Opinion of the Economic and Social Committee on the 'Communication from the Commission - Towards a Single Market for Supplementary Pensions - Results of the consultations on the Green Paper on supplementary pensions in the Single Market'
Date: 1999-10-21
Institutions: European Economic and Social Committee
Subjects: free movement of workers, pension scheme, single market, social security, supplementary pension, tax system

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7.6.
The Committee therefore urges the Council, the Euro-
pean Parliament and Commission to include the citizens’ right
to equal access to the provision of these services in the Charter
of Fundamental Rights which the Cologne European Council
agreed to draw up.

7.7.
The Committee urges the Council, the European Parlia-
ment and the Commission to ensure, as far as possible, that
these services continue to be provided after the conclusion of
the next round of WTO negotiations.

Brussels, 21 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONI MACHIAVELLI

Opinion of the Economic and Social Committee on the ‘Communication from the Commission
— Towards a Single Market for Supplementary Pensions — Results of the consultations on the
Green Paper on supplementary pensions in the Single Market’

(1999/C 368/18)

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

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

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

1.

Introduction

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

Retirement schemes are based on a combination of

1.2.
3 pillars:

— the first pillar consisting of state social security schemes

— the second pillar consisting of occupational schemes, and

— the third pillar consisting of personal pension plans.

The second and third pillars are generally known as sup-
plementary pension schemes.

ensure that the barriers to the development of supplementary
schemes are removed in line with Single Market requirements.

At present, the value of assets held by pillar 2 schemes

1.3.
amount to 23 % of EU GDP and those of pillar 3 to 35 %.

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

2. The Commission Communication

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

1.2.1. While the extent of the reliance on each pillar is
entirely a matter for Member States, the Commission wishes to

(1) COM(97) 283 of 10.6.1997.
(2) OJ C 73, 9.3.1998, p. 114.
(3) The Committee is currently preparing an opinion on the ‘Demo-

graphic Situation and Trends in the EU’.

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

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

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

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

Chapter 4: Co-ordination of Member States’

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

3. General Comments

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

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

3.2.
The Committee welcomes the Commission’s action in
bringing forward this communication to deal with three
important areas in relation to supplementary pensions high-
lighted in two recent Committee opinions (2).

3.3.
The Committee has also expressed its support for a
‘level playing field’ between pension schemes and pension
arrangements secured under a life insurance contract although
it pointed out the fundamental difference between the two.
The lack of a Community regulatory framework for pension
funds may actually impede the proper development of such
schemes, in addition to the potential risks to beneficiaries. The
Committee has therefore previously stressed the need to
provide a legally secure framework for all supplementary
pension schemes (2).

3.4.
The Committee welcomes the comments of the Com-
mission on the possible ways in which equality of treatment in
investment rules between pension funds and life assurance
arrangements might be achieved. Because of the specific
characteristics and the different forms of occupational pension
provision in Member States the Committee has already rec-
ommended that separate prudential rules should apply subject
to the nature of the underlying pension product. In order to
ensure that insurance companies do not suffer any distortion
of competition in relation to their pension investment, Member
States that rely on high and strict quantitative restrictions for
certain categories of assets covering technical provisions (e.g.
shares) could contemplate reducing these thresholds for the
occupational pension business of insurance companies with-
out necessarily increasing risk.

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

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

The Committee notes in particular the significant
3.6.
administrative and other costs to multinational employers
operating through the EU, of operating many and diverse

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

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

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

The Committee agrees that the potential economic
3.7.
benefits for the EU from pension fund investments are
considerable, as it mentioned in its earlier opinions (1). It
agrees, however, that this has to be viewed as a secondary
effect and not the prime purpose of such investment.

however, that the prudence principle must be maintained and
that investment freedom must not be at the expense of
adequate risk control.

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

4. Detailed comments

4.2. Chapter 3: Facilitating the free movement of workers

4.1. Chapter 2: Prudential rules for pension funds compatible with

the single market and the Euro

4.1.1.
The approach in this chapter is in line with the
Green Paper, for which there was broad support from most
commentators including the Committee(2).

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

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

In addition,

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

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

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

4.2.2.
The Committee welcomes the Commission’s pro-
posal to eliminate national obstacles which impede workers
from exercising the fundamental freedoms guaranteed by the
Treaty.

The Committee accepts that the most practical way
4.2.3.
forward is to follow the precedent for statutory schemes under
regulation (EEC) No 1408/71 (3) — an approach based on
co-ordination rather than harmonisation of national schemes.

4.2.4.
The Commission envisages that elimination of the
barriers will be progressive and points to the step already taken
in Directive 98/49/EC (4) concerning posted workers. The
Committee expressed its support for the proposal for this
Directive in its opinion dated 25 March 1998(5), while urging
the Commission to continue its work in this field.

If

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

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

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

(5) OJ C 157/26 of 25.5.1998.

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

Supplementary Pensions, the Committee suggests that any
recommendations should be co-ordinated with the rules for
Pillar 1 schemes. The Committee would be happy to participate
in the Forum.

4.2.7.
three areas in particular where progress needed to be made:

In its previous opinions, the Committee highlighted

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

systems

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

b) difficulties with transferability of vested pension rights

from one Member State to another;

c)

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

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

— the inequality of treatment between members of occu-
pational schemes and individuals with personal schemes;

— the possibility of devising a model pan-European company

occupational pension scheme.

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

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

The High Level Panel on Free Movement has
4.2.10.
suggested the idea of a Pensions Forum to consider how
cross-border labour mobility relating to supplementary pen-
sions can be addressed. In its opinion on the Green Paper (1)
the Committee expressed some hesitancy about the creation
of yet another body, but the Committee notes the support for
this proposal coming from the social partners. While it
appears that the Forum will primarily address issues related to

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

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

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

4.3.3.
to be adopted is founded on three principles:

The Committee notes that the underlying approach

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

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

— no revenue shortfall
should be safeguarded.

i.e. Member States’ tax revenues

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

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

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

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5. Conclusions

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

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

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

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

5.5.
The Committee supports the view that a flexible
approach should be taken to investment rules provided that
these are counterbalanced by effective prudential rules so as to

control risk, and that regular and independent actuarial
assessments of liabilities are carried out.

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

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

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

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

Brussels, 21 October 1999.

The President

of the Economic and Social Committee

Beatrice RANGONIi MACHIAVELLI