Opinion of the Economic and Social Committee on the "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"

(1999/C 368/18)

On 18 May 1999 the Commission decided to consult the Economic and Social Committee, under Article 262 of the Treaty establishing the European Community, on the above-mentioned communication.

The Section for the Single Market, Production and Consumption, which was responsible for preparing the Committee's work on the subject, adopted its opinion on 7 October 1999. The rapporteur was Mr Byrne.

At its 367th plenary session (meeting of 21 October 1999) the Economic and Social Committee adopted the following opinion by 89 votes to five, with five abstentions.

1. Introduction

1.1. Pension benefits are a key component of Member States' welfare protection systems. Expenditure by state pension schemes account for nearly half of all welfare spending, currently ranging between 9 % and 15 % of GDP and likely to rise quite steeply due to demographic factors.

1.2. Retirement schemes are based on a combination of 3 pillars:

- the first pillar consisting of state social security schemes

- the second pillar consisting of occupational schemes, and

- the third pillar consisting of personal pension plans.

The second and third pillars are generally known as supplementary pension schemes.

1.2.1. While the extent of the reliance on each pillar is entirely a matter for Member States, the Commission wishes to ensure that the barriers to the development of supplementary schemes are removed in line with Single Market requirements.

1.3. At present, the value of assets held by pillar 2 schemes amount to 23 % of EU GDP and those of pillar 3 to 35 %.

1.4. The Commission's Communication is a follow up to the consultations which took place on the Green Paper on Supplementary Pensions in the Single Market(1) issued in June 1997 on which the Committee's opinion was dated 10 December 1997(2).

2. The Commission Communication

2.1. The Commission restates briefly the main points of the Green Paper and in particular the demographic pressures which suggest that the ratio of the number of persons of working age to pensioners will reduce from the present 4:1 to 2:1 by 2040 in an overall EU context(3).

2.2. The Communication concentrates on supplementary schemes, i.e. pillars 2 & 3, in relation to three specific areas on which there was broad agreement during the consultation process:

2.2.1. Chapter 2: Prudential rules for pension funds - such funds are the only major financial institutions not covered by EU legislation guaranteeing the application to them of Single Market freedoms. This is in part because such schemes have developed under national regulation, but the need for an EU initiative is particularly relevant in the context of the completion of the Single Market. Any proposal would aim to guarantee the best possible protection of fund members' rights - requiring development of an appropriate prudential framework as was done for the banking and insurance sectors. It should also allow for the mutual recognition of existing supervisory systems (which is a sine qua non for cross-border membership) and prevent the adoption of investment rules that are over-restrictive and incompatible with the use of the Euro.

2.2.2. Chapter 3: The removal of obstacles to labour mobility in the Union - while there are EU rules on social security pensions for migrant workers, those covering supplementary pension schemes are extremely limited. Hence the Communication foresees consultations on the acquisition of rights favourable to freedom of movement, convergence of national rules on the transfer of rights, and conditions to be met if funds are to manage plans in various Member States. The Communication proposes the establishment of a "Pensions Forum" to identify a consensus on these issues.

2.2.3. Chapter 4: Co-ordination of Member States' tax systems - The Communication proposes abolition of tax discrimination against products offered by pension funds and insurance companies established in Member States other than that in which the fund member or potential customer resides. It suggests a first move in the form of legislation covering the tax treatment of cross-border contributions paid by migrant workers to occupational pension schemes.

3. General Comments

3.1. Although the Commission Communication covers supplementary pensions only the Committee believes it is important to repeat its earlier comments on state pensions (Pillar 1)(4).

3.1.1. The Green Paper pointed out that state pensions currently account for 88 % of pension payments across the EU and will continue to provide the bulk of pension payments.

3.1.2. The Committee has already recommended that, given the importance of Pillar 1 schemes as outlined above, Member States should seek ways to improve the sustainability of these schemes.

