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
Date: 1999-05-11
Institutions: European Commission
Subjects: free movement of workers, single market, social security, supplementary pension, tax harmonisation

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 
1.2 

Need for a single market in supplementary pensions 
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 

Increased security of investment portfolios 
Increased efficiency of investment portfolios 

2.1.1 
2.1.2 
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 
2.2.4  Means of ensuring equal treatment of operators 
2.2.5  A new context 

Insurance against system failures 

3. 

FACILITATING THE FREE MOVEMENT OF WORKERS 

3.1 
3.2 
3.3 

General remarks 
Results of the Green Paper consultations 
Possible actions 

4. 

TOWARDS A BETTER COORDINATION OF NATIONAL TAX SYSTEMS 

4.1 
4.2 

Results of the Green Paper consultations 
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) 

(ii) 

(iii) 

(iv) 

to ensure the best possible protection  of beneficiaries.  This means that  investment 
and management freedom  has to be placed in an overall prudential  framework. 

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. 

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. 

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) 

(ii) 

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 
to  members  and  the 
setting-up  of  mechanisms  for  periodic  declarations 
supervisory  authorities. 

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) 

(ii) 

(iii) 

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. 

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. 

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. 

this 

flexible  and  coordinated  approach, 

Following 
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  Commission  and 

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. 

3. 

4. 

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 
than  pay-as-you-go 
no  cross-border  portfolio  restrictions,  permit  greater  flexibility 
schemes  in coping with  the demographic  crisis affecting  pension  systems. 

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. 

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. 

6. 

7. 

8. 

9. 

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 
framework 
accompanies these trends. 

that  an  appropriate  Community 

in  France.  It  is  essential 

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 : 

• 

• 

• 

the freedom  to provide services; 

the freedom  for labour to move across borders; 

the  freedom 
restrictions. 

to  invest  across  borders  subject  only  to  appropriate  prudential 

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 

The Commission received  about  100 replies to the Green Paper from  Member States, the 
the  European 
European  Parliament, 
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. 

the  Economic  and  Social  Committee  of 

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 
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. 

sufficient: 

in  order 

to 

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 
. Given 
aim at improving mobility  across the EU and which  can receive venture capital 
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; 

to  make  authorisation  subject 

need 
responsibility, competence and integrity of managers; 

to  strict  criteria  regarding 

the 

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 
also  be  appropriate  for 
based  on  co-ordination  and  not  harmonisation  would 
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 

Objectives 

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 

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. 

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 

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. 

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. 

Commission 

During  1999/2000 

Commission 

During  1999 or 
2000 

Commission in 
conjunction  with 
Member States, the 
pension  fund 
industry and 
employer/employee 
organisations. 

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 

1984-93 

1984-96 

Belgium 
Denmark 
Germany 
Ireland 
Japan 
Netherlands 
Spain 
Sweden 
Switzerland 
United Kingdom 
United States 
No asset limits 
Asset limits 

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 

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 

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 

Closed  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 
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 pension  fund 
in the case of 
defined  benefit 
schemes; 
investment risk 
borne by the 
employee in  defined 
contribution 
schemes. 
Indirect, via the 
employer. 

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 

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 

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 

Source: Morgan Stanley Dean Witter 

10 

15 

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 % 

Source: Pragma Consulting NV/SA 

10 year period 
1989-1998 
1.98 % 
0.17 % 
3.71 % 
-3.47 % 
7.95 % 
2.94 % 
12.08 % 
1.40 % 
7.08 % 

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 

1) 

2) 

3) 

money market  instruments 
50/50 % fixed  and floating issues 
includes loans to employer, mortgages and other short term loans 

Cash/ 
Other 
% 
10 
2 
13 l) 
2 
3 
7 
2 
2 
8 
7 
23 
— 
37 3) 
8 

41 

ANNEX  8 

Population and pension  assets 

Country 

Population 
in millions 

Dependency 
ratio1' 

Belgium 
Denmark 
Finland 
France 
Germany 
Ireland 
Italy 
Netherlands 
Norway 
Portugal 
Spain 
Sweden 
Switzerland 
UK 

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 

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. 

43 

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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