/62/98) available on DG XV's Internet site (http://europa.eu.int/comm/dgl5). 
Pension fund refers in this context to supplementary pensions linked to employment. 
Source: European Federation for Retirement Provision (EFRP). The figure is 20% if one subtracts the 
assets of book reserve and group life assurance arrangements. 
3 
(i) to ensure the best possible protection of beneficiaries. This means that investment 
and management freedom has to be placed in an overall prudential framework. 
(ii) to allow pension funds to profit fully from the single market and the euro. Pension 
funds should only be limited in their investment strategy for prudential reasons. 
They should also be able to use the services of any asset manager and agent duly 
approved in the Union. 
(iii) to guarantee equal treatment between occupational pension providers. Pension 
funds have their own characteristics; they justify the development of a specific 
legal framework. But at the same time, the introduction of competition distortions 
with other service providers, such as life assurance companies,7 must be avoided. 
This involves the establishment of a genuine prudential framework, as undertaken 
for life assurance companies. It could also involve the definition of similar rules 
for well defined products. 
(iv) to allow the mutual recognition of prudential regimes. At present, a pension fund 
cannot have members in more than one Member State of the Union. Given the 
characteristics of supplementary pension schemes and their link to public 
schemes, only limited forms of membership should be envisaged (for example, 
inside a single company). Moreover, cross-border membership can only be a 
long-term aim because numerous conditions need to be met: in particular, better 
coordination between the tax systems in the Member States is required. Mutual 
recognition of prudential regimes will also be needed. If a proposal for a directive 
could allow for such mutual recognition, it would be a first step towards cross-
border membership. The latter would have several advantages: for migrant 
workers, who would no longer run the risk of losing their supplementary pension 
rights, but also for employers and pension funds, which would be able to achieve 
economies of scale in terms of administrative and financial management, and 
hence reduce labour costs. 
From the present state of play it can be gathered that a proposal for a directive might 
comprise three sets of rules: 
(i) Fundamental prudential rules. This involves in particular the approval of a 
pension fund by a competent authority; the need to subordinate approval to strict 
criteria covering responsibility, competence and the managers' standing; the 
definition of the intervention powers of the supervisory authority; and the 
setting-up of mechanisms for periodic declarations to members and the 
supervisory authorities. 
(ii) Rules concerning the investment of contributions. Absolute investment freedom 
for pension funds is not desirable. Investments have to be adapted to the nature 
and duration of the liabilities and duly diversified (by currency, geographical area 
and economic sector). The necessity of having a currency matching requirement 
needs to be discussed. In any event, te regulatory framework has to be fully 
compatible with the free movement of capital. It must be stressed that, in general, 
these aspects will have to form the subject-matter of detailed consultations with 
the Member States and industry. 
7 Life assurance companies are also active in the supplementary pensions field, offering group life 
contracts linked to employment. In some Member States, UCITS are likewise used as a vehicle to 
provide this type of pension. 
4 
(iii) Rules concerning the liabilities of pension funds and the link between assets and 
liabilities8 Investments have to be based on a precise evaluation of the fund's 
liabilities. This evaluation establishes technical provisions calculated according to 
a prudent and recognised actuarial method. Signature of the accounts of the 
pension fund by an independent actuary has to be considered for this purpose. A 
minimum financing level intended to guarantee that acquired rights to benefit are 
completely covered also appears necessary. 
Minimum harmonisation should be the aim for these subjects. Owing to the wide 
disparity between pension funds active in the Union, the objective can only be to fix a 
general framework prescribing the principles to be respected in order to guarantee the 
protection of recipients and economic effectiveness. Cooperation between supervisors of 
pension funds seems, moreover, essential. A body bringing together the competent 
authorities may be useful once the directive is adopted. 
The removal of obstacles to labour mobility in the Union 
A fundamental principle of the single market, labour mobility is all the more important at 
a time when economic and monetary union (EMU) is being established. At stake is the 
credibility of EMU among the general public. Europe already has Community rules 
coordinating effectively, for migrant workers, pillar 1 pension schemes. On the other 
hand, the lack of such coordination in the case of supplementary pensions is a real barrier 
to the free movement of workers covered by such schemes. This barrier will affect more 
and more people and will limit workers' capacity for movement if Member States choose 
to rely increasingly on supplementary schemes. 
Debate here should therefore focus on the following aspects: 
(i) conditions for acquiring supplementary pension rights. Conditions that are too 
complex, or excessively long vesting periods, can constitute a considerable 
obstacle to the free movement of persons. It is essential that Member States and 
the social partners give this matter careful consideration. 
(ii) the methods for transferring rights. It is a fact that the absence of a common 
actuarial standard for the calculation of transfer values penalises migrant workers 
compared with those who remain in the same Member State. On the basis of 
technical work to be begun with all interested parties, the Commission could 
envisage the possibility of a legislative proposal on the subject. 
(iii) the conditions for cross-border membership of pension funds. Cross-border 
membership would require mutual recognition of supervisory regimes and better 
coordination of tax systems. But occupational schemes are also, at the national 
level, subject to specific social rules, which are connected in particular with 
benefits payment (treatment of part-time and full-time employees, forms of 
pension pay-outs, etc.). A technical study seems necessary in order to determine 
how these rules have to be dealt with in the context of cross-border membership. 
(iv) the creation of a pensions forum. A pensions forum might prove to be a useful 
place in which to discuss the implications of labour mobility in the Union. Such a 
forum might facilitate the carrying-out of the necessary technical work in this 
field. Bringing together representatives from the Member States, pension funds 
This section is relevant mainly to defined benefit schemes. 
5 
and the social partners, it might also monitor existing and future Community 
legislation. 
Coordination of Member States' tax systems 
National disparities in the tax treatment of life assurance and pension products, their 
complexity and specificities, are major obstacles to labour mobility and freedom to 
provide services in the Union. While ruling out at this stage any harmonisation attempt 
and taking care to safeguard the tax income of Member States, it is felt that an endeavour 
should be made to abolish national tax discrimination against products offered by 
institutions (insurance companies, pension funds) established in other Member States. 
Following this flexible and coordinated approach, the Commission and the 
Member States have started to cooperate in order to examine how to eliminate the main 
obstacles in this field. According to many migrant workers and employers, an issue 
which needs to be addressed as a matter of priority is the treatment of contributions and 
premiums paid to institutions that are established in a Member State other than that in 
which the member or the policy-holder is established. 
The subject is being dealt with within the framework of the Taxation Policy Group, 
which serves as a high-level forum for discussion between the Commission and the 
Member States in the tax field. There is a broad consensus on the need to continue the 
work in hand. Given the diversity and complexity of the problems, a step-by-step 
approach is generally seen as the appropriate way. On the basis of this work, a legislative 
initiative which would cover the tax treatment of cross-border contributions paid by 
migrant workers to supplementary pension funds might be envisaged. 
Conclusion 
These possible initiatives, which are summarised in Annex 1, would to some extent be 
separate. They would nevertheless be highly interdependent. Cross-border membership, 
for example, will require at one and the same time mutual recognition in prudential 
matters, coordination of tax systems and an adaptation of social legislation. 
All also make for a better integration of financial services in the Union. In this, a dual 
objective must be pursued: to contribute to the integration of financial services for the 
benefit of growth and employment, and to improve the quality of the benefits provided to 
future pensioners. 
1. INTRODUCTION 
1.1 The need for a single market in supplementary pensions 
Pension schemes are at the heart of Member States' welfare protection. Population ageing 
and its budgetary implications raise, in all Member States, the question of the financial 
viability of such schemes. The State is as a rule the leading pension provider through 
pillar 1 schemes, which are usually financed on a pay-as-you-go basis. There is a risk, 
therefore, that demographic trends will lead to a significant increase in public spending 
on pensions. Member States, which are responsible for the structure of pension provision, 
have actively started reform but many types of continuing action will still be needed to 
ensure the lasting financial stability of schemes (see box 2). The Commission has stated 
on a number of occasions that higher employment rates and productivity play a decisive 
role in this regard. It has also stated that thought must be given to ways of tackling the 
numerous early retirement departures, which place a heavy burden on schemes.9 This 
need to increase the employability of older people who have not yet reached the statutory 
retirement age has, moreover, recently been confirmed by the Council in the 1999 
Employment Guidelines 10. Part of the solution, in order to alleviate the burden on the 
public purse, can also be greater reliance on funded supplementary pensions related to 
employment. It is therefore essential to put in place, from a financial and social point of 
view, a Community framework that is conducive to their development. 
See the communication "Modernising and improving social protection in the European Union" 
(COM(97) 102 final) and the draft communication "Towards a Europe for all ages", currently being 
adopted. 
Council Resolution of 9 February 1999 on the 1999 Employment Guidelines (5530/99). 
7 
Box 1: 
The various types of pension scheme 
Pension schemes are traditionally described using the three pillars model: social security schemes 
are part of pillar 1 and supplementary schemes belong to pillars 2 and 3. 
Pillar 1: this is the basic state scheme, in which participation is generally compulsory. These 
schemes are usually financed on a pay-as-you-go basis, where current workers' contributions are 
used to fund the pension payments of retired people. Pension benefits are guaranteed by the State 
and the scheme is managed by a public body. At Community level, Regulation 1408/71 
coordinates these schemes. 
Pillar 2: these schemes are characterised by a link to employment, to a professional occupation. 
They are known as "occupational schemes". They usually operate on a funded basis: employer 
and employees build up savings which are invested and will be used to finance future pension 
benefits. Moreover, they frequently provide cover for biometric risks (death, invalidity and 
longevity). Occupational schemes can be organised in many different ways: 
creation of -or participation in- a pension fund separate from the employer. The fund 
receives the contributions, invests them and pays out the benefits. Funds are said to be 
"open" (companies from various industrial sectors can join in) or "closed" (participation 
is limited to a single company or a group of companies from a given industrial sector). 
There can be "defined benefits" schemes (the employer guarantees the payment of a 
given level of benefits) or "defined contribution" schemes (benefits vary according to the 
returns on the funds invested); 
subscribing a group life assurance contract: contributions are paid to a life assurance 
company which invests them and pays the benefits. The insurance company generally 
underwrites the payment of the benefits. Life assurance companies are already regulated 
at Community level;11 
purchasing of securities through an undertaking for collective investment in transferable 
securities (LOTS): contributions are used to buy securities. Pension benefits vary 
according to the returns provided by the securities. LOTS are already regulated at 
Community level;12 
"book reserve" mechanisms: the employer undertakes to pay benefits to his employees 
and makes provision for commitments on the liabilities side of his balance sheet; 
Pillar 3: these are contracts subscribed by individuals with service providers, such as life 
assurance companies or LOTS. 