3.1.3. The Committee has noted that any switch, however gradual from pay-as-you-go schemes will involve more resources being devoted to pension provision. Care should be exercised therefore to ensure that any initiatives under Pillar 2 and 3 can be sustained without undermining acquired pension rights under Pillar 1 commitments.

3.2. The Committee welcomes the Commission's action in bringing forward this communication to deal with three important areas in relation to supplementary pensions highlighted in two recent Committee opinions(5).

3.3. The Committee has also expressed its support for a "level playing field" between pension schemes and pension arrangements secured under a life insurance contract although it pointed out the fundamental difference between the two. The lack of a Community regulatory framework for pension funds may actually impede the proper development of such schemes, in addition to the potential risks to beneficiaries. The Committee has therefore previously stressed the need to provide a legally secure framework for all supplementary pension schemes(6).

3.4. The Committee welcomes the comments of the Commission on the possible ways in which equality of treatment in investment rules between pension funds and life assurance arrangements might be achieved. Because of the specific characteristics and the different forms of occupational pension provision in Member States the Committee has already recommended that separate prudential rules should apply subject to the nature of the underlying pension product. In order to ensure that insurance companies do not suffer any distortion of competition in relation to their pension investment, Member States that rely on high and strict quantitative restrictions for certain categories of assets covering technical provisions (e.g. shares) could contemplate reducing these thresholds for the occupational pension business of insurance companies without necessarily increasing risk.

3.5. The Committee supports the concept of mutual recognition of existing supervisory systems as the best way forward, and one which it hopes will enable speedy progress to be made. This approach should also ensure that well established systems of national control, which recognise the nature and particular requirements of different national pension systems, will not be subject to unnecessary change.

3.6. The Committee notes in particular the significant administrative and other costs to multinational employers operating through the EU, of operating many and diverse pension systems subject to equally diverse regulations. The Committee hopes that as soon as possible, the Commission will bring forward proposals to facilitate EU-wide occupational pension schemes (under pillar 2) as a logical extension of the Single Market, particularly with the introduction of the Single Currency. In the interim, the Committee would especially support some early moves to a system of mutual recognition to facilitate such employers provided the result would not lead to any diminution of the quality of pension rights or regulatory protection.

3.7. The Committee agrees that the potential economic benefits for the EU from pension fund investments are considerable, as it mentioned in its earlier opinions(7). It agrees, however, that this has to be viewed as a secondary effect and not the prime purpose of such investment.

4. Detailed comments

4.1. Chapter 2: Prudential rules for pension funds compatible with the single market and the Euro

4.1.1. The approach in this chapter is in line with the Green Paper, for which there was broad support from most commentators including the Committee(8).

4.1.2. The Committee is pleased to note that its support for a broad directive is being followed. This should include a minimum of common rules for supplementary pension schemes to guarantee the best possible protection of fund members' rights while also facilitating fair competition for the provision of services by financial operators.

4.1.3. The Committee agrees with the basic prudential requirements listed by the Commission subject to the addition of an additional inset point: "the appointment of an independent actuary by each pension scheme". In addition, the Committee would emphasise that not only must the assets of pension funds be kept entirely separate from those of the sponsoring employer, but they should be outside the employer's control. Instead they should be vested in an independent body such as a board of trustees and as an additional safeguard, members of the supplementary scheme should have the right to nominate up to 50 % of the board members.

4.1.4. The Committee believes that a flexible approach to investment rules is the one most likely to maximise the benefits for members, and recommends there should be no requirements to invest a minimum percentage in defined categories of assets nor should currency matching requirements go beyond what is prudently justified. There should be an obligation not to invest more than 5 % of the fund in the sponsoring company and to maintain a well balanced and diversified investment portfolio. The Committee would stress, however, that the prudence principle must be maintained and that investment freedom must not be at the expense of adequate risk control.