The analysis carried out in this Communication cover the following areas. 
Chapter 2 deals with the prudential regulation of pension funds that are separated from the 
employer and the means to ensure a level playing-field between these funds and other providers 
of occupational pension schemes. 
Chapter 3 examines the obstacles to the free movement of labour stemming from the social 
regulation governing pension funds and book reserves schemes. 
1' See Directives 79/267, 90/619 and 92/96. 
12 See Directives 85/611, 85/612 and 88/220. 
Chapter 4 covers the taxation of supplementary pensions more generally : occupational schemes 
and life assurance contracts. It considers the possibility of launching a first legislative initiative 
on occupational schemes. 
2. As a solution for ageing populations, funded supplementary schemes cannot, however, 
perform miracles. Whatever the system of financing (pay-as-you-go or funded), pensions 
will always account for part of the domestic product for the period when they are paid. 
Consequently, people in work always finance the benefits of current pensioners. But 
supplementary schemes may offer a more global productive investment perspective, both 
inside and outside the Community, unlike pay-as-you-go schemes, which offer only a 
national perspective. For this reason, supplementary schemes, especially when there are 
no cross-border portfolio restrictions, permit greater flexibility than pay-as-you-go 
schemes in coping with the demographic crisis affecting pension systems. 
3. In other words, the advantages of pension savings must not be underestimated. If such 
savings are invested productively, then they can help to increase national income and 
hence ease the financing of pensions. The income from investments outside the Union 
could, in economies which are in need of capital, play an altogether decisive role here. 
4. Given the high savings rates in a number of Member States, pension fund growth might 
only give rise to a switching between forms of saving. But it could also usefully prevent, 
in some countries, a fall in savings rates. What is more, pension savings have the 
advantage of being a very long-term form of saving, contributing in a stable fashion to 
the financing of the economy. 
Box 2: 
Demographic prospects, their financial implications 
and possible responses 
Resolving the retirement provision problem related to an ageing population is one of the major 
challenges confronting all Member States of the European Union. The gravity of the situation 
may vary from one Member State to another depending on their demographic structure. But 
Member States in general are faced with some major political choices. 
There are today four workers to every pensioner. In 2040 the ratio will be two to one. Without 
reform, the level of expenditure of state pension schemes could in some Member States reach 
15-20% of GDP (1997: approximately 10%). The scale of the possible fiscal implications must 
be underscored: in some Member States, unfunded pension liabilities could rise to 200 % of 
GDP. 
Basic public schemes play an altogether central role in Member States' welfare protection 
systems and should continue to provide a very significant part of retirement benefits. However, in 
order to enable such schemes to perform this task without undermining public finances, 
Member States will have to adapt the financing of their schemes to take account of demographic 
change. They have the possibility of developing supplementary schemes or of continuing to rely 
essentially on public schemes and envisaging, for instance, an increase in the period of 
contributions and/or a decrease in pension pay-outs. An increase in employment rates among, and 
in the employability of, older people would also constitute an effective response to current trends. 
5. The June 1997 Commission Green Paper on supplementary pensions in the single 
market13 re-launched the debate in an area in which the EU has failed so far to harness 
the potential efficiency improvements offered by the single market. Without action, the 
potential of the euro will also be missed. The lack of an adequate Community framework 
in the field of supplementary pensions can be regarded as highly unsatisfactory for both 
future pensioners and the pensions industry. The former are looking for a safe and high 
pension when retired and the latter already have assets amounting to the equivalent of 
23% of EU GDP14 which they need to invest. Given the reforms launched in Member 
States and which often aim at developing pension funds, this figure is constantly rising. 
A reform has been introduced, for instance, in Italy and similar projects are being 
discussed in France. It is essential that an appropriate Community framework 
accompanies these trends. 
6. The intention of the Green Paper was to foster the widest possible debate on the best 
ways to tackle the demographic and economic challenges ahead and to determine how 
the single market and the euro can increase the efficiency of supplementary pensions. 
The specific role pension funds are to play is for Member States to decide. However, 
decisions of Member States must take place in a coherent Community framework and 
respect the following single market freedoms : 
7. 
• the freedom to provide services; 
• the freedom for labour to move across borders; 
• the freedom to invest across borders subject only to appropriate prudential 
restrictions. 
8. Furthermore, the Commission must take account of Article 2 of the EC Treaty, which 
identifies the maintenance of a high level of employment and social protection as a 
Community objective. This has to be done while respecting the subsidiarity principle, 
according to which Member States are responsible for their pension schemes. 
1.2 The consultations on the Green paper on supplementary pensions in the 
single market 
9. The Commission received about 100 replies to the Green Paper from Member States, the 
European Parliament, the Economic and Social Committee of the European 
Communities, consumer organisations, unions, industry and all financial services. A 
summary of the replies15 was prepared and used as a basis for discussion at a hearing 
held on 21 April 1998 to which all interested parties were invited. 
10. The Commission is very pleased with the high level of interest demonstrated by this 
consultation phase and the overall firm level of support from nearly all parties for 
Community action in this area. 
11. However, the Green Paper was criticised on two important horizontal points. Some 
respondents felt that the Commission should have put more emphasis on the social 
aspects of pension funds and that too much stress had been placed on pension funds as a 
vehicle to create European capital markets. It is clear that capital markets are there to 
13 COM(97) 283 final. 
14 Source: EFRP. 
15 Document CAB/62/98, referred to above. 
10 
serve pensioners, not the other way round. Therefore, the policy proposed by the 
Commission will have as primary concern the protection of beneficiaries' rights and the 
creation of an environment in which they can enjoy a high level of benefits. However, the 
role that EU capital market integration can play in favour of growth and employment 
should not be disregarded: efficient and transparent financial markets can facilitate access 
to capital and enhance capital productivity. 
12. The second issue raised by a number of respondents was the need to address more 
specifically the security of pensions. Some of them insisted, for instance, on the need to 
ensure that occupational pension plans are backed by an insurance mechanism 
safeguarding the accrued rights of beneficiaries in the event of the insolvency of the 
sponsoring company and of a situation where the assets held by the fund are insufficient 
to cover liabilities. It is obvious that future pensioners want maximum security for their 
pensions. Pension security is a critical issue that the Commission should take more into 
account in its future work, by proposing a genuine prudential framework for pension 
funds. 
13. Notwithstanding these criticisms, the overwhelming majority of contributions fully 
supported the Commission's analysis in the Green Paper. Other topics raised during the 
consultations will be examined in the following chapters of this communication. 
14. This communication will thus present the policy conclusions to be drawn from the 
consultations and set out the steps the Commission considers necessary in order to move 
towards a single market for supplementary pensions. 
2. PRUDENTIAL RULES FOR PENSION FUNDS COMPATIBLE WITH 
THE SINGLE MARKET AND THE EURO 
15. This chapter explains how the euro and the single market can help increase the 
security and performance of pension funds. It outlines proposals for a directive on 
the prudential regulation of pension funds that are separateyfrom the company and 
operate on a funded basis. 
2.1 Pension funds in the euro zone 
2.1.1 Increased security of investment portfolios 
16. The primary object of any prudential regulation is to protect consumers - or, in this case, 
members of pension schemes. The euro, by itself, with the elimination of currency risks 
and currency matching requirements within the euro zone, helps reinforce security. 
Pension funds, as well as insurance companies, can benefit from a wider capital market 
in which they can better diversify their assets and their risks. However, this cannot be 
considered sufficient: in order to really guarantee beneficiaries' protection, 
diversification of assets has to build on an accurate estimate of the duration and cost of 
the commitments. Pension funds have always to make sure that they hold enough liquid 
assets, denominated in the same currency as the commitments, in order to pay the 
benefits arriving at maturity. Furthermore, pension funds' activities have to be inserted in 
a overall prudential framework. Pension funds must, inter alia, be duly authorised and 
controlled by a competent authority. Members have to be informed, as well as possible, 
about how the fund is managed. 
11 
2.1.2 Increased efficiency of investment portfolios 
17. If Member States opt for increased reliance on schemes to supplement the basic state 
social security scheme and if these schemes are funded, then an EU-wide capital market 
and the euro can make the accumulation of these funds more efficient via increased 
return on investment of pension fund assets. This can lead to higher pensions and thus 
help to sustain basic state systems, or reduce the social charges for any given pension and 
so have positive effects on the employment situation. But always, the balance between 
different pension schemes remains a decision for individual Member States. 
18. The euro contributes to increased efficiency in investment portfolio management. 
Investors are able to make better use of deeper and more liquid capital markets due to the 
elimination of exchange risks, a reduction of transaction costs and increased competition 
between market participants. Most respondents to the Green Paper expect that an 
EU-wide capital market will provide much more capacity than individual national 
markets to absorb the likely growth in pension funds assets. EU equity and corporate 
bond markets are still underdeveloped and therefore provide a huge potential for 
expansion. This is especially true with regard to private bonds, which will offer a 
broadened spectrum of interest rates at the same time as the spectrum of public bonds is 
narrowing. Investment in private bonds could thus represent a significant source of 
revenue for pension funds in the future. 
19. Pension funds should also play an important role in the development of pan-European 
risk capital markets because smaller and more innovative companies in the fields of key 
technologies and industries such as telecommunications, biotechnology, health care, 
financial services and energy are constantly searching for equity or corporate bond 
capital. They could usefully help financing the Trans European Networks projects, which 
aim at improving mobility across the EU and which can receive venture capital . Given 
the need to always have a well diversified investment portfolio, pension funds will only 
invest a limited part of the contributions received in risk capital markets. However, if all 
European pension funds had 2% of their assets in risk capital shares, the impact on the 
growth of small and medium-sized companies would undoubtedly be quite significant.17 
Box 3 
The benefits to the economy and employment of a single market for supplementary pensions 
A single market for supplementary pensions would be beneficial not only to pensioners and 
pension providers. More generally, the following benefits might ensue: 
- enabling pension funds to invest on a continental scale and increasingly in shares is likely to 
improve their performance: this might help to reduce the indirect cost of labour, which is often a 
brake on job creation; 
- enabling pension funds to invest more in shares would increase the supply of capital to 
European businesses. This would bring together investors and borrowers, thereby promoting the 
process of banking disintermediation. Once free of bank charges, businesses would be able to 
finance themselves more cheaply; 
16 Decision 1692/96 of 23 July 1996. 
17 Commission proposals on pension funds have thus to be seen in conjunction with the work undertaken 
in the field of risk capital. See "Risk capital: a key to job creation in the EU" (SEC(98) 552). 
12 
- pension funds have a key role to play in the growth of SMEs, especially those which are 
innovative in the new technologies. In the Union, between 1991 and 1995 employment increased 
by 15% in businesses benefiting from risk-capital investment; 
- by enabling pension funds to manage plans in more than one Member State of the Union, such 
funds would achieve economies of scale in terms of administrative and financial management, 
and this would have a knock-on effect on the indirect cost of labour. In a company or group of 
companies, a fund covering the whole Union might well replace 15 separate occupational 
schemes. 
2.1.3 A qualitative approach to supervision 
20. The euro is creating a huge pool of European capital denominated in a single currency. 
Market size and liquidity are thus increasing, allowing European companies to reduce 
their cost of equity capital and to borrow money on better terms. At the same time, the 
continued efforts of Member States within the Stability and Growth Pact to run smaller 
budget deficits and reduce the level of government debt will have the effect of 
"crowding-in" private-sector capital. 
21. Hence, double dividends are within reach: for future pensioners and the economy of the 
Union as a whole. However, there are obstacles to bringing about this "golden scenario", 
capable as it is of providing a major stimulus to investment with positive consequences 
for job creation and growth. 
22. Some of these obstacles are related to investment rules. Quantitative and rigid asset 
allocation rules applied in some Member States will hamper pension funds in their 
attempt to operate on an EU-wide capital market. Stringent limits on the proportion of 
equities that pension funds can have in their investment portfolio could notably reduce 
their rate of return (see box 4), without improving the security of the investments. In fact, 
excessively strict quantitative restrictions can even be a threat to security. Such 
restrictions might prevent investors from benefiting from the euro zone in order to 
diversify theirs risks. Moreover, experience shows the lower volatility, and hence the 
lower risk, of equity investment in comparison with government bond investment over 
the period of time of a retirement commitment (see Annex 4). Only a qualitative 
approach to supervision will provide pension funds with the necessary flexibility to 
achieve the appropriate mix between risk and return in view of the demographic sea-
change and the opportunities provided by EU-wide capital markets. At the same time, 
and as mentioned before, every step needs to be taken to protect as well as possible the 
rights of members. Therefore, freedom of investment must always be subject to a proper 
diversification of assets and inserted into a global prudential framework. 
23. This flexible approach will also enable pension funds to participate in the development of 
risk-capital companies. It is recognised that in the United States, at the end of the 1970s, 
the elimination of investment restrictions imposed on pension funds played a key role in 
the development of technologically innovative SMEs. Furthermore, these SMEs have 
provided high levels of returns (see Annex 5). Continued financing of pension provisions 
relying essentially on public debt, on the contrary, could have the effect of depriving 
industry, and especially small and medium-sized companies, of the private investment 
they need in order to play a positive role in the push for growth and employment. 
13 
Box 4: 
How to improve both the security and performance of pension funds 
In those countries in which pension funds are widespread and where they operate successfully, 
there are no quantitative restrictions on the mix of investments (e.g. listed and unlisted equities, 
bonds, real estate, loans, etc.). Annex 2 illustrates the better returns of pension funds which are 
not constrained by investment restrictions. These better returns have been achieved because the 
share of equities in the asset portfolio can be much higher than in countries which prescribe 
quantitative limits on the asset mix. They therefore take advantage of the better returns generally 
provided over the last few decades by equities in comparison with government bonds (see Annex 
4). 
Some Member States impose strict quantitative limits on certain classes of asset - especially 
equities - that pension funds can hold. Apart from the fact that this generally de facto reduces the 
rate of return of a portfolio, it is considered more prudent to invest a substantial part of the asset 
portfolio in equities because they can better meet the long term nature of pension liabilities. It is 
important to note in this regard that over the long term, as shown in Annex 4, equities are less 
volatile than government bonds. This is notably due to the constant growth, in the long run, of the 
real economy and productivity, reflected in the stock-market quoting of companies. Public bonds, 
while being more stable in the short term, are subject to inflation and interest-rate variations. 
Furthermore, equity investment can be regarded as an effective tool to tackle the inflation risks 
inherent in future pension payments. 
Reducing quantitative constraints within an appropriate prudential framework would therefore 
give asset managers enough flexibility to increase equity investment as they see fit, thereby 
increasing pension fund performance while providing security. 
2.2 Prudential rules for pension funds 
2.2.1 Appropriateness of a directive 
24. The consultations on the Green Paper on supplementary pensions showed that several 
Member States, several social partners and almost the entire financial sector consider that 
the lack of a framework for pension funds constitutes a major gap in the European 
legislation on financial services.18 This is the view taken by the Economic and Social 
Committee, which, in its opinion of 10 December 1997,19 indicated that a directive on 
fundamental principles would be appropriate. This is also the opinion of the European 
Parliament, which, in its resolution of 3 December 1998 on the Green Paper, asked the 
Commission to adopt a proposal for a directive which, in particular, could "enable 
pension funds to enjoy freedom of investment, lay down the spheres and limits of 
operation in the individual Member States, and the operating procedures for pension 
funds to raise capital on Community markets ..." and allows "...advisers to exercise the 
freedom to provide management services, if they are licensed to do so in any one 
Member State...".20 
18 
19 
20 It is worth recalling that the assets held by pension funds in the 15 Member States total around 23% of 
the Union's GDP. By way of comparison, assets of insurance companies amount to approximately 35% 
of GDP, operating in a single market based on nearly 30 legislative or regulatory acts. 
ESC 1403/97. 
Point 3 of Resolution A4-0400/98. 
14 
25. The euro contributes in itself to widening the investment opportunities available to 
pension funds. Possible restrictions contrary to the Treaty could for their part be 
eliminated by means of infringement proceedings. It follows, nevertheless, from the 
consultations that the combination of these two options would not have, for the social 
and financial operators concerned, the same advantages as a clear legal framework 
harmonising fundamental prudential principles. 
26. A directive, moreover, seems necessary in order to allow the mutual recognition of 
prudential supervisory regimes, which is necessary for cross-border membership of 
pension funds. Numerous commentators stressed the need to lay down highly specific 
membership conditions, especially inside the same company or group of companies, and 
this despite the fact that there can be no question of opening up completely the 
supplementary pensions market, as supplementary schemes are closely linked to basic 
public schemes. But cross-border membership would facilitate the mobility of workers in 
the Union: the consultations showed without ambiguity that the impossibility of any 
cross-border membership constituted a major obstacle to such mobility. And it would 
enable pension funds to achieve economies of scale in terms of administrative and 
financial management. 
27. The lack of mutual recognition of supervisory regimes is obviously not the only obstacle 
to cross-border membership. Other obstacles include, in particular, tax obstacles which 
are best treated within the framework of the Taxation Policy Group.21 Obstacles that are 
inherent in the specific legal or regulatory provisions in force in some Member States 
(for example, the obligation to contribute to a national occupational scheme) should also 
be treated in cooperation with the Member States concerned. The proposal for a directive 
suggested here would therefore constitute only a first stage in the lifting of the various 
obstacles which, at this stage, prevent cross-border membership.22 
2.2.2 Scope and content 
28. In order to ensure a homogeneous scope, any directive could concern only those 
institutions which are genuine entities, are not part of the social security system and 
operate on a funded basis.23 The choice of a directive covering pension fund institutions, 
and not all occupational pension products, would be consistent with existing European 
legislation on financial services. Products offered by life assurance companies and 
UCITS would not be affected as they are already covered by Community legislation. 
29. In order to ensure that the above-mentioned objectives are met and to afford future 
pensioners the best possible protection, a future proposal for a directive could cover the 
following: 
21 
22 
23 See section 4 below. 
It is desirable that any political action in this area should, were it to be decided on, be based on 
statistics reflecting economic reality in the sector. Eurostat has accordingly initiated the establishment 
of a common framework for the collection, compilation, transmission and evaluation of data on the 
structure, activities and performance of pension funds in the countries of the Union. This framework, 
which is annexed to Council Regulation 58/97, might be adopted in 2000. 
The need for an homogenous scope of a possible Directive seem to require that pay as you go and 
book reserves schemes remain outside of this exercise. However, entities managing these schemes 
should comply with the EC treaty provisions on free movement of capital and free provision of 
services. Furthermore, a list of social security institutions to be excluded from the scope of the 
proposal will doubtless have to be drawn up. 
15 
• Basic prudential requirements 
separation of the assets of the pension fund and of the sponsoring company; 
authorisation of pension funds by a competent authority and setting-up of a 
system of sanctions; 
need to make authorisation subject to strict criteria regarding the 
responsibility, competence and integrity of managers; 
definition of the supervisory authority's powers to intervene; 
setting-up of a mechanism for periodic statements to members. Transparency 
is absolutely crucial for the protection of beneficiaries. They must always 
have the opportunity to be aware of the financial situation of the fund. This is 
especially true concerning defined contribution schemes in which the worker 
generally bears the investment risk. 
setting-up of a mechanism for periodic statements to the supervisory 
authorities. These might be supplemented at regular intervals by an 
explanation of the overall investment strategy in the light of the commitments 
entered into. 
• Investment rules 
30. The principle of "prudent person" management (see box 5) drew wide support during the 
consultations. It would be the most appropriate regulatory framework with a view to free 
movement of capital and would allow managers to achieve optimum matching of assets 
to the nature and duration of their commitments, while taking account of changes in the 
economic and financial context. It is also suited to the usual profile of pension 
commitments: the liabilities extend over several decades. It is therefore vital that fund 
managers be in a position to use a variety of assets with greater or lesser liquidity. Any 
quantitative restriction of assets by category should be duly justified on exclusively 
prudential grounds. If Member States so wish, national authorities might be allowed to 
apply quantitative limits provided they do not unduly restrict freedom of investment (e.g. 
a 70% ceiling on stock investment). Legal requirements to the effect that funds must 
invest in specific categories of asset, and a proliferation of quantitative thresholds which 
in fact significantly restrict freedom of investment must, however, be avoided. 