4.1.5. The Committee agrees that a last resort "guarantee" which would operate in the event of a pension fund not being able to meet its liabilities would be an important safeguard provided that it did not result in the dilution of the prudential investment obligation. Several possibilities exist such as the UK compensation scheme and the German mandatory insolvency insurance scheme for pension fund reserves created by employers. The Committee believes that the critical issue here is to have effective arrangements in place if a genuine Single Market with cross-border membership is to be achieved. Therefore it may be necessary to develop some common minimum standards.

4.2. Chapter 3: Facilitating the free movement of workers

4.2.1. The Commission points out that the EU already has effective rules for pillar 1 schemes for migrant workers. The limited scope of such rules for supplementary schemes constitutes a real barrier to free movement within the EU for those citizens covered by such schemes.

4.2.2. The Committee welcomes the Commission's proposal to eliminate national obstacles which impede workers from exercising the fundamental freedoms guaranteed by the Treaty.

4.2.3. The Committee accepts that the most practical way forward is to follow the precedent for statutory schemes under regulation (EEC) No 1408/71(9) - an approach based on co-ordination rather than harmonisation of national schemes.

4.2.4. The Commission envisages that elimination of the barriers will be progressive and points to the step already taken in Directive 98/49/EC(10) concerning posted workers. The Committee expressed its support for the proposal for this Directive in its opinion dated 25 March 1998(11), while urging the Commission to continue its work in this field.

4.2.5. If the category of worker covered by Directive 98/49/EC is extended, the Committee considers it would be appropriate to maintain the requirement that such a worker could not at the same time be covered by the host country social security system and remain a member of the home country supplementary scheme, or vice versa.

4.2.6. While the proposed arrangements are likely to deal with the vast bulk of mobile workers, there is a small but possibly growing body of such workers who are highly mobile and who have in practice no country of domicile to which eventual return can be presumed. Consideration should be given as to whether some special pan-European arrangements could be made for such people.

4.2.7. In its previous opinions, the Committee highlighted three areas in particular where progress needed to be made:

a) qualifying conditions for acquiring rights - in particular the long period of years necessary in some Member States;

b) difficulties with transferability of vested pension rights from one Member State to another;

c) the position of a worker temporarily employed in another Member State other than on a posted basis,

and it therefore welcomes the proposals outlined in the Communication for dealing with these. In addition the Committee would like to remind the Commission of two further points from its earlier opinions on the subject:

- the inequality of treatment between members of occupational schemes and individuals with personal schemes;

- the possibility of devising a model pan-European company occupational pension scheme.

4.2.8. The Committee particularly welcomes the recognition that long vesting periods are a potential source of indirect discrimination affecting female workers, since they are less likely to be able to achieve the same length of continuous service than men.

4.2.9. The Committee accepts as a practical reality the difficulties outlined by the Commission in relation to the transferability of pension rights to or from book reserve schemes. It believes, however, that care should be taken to ensure that employing companies opting for this approach do not secure any unfair advantage over their competitors. In particular, a mandatory system of preservation and revaluation of pension rights between leaving the employment and the pension coming into payment may be an effective alternative safeguard.

4.2.10. The High Level Panel on Free Movement has suggested the idea of a Pensions Forum to consider how cross-border labour mobility relating to supplementary pensions can be addressed. In its opinion on the Green Paper(12) the Committee expressed some hesitancy about the creation of yet another body, but the Committee notes the support for this proposal coming from the social partners. While it appears that the Forum will primarily address issues related to Supplementary Pensions, the Committee suggests that any recommendations should be co-ordinated with the rules for Pillar 1 schemes. The Committee would be happy to participate in the Forum.

4.3. Chapter 4: Towards a better co-ordination of national tax systems

4.3.1. Because of the diversity and complexity of national tax systems, the Commission believes that the Taxation Policy Group is the most suitable forum in which to formulate an appropriate legislative initiative. To this end it has been decided to create a technical sub-group to assist the Taxation Policy Group.