Investments in a single issuer and in the sponsoring company should be limited to a 
prudent level (e.g. 5-10%). 
16 
Box 5: 
Prudent person investment principle and modern asset-liability 
management techniques (ALM) - application in practice 
The prudent person investment principle 
Prudent person rules are general guidelines for those responsible for the conduct of pension funds 
and investment activities (e.g. fiduciary agents, trustees, asset managers). These rules are of a 
qualitative nature. The aim is that the responsible persons behave as careful professionals in 
making investment decisions, but at the same time are aware of the need to earn an adequate 
return on investments. Prudent person principles require that the fund does not assume 
unnecessary risk. In fact, it aims at diminishing risk through diversification. 
The prudent person investment principle is not just an abstract principle but works in practice. 
Several Member States have successfully applied it over long periods. It has been shown to give 
security equivalent to other types of investment rules, but higher yields. If investment strategy is 
overly timid, this can have the effect of unnecessarily reducing returns. But reckless use of 
freedom of investment clearly violates the prudent person principle. Both situations lead to sub-
optimal results and must be avoided. 
Modern asset-liability management (ALM) techniques 
Modern ALM is very helpful as a means of managing investment portfolios and ensuring that 
assets are invested in a way that reflects the nature and duration of the corresponding liabilities. 
The prudent person investment principle can be regarded as a substantial component of modern 
ALM techniques and of the financial risk management of financial institutions. These techniques 
provide information on risks of financial market volatility and their impact on both assets and 
liabilities. 
A properly functioning ALM is most effective when there are no quantitative restrictions for fund 
managers and trustees in order to fulfil the needs of portfolio diversification as part of risk 
diversification. Risk diversification aims at improving the return-to-risk ratio of the investment 
portfolio. During the consultations on the Green Paper, professional respondents gave strong 
support to the idea that the diversification of investments permitted by an ALM approach would 
increase the protection of investors by minimising their exposure to problems arising in 
individual countries or types of investment, rather than increase risks. 
For the time being, mathematical ALM techniques are used mainly in big institutions because of 
their cost. Small and medium-sized institutions use more conventional methods of liquidity 
planning. However, service provision in the field of risk measurement and risk management is a 
growing market. 
Mature pension funds must always ensure sufficient liquidity. These mature pension funds will 
have liabilities with a short time horizon and high degree of risk aversion. In contrast, immature 
pension funds with long-term liabilities and whose cash inflow from contributions is higher than 
the cash outflow in the form of pension payments will reflect this situation in their investment 
strategy. Therefore, the share of cash and liquid assets in a portfolio covering short-term 
liabilities has to be higher than in immature pension schemes. Any given strict quantitative 
ceiling can thus prove to be appropriate for some pension schemes but not for all of them. Only a 
qualitative approach to prudential supervision can cater for the various structures of pension 
scheme liabilities. 
17 
Box 6: 
Adequate supervision 
The experience of those Member States which apply the prudent person investment principle and 
modern asset-liability management techniques shows that a strict supervisory framework is 
necessary. The sole application of the prudent person principle is not sufficient. It must be 
inserted in an overall prudential framework, with both internal and external controls via: 
• scheme actuary and fund manager/trustee - internal controls; 
• external auditor; 
• competent supervisory authority. 
Scheme actuary and fund manager/trustee — internal controls 
The scheme actuary has to make sure that the pension commitments are calculated in a prudent 
way. He must ensure that the assets reflect the nature and duration of liabilities. The structure 
established by the actuary is the primary guarantee of pension security. Therefore the scheme 
actuary sets the framework for the scheme trustee who must ensure that this policy is efficiently 
carried out. 
Internal control procedures usually comprise 
• structural measures (e.g. strict separation of front-office and back-office functions with 
regular auditing checks); 
• measurement and management of investment risks and of the information system. 
External auditor 
The external auditor has to check whether the internal control system implemented in a pension 
fund works effectively to guarantee a high level of security for the beneficiaries. He must 
therefore verify whether the internal control procedures established by the management are 
rigorous enough and whether the investment managers actually follow the prescribed procedures. 
Competent supervisory authority 
Pension funds usually report on the structure of their liabilities, and their investment policy plan 
is part of the annual accounts which may be examined by the competent supervisory authority. 
This provides the supervisor with the possibility of checking whether the applied risk 
diversification procedures and internal control structures are adequate. If he considers it 
necessary, the supervisor can impose remedial measures and sanctions. Given the key role asset 
management, trustees and actuaries play in the application of the prudent person principle, they 
are normally subject to. special "fit and proper" criteria. 
Most responses to the Green Paper considered that increased use of the prudent person 
investment principle and modern ALM techniques implies an important change and a challenge 
for those supervisory bodies that are applying strict quantitative limits at the moment. A shift 
from a quantitative approach to a qualitative supervisory approach may take time. But the 
benefits of such a change greatly outweigh the costs. 
18 
• Currency matching requirement 
31. The negotiations leading up to the 1991 proposal for a directive failed essentially because 
of differences of opinion over currency matching. However, the euro considerably limits 
the scale of these difficulties by making any currency matching requirement within the 
euro zone unnecessary. With regard to countries not initially participating in EMU, 
solutions similar to those adopted in the insurance field could be considered, i.e. 
non-participating Member States could be permitted to consider that assets in euros 
match commitments in national currency.24 It remains to be seen whether a matching 
requirement should be applied to assets in third-country currencies. European legislation 
imposes an 80% matching rule on insurance companies. The very long-term nature of 
commitments contracted by pension funds allows them, however, to worry less about 
exchange rate fluctuations. The view might also be taken that income from investments 
placed outside the European Union in countries which require capital and in which the 
proportion of the active population is greater than in the EU might usefully help in the 
coming decades to finance retirement benefits in EU countries. This question should be 
the object of further discussions between the Commission and the Member States. 
• Freedom of choice for managers 
32. The right of managers of pension funds to make use of any approved provider of 
management services (agent, asset manager) anywhere in the EU should be confirmed in 
any proposal for a directive. 
• Link between assets and liabilities25 
33. Protection of beneficiaries demands that freedom of investment be based on an accurate 
assessment of the commitments entered into by the fund (see box 7). This includes 
calculating technical reserves according to a prudent and recognised actuarial method. 
An appropriate calculation of technical reserves is the first guarantee of security for 
members, and the signing of the fund's accounts by an independent actuary might be 
considered in order to improve this security. A second guarantee might be to impose a 
minimum level of finance of pension funds in order to ensure that acquired pension rights 
are fully covered. Finally, a third guarantee is a prudent evaluation of the assets covering 
the technical reserves. The holding of assets in excess of technical reserves might also 
protect members against the risk of a sudden loss of value. However, any requirement in 
this respect should be moderate (e.g. around 5%) so as to limit the loss of tax revenues. 
24 
25 See point 5 of Annex 1 to Directive 92/96/EEC (third life assurance Directive). The following 
asymmetry should be noted: insurance companies established in Member States belonging to the euro 
zone do not have the possibility of matching their commitments denominated in euros with assets 
denominated in currencies of non-participating Member States. 
These comments apply above all to defined benefit schemes. In defined contribution schemes, the 
benefit to which the member is entitled is based on the total of contributions paid and income from the 
investments made with the funds so contributed; he therefore bears the entire investment risk. 
19 
Box 7: 
Nature of the pension liability 
The first line of security for future pensions is the calculation of future liabilities in a sufficiently 
prudent way. A sufficient provision for liabilities serves as a starting point when applying ALM 
and this procedure can be regarded as a core matter of security. Assets must then be chosen 
appropriately to match these liabilities. With respect to the variety of existing pension products 
offered in the market, general distinctions can be drawn between firm commitment pension plans 
(usually defined benefit schemes) and best effort commitment pension plans (usually defined 
contribution schemes). 
In defined benefit schemes, the benefit to which the employee is entitled is determined by a 
formula which typically links the annual pension to the employee's years of service and earnings 
history. Such schemes can be unfunded (no separate fund), underfunded (fund is worth less than 
the present value of promised benefits), overfunded (fund is worth more than the present value of 
promised benefits) or simply funded (fund is worth the present value of promised benefits). The 
employer usually bears the investment risk and guarantees to make up any shortfall. 
In defined contribution schemes the benefit to which the employee is entitled is based on the 
accumulated contributions made on the employee's behalf, together with the investment income 
earned on these contributions. A key feature of a defined contribution plan is that the beneficiary 
bears all the investment risk and by definition the retirement account is always fully funded. 
A prudential framework for supplementary pensions must take into account the different 
implications of defined benefit and defined contribution schemes. The guarantees given to the 
employee and the question of who bears the investment risk are two key issues in this regard. The 
existence of so-called hybrid pension plans, which combine features of both defined benefit and 
defined contribution plans, has also to be taken into account. 
2.2.3 Insurance against system failures (see box 8) 
34. One additional safety measure might be to insure against the risks of the scheme being 
interrupted. In a defined benefit scheme, this type of insurance, which can take various 
forms (guarantee given by a third party, guarantee fund, state guarantee, etc.) is meant to 
remedy a situation in which the fund's sponsoring company becomes insolvent and the 
assets held by the fund are not sufficient to meet the commitments entered into. It might 
also be useful in the case of both defined benefit and defined contribution schemes as a 
means of remedying any fraudulent activities on the part of managers. However, a system 
of this kind needs to avoid the pitfall of the moral hazard. Knowing that acquired rights 
will in any case be honoured, some managers might be drawn into a risky investment 
strategy. It may be possible to avoid this altogether by limiting cover to cases of illegal 
transactions (e.g. fraud, embezzlement or theft). 
35. Member States should consider whether this might be appropriate, in particular when it 
comes to responding to the problems which result from fraudulent transactions. It is 
essential that potential members, notably when cross-border membership becomes 
possible, be duly informed of the existence or otherwise of such insurance. 
20 
Box 8: 
National experiences with regard to plan termination systems 
Germany: in 1996, about 57% of occupational pensions in Germany were established as 
book reserves. Under the book reserve method, firms must form a book reserve to offset the 
pension benefits earned by employees as these benefits accrue. There is no legal separation of 
assets that cover the pension liabilities from other assets of the company. To protect the 
promised pension benefits in the event of employer insolvency, the book reserve system is 
accompanied by mandatory insolvency insurance. Insolvency insurance is provided by the 
Pensions-Sicherungs-Verein auf Gegenseitigkeit (PSVaG), a mutual insurance corporation. 
Apart from investment returns on PSVaG assets, employers are required by law to make 
contributions sufficient to finance the insolvency insurance on a pay-as-you-go basis. 
United Kingdom: the minimum funding requirement (MFR) sets out a statutory funding 
level most private-sector defined benefit occupational pension schemes must meet. The MFR 
is a discontinuance test aimed at ensuring that the scheme has sufficient funds to meet 
members' benefits at any time, thus providing protection if the employer becomes insolvent. 
Apart from the MFR, all UK pension schemes are generally part of the Pensions 
Compensation Scheme, which provides compensation to members in certain limited 
circumstances where the assets of the scheme are insufficient to pay benefits (there should be 
at the same time insolvency of the employer, underfunding of liabilities by more than 10% 
and reduction of assets caused by theft or fraud). The compensation is financed by a levy 
payable by all schemes. 
United States: the Pension Benefit Guaranty Corporation (PBGC) guarantees pensions 
provided by defined benefit schemes. In general, US defined benefit schemes are required to 
purchase PBGC insurance, whereas PBGC is required to provide coverage to protect 
participants in these plans. PBGC is financed by premiums from insured pension plans, 
investment returns on PBGC assets, assets held by plans at termination and amounts 
recovered from employers who terminate underfunded plans. 
21 
2.2.4 Means of ensuring equal treatment of operators 
• General comments 
36. The consultations showed support for the idea that similar pension products should be 
subject to equivalent prudential treatment, irrespective of the institutions offering them 
(life insurers, pension funds, combined banks and insurance companies, UCITS). The 
main service providers currently operating under pillar 2 are pension funds, both open 
and closed (see box 9), and life assurance companies. Annex 3 indicates some of the 
differences between these institutions and the products they offer. 
37. In general, the Commission considers that a specific prudential framework should be 
defined for pension funds. Applying rules identical to those applicable to life assurance 
would not seem appropriate given the existence of several institutional and functional 
differences between the two. It is, however, absolutely essential that everything should be 
done to offer pension fund members the highest possible standards of security. This 
means that account should be taken of the diversity of existing pension funds and that 
precise and strict rules should be laid down which take account of both the assets and 
liabilities on pension funds' balance sheets, as has already been done for insurance 
companies. 
• Equality of treatment at the level of the institution 
38. At the level of the institution, the insolvency of a life assurance company and the 
interruption of a pension fund scheme have very different consequences for beneficiaries. 
Where the operation of a pension fund is interrupted, members are generally deemed to 
own the assets held by it. By contrast, when a life assurance company becomes insolvent, 
policy-holders will often form a group of creditors which has a lower claim than other 
creditors (the liquidator, the company's employees, the tax authorities, social security 
institutions). The need to protect beneficiaries might therefore justify stricter prudential 
rules. 
39. Still at the level of the institution, it should be remembered that most pension funds 
operating in the Union are closed funds which offer their services on a non-profit-making 
basis to a single firm or a single group of firms within the same branch of the economy.26 
Such institutions predominate in the United Kingdom and the Netherlands, the two 
Member States in which pension funds are most common. These institutions do not seek 
to offer their products to other employers and this distinguishes them from insurance 
companies. A competition problem can arise, however, prior to the setting-up of an 
occupational pension arrangement. At this moment, the employer and/or social partners 
have the choice between the services of a life assurance company, the creation of a 
closed fund, participation in an open fund or other arrangements. 
26 See Box 6 and Annex 2. 
22 
• Equality of treatment at the level of the product 
40. At the level of the product, it must be stressed that, in the bulk of cases, pension funds do 
not themselves guarantee payment of the pension. In the case of defined benefit schemes, 
payment is usually guaranteed by the employer, while in defined contribution schemes, 
the member usually bears the investment risk. Life assurance companies, on the other 
hand, usually commit themselves to a guaranteed fixed rate of interest. Life assurance 
companies offering products where the investment risk is borne by the investor are an 
exception. In such cases, there is a lower solvency margin requirement (1% of 
mathematical provisions instead of 4% when the insurance company bears the investment 
risk).27 This fact also seems to militate in favour of different prudential treatment. 
41. Competition might, however, be distorted if, in the same way as an insurance company, a 
pension fund itself guaranteed to pay benefits. In this case, application of a solvency 
margin of 4% of the mathematical reserves should be contemplated. This is, incidentally, 
how things are regulated for pension funds in several EU Member States, including 
Germany and Spain. 
• Equality of treatment and investment rules 
42. Inequality of treatment might also occur at the level of investment rules. This would be 
the case, for example, if the investment rules proposed in a future directive were more 
flexible than the national provisions adopted by some Member States in transposing the 
investment rules of the third life assurance Directive. This problem might be dealt with in 
two ways: either unilaterally by the Member States concerned, which, while remaining 
within the framework established by the third Directive, might make their investment 
rules more flexible, or multilaterally, by considering the possibility of drawing up ad hoc 
investment rules for covering the technical reserves linked to group policies taken out 
with life assurance companies. 
27 See Article 19(e) of the first life assurance Directive (79/267/EEC). 
23 
Box 9: 
Issues to be considered in order to ensure a level playing-field 
between occupational pension providers 
The problem of the level playing field can only be solved through a comprehensive analysis of 
pension business managed by the various types of pension providers. The following elements 
have to be considered. 
• The type of benefits offered: a distinction must be made between firm commitment pension 
business (usually defined benefit plans) and best effort commitment pension business 
(usually defined contribution plans). The plan/scheme can be financed through a diversity of 
vehicles, e.g. pension funds, insurance programmes, etc.; 
The type of guarantees offered: a distinction must be made between company-sponsored 
pension funds (where the employer usually bears responsibility for the final delivery of 
pension benefits) and open or autonomous pension funds (institutions that themselves bear 
responsibility for the payment of the benefit or where all the risks are borne by the 
employee); 
The types of risk: a distinction must be made between technical risks (risks relating to 
pension liabilities, notably actuarial calculations and underlying projections) and financial 
risks (risks relating to assets covering pension liabilities, notably investments, interest rates 
and inflation); 
The type of pension asset administration: a distinction must be made between self-
administration (where the institution manages the pension business assets and pension 
business liabilities itself), simple financial management28 and financial management with 
29 
guarantee; 
The rights of pensioners in case of insolvency: a distinction needs to be made between 
pension funds where future pensioners are the sole creditors and life assurance companies 
where future pensioners are only one in a list of creditors whose preference is ranked 
according to national law. 
28 
29 Business line run by life assurance companies pursuant to Article l(2)(c) of Directive 79/267/EEC. 
Business line run by life assurance companies pursuant to Article l(2)(d) of Directive 79/267/EEC. 
24 
2.2.5 A new context 
43. The withdrawal of the proposal for a directive presented by the Commission in 1991 and 
amended in 199330 and the problems linked to the 1994 communication31 have 
highlighted the difficulty of reaching agreement between the Member States on how the 
prudential supervision of pension funds should be brought into line with the principles of 
the single market. However, in the light of the reactions to the Green Paper and the 
consultations which have taken place in the context of the framework for action on 
financial services, the Commission considers it should take this matter up again. 
44. While remaining true to the central objectives of freedom of investment and 
management, this new initiative should differ from earlier proposals on a number of 
points. Drawing the lessons from the consultations, the new proposal should place greater 
emphasis on fund security and compliance with basic prudential requirements. It would 
thus not focus solely on asset allocation, but would take better account of constraints 
linked to the liabilities on a pension fund's balance sheet and the need to avoid creating 
any distortion of competition between the main operators in the area of supplementary 
pillar 2 pensions. Finally, the proposal should be more ambitious and strive to take a first 
step towards creating the conditions necessary for cross-border membership. The 
probable emergence in the long term of transnational products calls for the development 
in the Union of cooperation between national pension fund supervisors. The specifics of 
such cooperation should be considered in the near future. 
45. A proposal for a directive would be put forward in a very different context to that 
prevailing in 1991. Apart from the single currency, which offers pension funds greater 
security and wider investment possibilities, there is nowadays much greater consensus on 
the need to reform pension schemes in order to face up to the budgetary and demographic 
prospects summarised in the first chapter of the Green Paper. These prospects require all 
public authorities to do their utmost within their respective areas of competence to ensure 
the long-term financial sustainability of pension schemes. Enabling supplementary 
schemes to take advantage of the single market and the euro should be seen in this 
context. 
30 91/C 312/04. 
31 94/C 360/08. 
25 
3. FACILITATING THE FREE MOVEMENT OF WORKERS 
46. This chapter examines the problems generated by occupational pension schemes for 
the free movement of workers in the Union. 
47. A fundamental principle of the single Market, labour mobility is, potentially, all the more 
important now that Economic and Monetary Union has been established. Europe 
already has effective community rules which co-ordinate first-tier pensions for migrant 
workers. These have allowed millions of EU workers to migrate within the Union for all 
or part of their working lives, secure in the knowledge that they can receive a retirement 
pension based on the aggregation of their years of work throughout the. Union. By 
contrast, the absence of such a co-ordinating system for supplementary pensions 
constitutes a real barrier to free movement on the part of those European citizens who are 
covered by such systems. This barrier will, if Member States choose to rely increasingly 
on supplementary pensions, affect more and more people and will, in the process, 
damage the capacity for mobility within the European labour force. 
48. Successive European Councils have stressed the paramount importance of creating 
conditions in the Member States that would promote a skilled and adaptable workforce 
and flexible labour markets responsive to economic change. The remaining problems 
relating to supplementary pensions constitute real obstacles to free movement and 
adaptability. In order to meet the objectives of the European Employment strategy, these 
challenges require active intervention by the member States and the European Union. 
3.1 General considerations 
49. Article 42of the EC Treaty specifies that the Council shall, acting unanimously on a 
proposal from the Commission, adopt such measures in the field of social security as are 
necessary to provide freedom of movement for workers. 
50. On this basis, the Community adopted legislation (Regulations (EEC) No 1408/71 and 
No 574/72)32 which aims to remove obstacles to cross-border mobility of workers in the 
field of statutory pensions. The legislation does not interfere with the freedom of 
Member States to determine the organisation of their own statutory pension schemes; it 
seeks to ensure that the potential mobility of a worker is not impeded by being penalised 
in terms of pension (and other social protection entitlements) on moving from one 
Member State to another. 
51. These Community Regulations, however, do not apply to supplementary pension 
schemes. 