4.3.2. The Committee recognises the complexity of the issues to be faced and the difficulty of reconciling Member States' conflicting approaches to this issue. Nevertheless, the problems faced by migrant workers are real and urgent; without some form of tax co-ordination the existing barriers to mobility will in practice remain, notwithstanding Directive 98/49/CE and any subsequent amendments to that instrument. The Committee hopes, therefore, that the ambition to have a legislative initiative on the first aspects formulated by 1999 or 2000 is not over optimistic.

4.3.3. The Committee notes that the underlying approach to be adopted is founded on three principles:

- no harmonisation i.e. co-ordination is planned instead;

- no discrimination i.e. free movement of workers cannot be unduly hampered by overly restrictive tax treatment of cross-border transactions;

- no revenue shortfall i.e. Member States' tax revenues should be safeguarded.

4.3.4. The Committee understands the pragmatism which underlies this approach, but is concerned that a "nobody loses anything" basis may fatally impede progress.

4.3.5. The Committee notes the influential role of the European Court of Justice in upholding Treaty rights of citizens in relation to both pensions and life assurance. It hopes the political system will prove similarly responsive.

4.3.6. With specific reference to the arguments set out in the Communication regarding the alternative options of taxing pension contributions (the TEE system) or taxing pensions as they are paid (the EET system), the Committee supports the option of taxing pensions as they are paid.

5. Conclusions

5.1. The Committee welcomes the fact that the Commission has followed up quite quickly on the Green Paper discussions, and is generally supportive of the Communication's content.

5.2. The Committee believes that because of its representational role it is well placed to assist the Commission on this issue. It therefore expresses its readiness to participate fully in any further consultation on this topic.

5.3. The Committee hopes that the incoming Commission will pick up rapidly the framework now set out in the Communication and that there will be no loss of momentum.

5.4. The Committee believes that the aim of pensions co-ordination and freedoms is fully in line with the expectations of European citizens in relation to the Single Market.

5.5. The Committee supports the view that a flexible approach should be taken to investment rules provided that these are counterbalanced by effective prudential rules so as to control risk, and that regular and independent actuarial assessments of liabilities are carried out.

5.6. The Committee also acknowledges the additional confidence that a guarantee system would provide for pension scheme members, and urges the Commission and the Member States to explore how this may be achieved.

5.7. The Committee supports the proposals to set up the Pensions Forum to examine barriers to the free movement of workers and the technical sub-group to assist the Taxation Policy Group. This seems the most practical way forward for dealing with the complex issues involved.

5.8. The Committee suggests that if supplementary pensions increase as a percentage of retirement income at Member State level, it will be increasingly important to provide a secure environment for efficient operation of supplementary funded schemes.

5.9. Finally, while fully supportive of the initiatives in relation to Supplementary Pensions the Committee requests that attention continues to be focused on the need to improve the sustainability of Pillar 1 schemes.

Brussels, 21 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONIi MACHIAVELLI

(1) COM(97) 283 of 10.6.1997.

(2) OJ C 73, 9.3.1998, p. 114.

(3) The Committee is currently preparing an opinion on the "Demographic Situation and Trends in the EU".

(4) OJ C 73, 9.3.1998, p. 114.

(5) OJ C 73, 9.3.1998, p. 114 and OJ C 157, 25.5.1998, p. 26.

(6) OJ C 73, 9.3.1998, p. 114 and OJ C 157, 25.5.1998, p. 26.

(7) OJ C 73, 9.3.1998, p. 114 and OJ C 157, 25.5.1998, p. 26.

(8) OJ C 73, 9.3.1998, p. 114.

(9) Regulation (EEC) No 1408/71 of 14.6.1971 on the application of social security schemes to employed persons and their families moving within the Community, OJ L 149, 5.7.1971, p. 2 (English special edition: Series 171(II) p. 416).

(10) Council Directive 98/49/EC of 29.6.1998 on safeguarding the supplementary pension rights of employed and self-employed persons moving within the Community, OJ L 209, 25.7.1998, p. 46.

(11) OJ C 157/26 of 25.5.1998.

(12) OJ C 73, 9.3.1998, p. 114.