52. In this connection as far back as its Communication to the Council of July 1991, the 
Commission addressed these questions and mapped out the future action to be taken in this 
area. While stressing the positive role played by_supplementary pension schemes in 
providing workers with social protection, it highlighted a number of obstacles to the free 
movement of workers and thus to the completion of the Single Market. 
32 The updated version of these Regulations is published in OJ L 28 of 30.1.1997. Since the extension of 
the personal scope of the Regulations to self-employed persons, the additional legal basis of Article 
308 of the Treaty has been required. 
26 
53. The treaty requires the elimination of any national measure likely to impede or render less 
attractive the exercise by workers of the fundamental freedoms guaranteed by the Treaty as 
interpreted in successive judgements by the Court of Justice33. Action is, therefore, needed 
to remove such obstacles in order to facilitate cross-border mobility of workers while taking 
account of the specific features of supplementary pension schemes. 
54. In the Green Paper on Supplementary Pensions in the Single Market, the Commission 
posed a number of questions to all interested parties (including governments, social 
partners, and supplementary pension scheme representatives) which are intended to 
deepen the analysis of the remaining problems which constitute obstacles to free 
movement. They concerned in particular long vesting periods, difficulties with 
transferability of vested pension rights and tax difficulties linked to acquiring pension 
rights in more than one Member State. 
3.2 Results of the consultation on the Green Paper 
55. In the field of social security, regulation 1408/71 has permitted the co-ordination of the 
schemes of employed, self-employed people as well as their families. The diversity of 
national schemes could only lead to co-ordination and not harmonisation. An approach 
based on co-ordination and not harmonisation would also be appropriate for 
supplementary schemes. 
56. The responses to the Green Paper demonstrated that there is a large consensus on the 
Commission's approach to the elimination of obstacles to free movement related to 
supplementary pensions. This elimination should be progressive and, therefore, 
Directive 98/49/ECadopted on 29 June 1998 should form the basis of further action. This 
Directive represents a first step towards removing obstacles to the free movement of 
workers. Under the Directive, posted workers now have the possibility to continue to 
make contributions to the pension scheme in the Member State of origin. 
57. A majority of Member States think that further new legislative action is at this stage 
premature. Nevertheless, a majority of other actors (social partners, pension funds) 
recognise that the problems identified in the Commission's Communication of 1991 and 
in its Green Paper on Supplementary Pensions are real, and that they impede free 
movement of persons within the European Union. The European Parliament and the 
Economic and Social Committee also consider that the problems encountered by workers 
moving within the European Union are significant, and that the Community should take 
further action to eliminate these obstacles since they are incompatible with the concept of 
the Single Market. 
58. There is also a view that before taking any further action, the Commission should have a 
closer look at how questions such as transferability of pension rights, long vesting 
periods and problems related to double taxation, should be tackled. 
59. Cross-border membership, at least for some categories of migrant workers moving for a 
short period to another member State, could be useful in order to avoid changes from one 
scheme to another and losses of pension rights. However, cross-border membership of 
workers will be very difficult to realise in practice. Apart from the harmonisation of 
prudential rules presented in the previous chapter, it will require mutual recognition of 
33 See Case C-279/93, Finanzamt Koln-Altstadt v. Schumacher, judgment of 14 February 1995, ECR p. 
1-225; Case C-19/92, Kraus, judgment of 31 March 1993, ECR p.1-1663; Case C-80/94, Wielochc, 
judgment of 11 August 1995, ECR p. 1-2493; Case C-107/94, Asscher, judgment of 27 June 1996, 
ECR pI-3089. 
27 
the relevant fiscal provisions in Member States and a series of amendments to existing 
national regulations governing labour conditions. However, cross-border membership 
would strongly facilitate labour mobility in the Union and is asked for by representatives 
of the industry. It should thus be seen as a medium to long-term objective for the 
European Union. 
60. The idea of a Pensions Forum, as suggested by the High Level Panel on Free Movement, 
was generally welcomed by the social partners but not by government representatives 
who preferred that the Commission use the existing bodies organised at Community level 
such as the Advisory Committee for Social Security of Migrant Workers. This is also the 
proposal of the Economic and Social Committee. The European Parliament welcomes, 
however, the idea of such a Forum. 
3.3 Possible actions 
61. The responses to the Green Paper would suggest that there are a number of areas in 
which future action might be taken. 
• Qualifying conditions for acquiring supplementary pension rights 
62. It is evident from the reactions to the Green Paper that this is an issue where there is no 
consensus amongst Member States. At this stage, a legislative framework seems to be 
premature. However, it cannot be denied that qualifying conditions in broad terms can 
constitute an obstacle to labour mobility. 
63. The creation of a skilled and adaptable European workforce for the next century is a 
central element of the European Employment Strategy and, as such, is a key policy 
objective for the Union. Long vesting periods for supplementary pension schemes tend to 
hamper the ability of workers to move in response to labour market developments: 
something which is likely to be of greater importance than ever in the future world of 
work. 
64. In addition, it could be argued that long vesting periods are a source of indirect 
discrimination affecting female workers, since they are most likely to change jobs or 
interrupt their careers. This aspect has been emphasised on several occasions by the 
social partners and the European Parliament. 
65. The Commission would feel that it would be appropriate to open a debate at European 
level with the social partners in order to examine how this obstacle to free movement can 
be overcome. 
66. The Commission will also take particular care to ensure that discriminations based on sex 
are eliminated in the area of supplementary pensions. 
• Cross-border affiliation for workers, other than posted, moving from one 
Member State to another for a short period 
67. Directive 98/49/EC of 29 June 1998 allows workers who are posted by their employer to 
another Member State, to remain affiliated to the supplementary pension scheme in the 
Member State where they were previously working. All other workers moving for a 
limited period to another Member State do not have this option. Like posted workers, 
these people expect to return to their Member State of origin and would normally wish to 
do so without a break in the accrual of their pension rights. Consequently, they would 
28 
benefit from being able to continue to make contributions to the supplementary pensions 
scheme in the Member Sate of origin. 
68. All the comments received by the Commission indicate that cross-border affiliation, as 
described above, would be an important step in terms of removing obstacles to free 
movement of labour across Member States' boundaries, but that it would be difficult to 
put into practice. It requires the lifting of a number of obstacles to the continued 
affiliation of the worker to his/her former pension scheme. An agreement between the old 
employer in the Member State of origin, the new employer in the host Member State, the 
worker, and where applicable, the supplementary pension scheme in question is not 
always easy to achieve. 
69. The Commission will launch a study to examine in detail how the difficulties for cross-
border affiliation of this category of workers could be overcome. In the light of the 
results of this study, the Commission will take the appropriate action in order to tackle 
this problem. 
• Transferability of pension rights 
70. The need for action in this area was, in particular, emphasised by trade unions and 
representatives from pension funds. It is undeniable that the calculation of transfer values 
which penalise scheme leavers and inadequate preservation of "dormant" rights are 
severe obstacles to labour mobility. 
71. The wide variation in the method of financing supplementary pensions in the actuarial 
calculation of transfer values and in taxation treatment, makes transferability from one 
Member State to another difficult. Technically it is possible in all countries to accept 
transfers from another Member State but this ability is theoretical or impossible in 
practice for certain schemes such as the book-reserve and pay-as-you-go schemes both of 
which do not set aside financial assets to back up their pensions commitments. 
Transferability would be possible only in the case of funded schemes where the nature of 
the scheme permits it. 
72. In a general way, within one Member State there are common actuarial standards to 
calculate the values of capital transfers from one scheme to another, provided that the 
schemes are of a similar nature . However, in the absence of a standard approach to the 
treatment of capital transfers in the supplementary schemes between Member States, a 
worker moving to another Member State is disadvantaged more than if transferring 
capital values to another company within his or her home country. 
73. A lowest common denominator for the calculation of the amount of capital transfers and 
the conversion of such transfers into future pension provision could help to overcome 
part of the problem. 
74. In cases where capital transfers are not possible, preservation of vested rights would be 
the only option. In these cases, a guarantee should be created that the "beneficiaries" of 
so-called dormant rights will get a fair share out of their supplementary pension scheme. 
It is clear that all of these goals will take some considerable time to achieve. 
75. The Commission will intensify its efforts with the assistance of all parties involved 
(representatives from governments, social partners and supplementary pension funds) to 
resolve the technical problems relating to the transferability of pension rights such as the 
29 
transfer of rights only to approved supplementary pension schemes, or the establishment 
of actuarial standards of transfer values. 
76. This would serve as a basis for further exploration of the necessity for a legal framework 
on transferability of vested rights. 
77. The Commission will also continue its research in the area of supplementary pensions 
with the publication of a biennial report on the situation in the different Member States. 
This will be prepared in collaboration with a network of high-level national experts on 
supplementary pensions. 
• Pensions Forum 
78. The establishment of a Pensions Forum has been suggested by the High Level Panel on 
Free Movement. Such a Forum would serve as a vehicle to bring together representatives 
of all involved parties (governments, social partners and pension funds) to consider how 
barriers to cross-border labour mobility related to supplementary pensions can be 
addressed. The Forum could assist the Commission to find appropriate solutions for the 
remaining problems identified, as well as in relation to the follow-up of existing 
Community legislation.. 
79. The Commission supports this idea and has, accordingly, decided to convene a Pensions 
Forum which will meet twice a year, to be composed of representatives of government, 
social partners, pension funds and, if appropriate, other institutions active in this field. 
4. TOWARDS A BETTER COORDINATION OF NATIONAL TAX 
SYSTEMS 
80. The Green Paper dealt with both 2nd pillar and 3rd pillar arrangements, and the 
basic tax problems are indeed identical. For practical reasons, however, the first 
step of staged Community action could tackle the tax treatment of cross-border 
contributions by migrant workers to supplementary pension institutions within the 
2nd pillar alone. 
4.1 Results of the Green Paper consultations 
81. The diversity, complexity and specificity of national tax rules that have developed over 
the years have been identified as major barriers to the free movement of persons and the 
freedom to provide services in the field of supplementary pensions and life assurance. 
Basically, the problems are the general question of how to treat cross-border payments to 
supplementary pension funds or life assurance companies and the fact that migrant 
workers are confronted with two or more pension and taxation systems which are not 
necessarily compatible. 
30 
Box 11: 
Summary of the problems resulting from heterogeneous tax regimes 
In many Member States the tax treatment of supplementary pension contracts and life 
assurance policies which have been concluded with non-resident institutions is less 
favourable than the treatment of policies with resident institutions. Generally, there is no 
principle of mutual recognition, so it is unlikely that a pension scheme approved in one 
Member State will meet the requirements for tax relief which is granted to schemes in 
another Member State. Consequently, persons interested in supplementing their pensions can, 
in practice, only buy national products if they wish to benefit from tax relief. Pension and life 
assurance institutions from other Member States are thus forced to set up an establishment in 
each Member State in order to secure the same tax conditions for their product. This negates 
freedom of services and freedom of choice for the consumer. 
A worker migrating from one Member State to another is often prevented from continuing 
with a policy held in his Member State of origin because the host Member State does not 
allow the deduction of premiums paid, or else taxes the contributions paid by the employer in 
circumstances in which contributions to an institution in the host Member State would not be 
taxed. 
The most serious problems have been identified with persons migrating from a Member State 
which operates the so-called EET system (contributions are exempt, growth of the policy is 
exempt, benefits are taxed) to a Member State with the so-called TEE system (contributions 
are taxed, growth of the policy is exempt, benefits are exempt) or vice versa. This basic 
mismatch of systems can lead to situations of double non-taxation (contributions can be 
deducted and proceeds are not taxed) or double taxation (both contributions and proceeds are 
subject to taxation). 
During the consultations, many expressed the view that the EET system is the most 
appropriate approach and should, in the long run, be generally applied. Its main advantage is 
that no tax is levied on an unsure future benefit when a pension is not inherited and the 
beneficiary may die before retirement (in which case, under a TEE system, he would have 
paid taxes via his contributions on pension payments he never received). 
Pension and life assurance institutions can also face tax obstacles, notably when investing 
across borders. Some of these obstacles are linked to the fact that pension institutions are 
often not subject to tax. An example mentioned in the reaction to the Green Paper was the 
capital gains tax imposed by a Member State on non-resident institutions which invest in 
assets located or traded in that Member State, compared with resident pension institutions 
which are exempt. This biases decisions on asset allocation within the single market. As to 
the accumulation of pension fund benefits, tax rebates are sometimes only given in respect of 
investment within the Member State concerned. 
Clearly, the above problems are exacerbated when more than two counties are involved. This 
is the case, for instance, where a migrant person is working in one Member State for a 
multinational company based in another and contributing to a supplementary pension fund in 
a third Member State. Therefore, some contributors stressed the need to find European 
solutions, in particular a definition of a pension plan that would be recognised for tax 
purposes in all Member States. In their view, this could then lead to the establishment of tax-
efficient, genuine pan-European pension funds that can operate throughout Europe and thus 
benefit from the resulting economies of scale. 
31 
82. The consultations also touched on the question of how these problems could be 
overcome. Some contributors expressed the view that the Commission should draw up 
guideline standards, based on principles and practices that are common to a number of 
existing bilateral agreements. In the discussions it was stressed that non-binding 
measures might be easier to achieve, but that their practical use might also be limited. An 
advantage of bilateral tax treaties is that they can be tailored to the pension systems of the 
countries concerned. On the other hand, it would be extremely cumbersome and 
time-consuming for Member States to negotiate and renegotiate 105 agreements34 and 
this would still not guarantee equal treatment and non-discrimination. The immediate 
practical value of guideline standards could therefore be limited, as it would take decades 
to integrate them into the bilateral tax treaties. 
83. Others contributors were of the opinion that Community legislation would be the most 
reasonable solution. The mutual recognition of pension schemes, criteria for the general 
recognition of genuine old-age schemes for tax purposes, rules allocating the right to tax 
in a way which prevents double taxation, but also rules to ensure an appropriate level of 
taxation, an effective system for the exchange of information, and efficient rules on 
mutual assistance in collection were mentioned as possible features of a Community 
initiative. Mention was made of a multilateral convention or a directive as examples of 
legally binding measures, providing legal certainty and creating a level playing field. 
4.2 Possible actions 
84. This is particularly important for workers moving from one Member State to an another 
who risk losing benefit rights already acquired under the scheme in the Member State 
where a pension has already been taken out. At present, there is no Community 
legislation governing the allocation of the right to tax pension income, or the tax 
treatment of transfer values representing pension rights acquired under a previous 
pension scheme. Nevertheless Member States should ensure that workers exercising their 
right to free movement should not be subject to any form of undue restriction or 
discrimination, in accordance with Articles 39 and 43 and Regulation 1612/68.35 
85. Whilst there should be safeguards to ensure that tax cannot be avoided by a migrant 
worker or a pensioner, Member States should ensure that migrant persons are not subject 
to any form of double taxation. Most bilateral taxation treaties currently include such 
provisions, often drafted along the lines of Article 18 of the OECD Model Tax 
Convention on Income and on Capital, which attributes the right to tax to the country of 
residence. If no bilateral treaty exists, the way in which double taxation is avoided 
depends on the national legislation of the relevant Member States. 
86. In a statement in the ECOFIN Council minutes of 1 December 1997, the Commission 
undertook to consider the problems of the taxation of life assurance and pensions with 
the assistance of the Taxation Policy Group and with a view to possibly drawing up a 
. proposal for a directive. The ultimate objective of this work is to ensure in practice the 
free movement of workers and self-employed persons (Articles 39 and 43 of the EC 
Treaty) and the freedom to provide services (Article 49 of the EC Treaty), as provided 
for in the 3rd life assurance Directive 94/96/EC. This work has already begun. 
34 
35 Within the Union, there are 105 possible bilateral relations, of which 98 are currently covered by a 
bilateral or multilateral tax treaty. Only a few of them already contain comprehensive arrangements in 
this area. In a Union with 20 Member States there will be as many as 190 bilateral relations. 
Regulation (EEC) No 1612/68 of the Council of 15 October 1968 on freedom of movement for workers 
within the Community, OJ L 257, 19.10.1968, p. 2. 
32 
• Principles for a coordinated approach 
87. In the Commission's opinion, the Green Paper on supplementary pensions, the written 
reactions and the hearing which followed show that there is a general consensus on the 
need for coordinated action on the basis of a step-by-step approach. After reviewing the 
results of the consultations, the Commission draws the conclusion that such a 
coordinated approach should build on the following principles: 
- The purpose is not to seek harmonisation of Member States' pension and life 
assurance taxation systems. A coordinated approach would be adapted to the diversity 
of rules within Member States. This approach has been successfully followed in the 
social security field, namely in Regulation 1408/71. 
- The freedom to provide services and the free movement of persons cannot be 
hampered by unduly restrictive or discriminatory tax treatment of cross-border 
pensions and life assurance. 
- Any common approach should allow and help Member States to safeguard the tax 
revenues which they are entitled to collect according to their tax legislation. It should 
provide for a system which is enforceable and which stimulates compliance with tax 
legislation by convincing taxpayers that they cannot escape their obligations, 
wherever they go or invest within the Union. 
• The influence of the case-law of the European Court of Justice 
88. According to the case-law of the European Court of Justice, restrictions resulting from 
unjustified differences in the tax treatment of cross-border pension and life assurance are 
contrary to the EC Treaty, in particular Articles 39, 43, 49,et 56. In the Safir case,36 the 
Court held that rules entailing differences in the tax treatment of foreign insurance 
policies which were likely to. dissuade individuals from concluding insurance policies 
with insurers established in other Member States were in principle contrary to Article 49 
of the Treaty. The Court robustly rejected all the arguments put forward to justify the 
restriction, in particular that of fiscal coherence. It should be noted that on no occasion 
since the Bachmann case 37 has the Court entertained this specific justification for tax 
policies. 
• State of play in the Taxation Policy Group 
89. At the meeting of the Taxation Policy Group on 3 July 1998, members were invited to 
express their views on the main issues relating to a coordinated approach for the taxation 
of supplementary pensions and life assurance. There was unanimous agreement on the 
need to do further work on the issue, with most members agreeing to a coordinated 
approach. The above-mentioned principles - no harmonisation, no discrimination, no 
revenue shortfall - were very broadly endorsed. There seemed to be support for tackling 
36 
37 Case C-l 18/96 [1998] ECR1-1897. 
Case C-204/90 [1992] ECR 1-249. The Court held that Belgium's refusal to allow deduction of pension 
and life assurance premiums constituted discrimination contrary to Article 39 and 49 However, it also 
held that, according to the characteristics of the Belgian pension tax system, such discrimination was 
justified by the need to preserve fiscal coherence. It is worth recalling that the Belgian tax system 
consisted in a delayed tax payment and not in an exemption given to pensions taken out in Belgium. In 
those circumstances, the refusal to grant an exemption for the premiums of non-Belgian insurance was 
balanced by the fact that no taxation would have been imposed on the proceeds of such an insurance 
policy, in contrast to a policy subscribed in Belgium. The Court's reasoning relating to fiscal coherence 
was set out more precisely in Case C-80/94 Wielockx [1995] ECR 2493. 
33 
as a matter of urgency the problems of migrant workers and there was also some support 
for exploring ways of improving the exchange of information. Some members favoured 
legally binding measures - a multilateral convention was a frequently mentioned option -
but others clearly opposed any legally binding solution, and could only support 
guidelines. Some members also stressed the need to take account of social and legal 
problems, instead of simply focusing on tax aspects. 
90. At the meeting of the Taxation Policy Group on 8 March 1998 there was agreement that 
a staged step-by-step approach would be advisable for addressing the differing and 
complex problems. Members also agreed that the first step should ideally tackle the tax 
treatment of migrant workers' cross-border contributions to second pillar institutions. 
Bookreserves schemes would nevertheless not be covered, since there are no 
contributions paid by the employees but only a commitment of the employer. 
Future work to be envisaged 
91. The Commission believes that the Taxation Policy Group is the most suitable forum for 
consultation with Member States on how to take the issue further. Given the complexity 
of the topic, it has been decided to create a technical sub-group which will assist the 
Taxation Policy Group. 
92. The Commission hopes that, on the basis of the work in the Taxation Policy Group and 
the technical group, it will be possible to formulate an appropriate legislative initiative in 
1999 or 2000. It follows from the foregoing that such initiative would be only the first 
step in the direction of broader action in this field. This first step could usefully cover the 
tax treatment of cross-border contributions by migrant workers to supplementary pension 
institutions. 
34 
ANNEX 1 
Measures to be considered following the consultation on the Green Paper on 
supplementary pensions in the single market 
Measure 
Proposal for a 
directive on the 
prudential 
regulation of 
pension funds 
Coordination of 
Member States' 
tux arrangements 
in the field of 
pensions and life 
' assurance 
Consultations on 
l he conditions for 
acquiring 
supplementary 
pension rights 
Feasibility study 
on cross-border 
membership 
Creation of a 
pensions forum 
Technical work on 
1 ransferability of 
supplementary 
pension rights Objectives 
To protect members' 
rights, ensure 
freedom of 
investment and 
management, and 
facilitate 
cross-border 
membership. 
To facilitate labour 
mobility and ensure 
freedom to provide 
supplementary 
pension and life 
assurance services. 
To identify means 
of facilitating labour 
mobility. 
To examine in detail 
the obstacles to 
cross-border 
membership, and 
identify ways of 
eliminating them. 
To create a forum 
for specific dialogue 
on pensions and 
labour mobility. 
To examine the 
conditions for 
introducing a 
legislative proposal. Institutions/bodies 
concerned 
Commission, 
interested parties, 
then Council, 
Parliament and 
Economic and 
Social Committee. 
Member States, 
Commission (in 
context of Taxation 
Policy Group). 
Council, Parliament 
and Economic and 
Social Committee 
(if proposal for a 
directive is 
presented). 
Commission and 
employer/employee 
organisations. 
Commission 
Commission 
Commission in 
conjunction with 
Member States, the 
pension fund 
industry and 
employer/employee 
organisations. Possible timeframe 
Adoption by the 
Commission at end 
of 1999/early 2000. 
Negotiations with 
Council and 
Parliament from 
2000. 
Consultations to be 
continued in 1999. 
Possibility that a 
proposal for a 
directive will be 
presented by the end 
of 1999 or early 
2000. 
During 1999/2000. 
During 1999/2000 
During 1999 or 
2000 
During 1999/2000. 
Possibility that a 
proposal for a 
directive will be 
presented during 
2000. 
35 
ANNEX 2 
Returns on pension fund portfolios 1984-96 
(mean of real total return in local currency) 
Percent domestic 
currency 
Belgium 
Denmark 
Germany 
Ireland 
Japan 
Netherlands 
Spain 
Sweden 
Switzerland 
United Kingdom 
United States 
No asset limits 
Asset limits 1984-93 
8.8 
6.3 
7.2 
10.3 
6.5 
7.7 
7.0 
8.1 
4.4 
10.2 
9.7 
9.5 
6.9 1984-96 
9.0 
6.0 
7.0 
11.0 
0.0 
8.0 
-
-
4.0 
10.0 
9.0 
9.5 
5.2 
Sources: EFRP report, June 1996; Pragma Consulting; and OECD staff calculations 
36 
ANNEX 3 
Indicative comparison between life assurance companies, open pension funds and 
closed pension funds 
Nature of aclivitv 
Relationship to 
other financial 
operators 
Situation in the 
event of an 
occupational 
scheme being 
interrupted 
Guarantee of 
payment of 
supplementary' 
occupational 
benefits 
Relationship to 
members of 
occupational 
pension schemes Life assurance 
companies (via 
group policies) 
Commercial activity 
based on a variety 
of products 
Service provider 
Policyholders are 
generally one of 
several groups of 
creditors.38 Each 
group has its claim 
met in a specific 
order. 
Provided by the 
insurer except in the 
case of policies 
linked to an 
investment fund 
where it is 
stipulated that the 
insurer does not 
assume any 
investment risk 
Indirect, via the 
employer. Open pension 
funds 
Commercial activity 
generally based on a 
single product 
Both service 
provider and 
consumer 
Members are 
generally deemed to 
own the assets held 
by the fund 
Generally provided 
by the pension fund 
in the case of 
defined benefit 
schemes; 
investment risk 
borne by the 
employee in defined 
contribution 
schemes. 
Indirect, via the 
employer. Closed pension 
funds 
Generally 
non-commercial 
activity based on a 
single service 
Both service 
provider and 
consumer 
Members are 
generally deemed to 
own the assets held 
by the fund. 
Generally provided 
by the employer in 
the case of defined 
benefit schemes; 
investment risk 
borne by the 
employee in defined 
contribution 
schemes. 
Members frequently 
participate in the 
management of the 
scheme 
38 See the proposal for a Commission directive on the winding-up of direct insurance undertakings 
(89/C253/04, OJ C 253, 6.10.1989). 
37 
ANNEX 4 
I 
00 
•8 .o c 
<§! 
,c 
.2 
O 
0) I 
ujnjsH |B3H IBnuuy SSBJSAV & 
This annex shows that for periods longer than 10 years, a portfolio consisting of 100% 
stocks was equally volatile (in other words, equally safe) as one consisting of 100% 
bonds but that shares had returns of approximately 7% and bonds of only 3-4%. Over a 
working life, a difference of 3% every year is enormous. Minimum risk shows lowest 
possible volatility that could have been obtained with the best mix of bonds and stocks. 
38 
ANNEX 5 
United States : Annual total return by category of asset (1926-1995) 
US Treasury bills 
Intermediate-term government bonds 
Long-term government bonds 
Long-term corporate bonds 
Small company stocks 
Large company stocks 
10 15 
Source: Morgan Stanley Dean Witter 
39 
ANNEX 6 
Equity versus Bond Markets 
Excess Return Equities 
Local Currencies 
Annualised figures 
Belgium 
France 
Germany 
Italy 
Netherlands 
Sweden 
Switzerland 
UK 
USA 15 year period 
1984-1998 
9.09 % 
3.12% 
4.36 % 
0.95 % 
7.18% 
4.32 % 
9.88 % 
3.67 % 
5.29 % 10 year period 
1989-1998 
1.98 % 
0.17 % 
3.71 % 
-3.47 % 
7.95 % 
2.94 % 
12.08 % 
1.40 % 
7.08 % 
Source: Pragma Consulting NV/SA 
40 
ANNEX 7 
Asset allocation 
Country 
Belgium 
Denmark 
Finland 
France 
Germany 
Ireland 
Italy 
Netherlands 
Norway 
Portugal 
Spain 
Sweden 
Switzerland 
UK Domestic 
equities 
% 
18 
17 
9 
8 
6 
24 
2 
15 
13 
14 
9 
20 
10 
53 Domestic 
bonds 
%• 
31 
65 
69 
75 
71 
26 
56 
47 
60 
72 2) 
65 
64 
25 
9 Foreign 
equities 
% 
24 
7 
1 
5 
3 
33 
-
19 
6 
4 
2 
8 
5 
22 Foreign 
bonds 
% 
12 
1 
1 
10 
4 
4 
-
10 
6 
1 
1 
— 
7 
6 Real 
estate 
% 
5 
8 
7 
— 
13 
6 
40 
7 
7 
2 
-
8 
16 
2 Cash/ 
Other 
% 
10 
2 
13 l) 
2 
3 
7 
2 
2 
8 
7 
23 
— 
37 3) 
8 
1) 
2) 
3) money market instruments 
50/50 % fixed and floating issues 
includes loans to employer, mortgages and other short term loans 
41 
ANNEX 8 
Population and pension assets 
Country 
Belgium 
Denmark 
Finland 
France 
Germany 
Ireland 
Italy 
Netherlands 
Norway 
Portugal 
Spain 
Sweden 
Switzerland 
UK Population 
in millions 
10.2 
5.3 
5.1 
58.6 
82.0 
3.6 
57.4 
15.6 
4.4 
9.9 
39.3 
8.9 
7.1 
59.0 Dependency 
ratio1' 
24.2 
22.4 
20.9 
22.7 
21.7 
19.0 
23.2 
18.8 
25.0 
22.4 
23.5 
28.6 
22.4 
24.6 Value of 
pension 
assets 
$bn 
25 
148 
40 
95 
310 
29 
91 
502 
35 
10 
22 
142 
288 
1015 Pension 
assets 
as a% 
of GDP 
11 
84 
35 
7 
14 
42 
7 
127 
23 
9 
4 
66 
117 
77 Pension 
assets 
per capita 
($000's) 
2.5 
27.9 
7.9 
1.6 
3.8 
8.0 
1.6 
32.2 
7.9 
1.0 
0.6 
16.0 
40.6 
17.2 
1) Population aged 65+ as a proportion of population aged 15-64. 
Source: Population Concern 30 June 1997. 
42 
Glossary of terms relating to pension funds management 
Actuarial calculation : calculation made by an actuary to establish whether a pension 
scheme has enough assets to cover its liabilities/commitments. The actuary must ensure 
that the liabilities are calculated in an adequate manner. 
Asset allocation : the spread of assets of a fund by type of asset and/or geographical area 
Asset Liability Management : method which aims to minimise risks by managing and 
controlling the matching of liabilities, assets, liquidity and investment policy 
Asset Manager : person engaged by the pension fund to manage the assets of the fund. It 
can be a credit institution, an insurance company or a collective investment company 
(UCITS). Some funds manage their own assets. 
Currency matching : requirement that assets used to cover liabilities are denominated in 
the same currency as these liabilities 
Custodian : institution (usually a credit institution) which holds the assets and the of the 
pension fund 
Defined Benefits Scheme : scheme where the benefits are fixed in advance (e.g. as a 
percentage of salary). In general the employer bears the risk with respect to the payment 
of the pension. 
Defined Contribution Scheme : pension scheme in which the contributions are 
fixed.The payment depends on the level of these contributions and on performance of the 
assets purchased. The employee usually bears the investment risk. 
Fund Manager : persons responsible for the overall policy of the fund (its financial, 
particularly asset allocation, and administrative aspects). Managers are in general 
representatives of the affiliates and the employer. The management can also be delegated 
to trustees, who make the commitment to manage the fund to the bast of their capacities. 
Funding requirement : requirement that the assets of a fund that are used to cover 
liabilities must never be less than these liabilities. 
Sponsoring company : company or group of companies which use the services of a fund 
in order to provide a pension to employees 
Technical provisions : item on liability side of balance sheet of a pension fund which 
represents the commitments undertaken by the fund. These technical provisions must be 
covered by assets whose liquidity, security (diversification) and rate of return are adapted 
to the commitments made. 
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ISSN 0254-1475 
COM(1999) 134 final 
DOCUMENTS 
EN 10 05 06 01 
Catalogue number: CB-CO-99-242-EN-C 
Office for Official Publications of the European Communities 
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