Making a case for portable pensions across Europe

As employers look at the EU as a single operating territory, the argument for a pan-European pension has become compelling, writes John Murray Brown

Little did John Feely know what he was taking on when he put himself forward to join the board of the European Federation for Retirement Provision (EFRP), the Brussels-based umbrella organisation for Europe's pension fund associations.

After all, he saw it simply as an opportunity to fill the gaps in his knowledge of how pensions worked in other parts of Europe.

Today, as well as being chairman of the Irish Association of Pension Funds, Mr Feely is chairman of the federation's key working party, steering through an ambitious plan to bring a long-overlooked aspect of financial services into the European single market.

As employers start to look at the European Union as a single operating territory, the case for a form of pan-European pension has become compelling. The debate has big implications, not just for cost-obsessed multinationals seeking to be able to provide for staff working in different parts of Europe.

The lack of a workable pan-European pension structure is cited as one of the main constraints on labour mobility within the EU. Mr Feely believes there is a cultural reason behind the idea of a unified pensions policy making so little headway.

In many EU member-states, such as France and Italy, pension provision is seen as the responsibility of the state. But as Europe's retired population increases, most economists predict the pay-as-you-go schemes - where the generation in work pays for the pensions of those already retired - will become increasingly unsustainable.

The European Commission has now given its backing to the development of occupational pensions - the so-called second pillar. "That argument is fairly well won," he says. But there remains a daunting course of obstacles to a pan-European scheme.

The Commission insists it remains a fundamental freedom that citizens should be able to work and claim the same level of tax benefits across the EU.

In practice, Mr Feely says, this will not be possible - short of harmonising tax across the EU.

Even when there is a Europe-wide pension scheme, the benefits paid are likely to vary according to the different social security levels in the different countries.

A commission directive on pensions, set for its second reading in the European parliament in the next few weeks, seeks to harmonise regulation across Europe - effectively producing a single licensing system for pensions. If approved, the last remaining obstacle to the creation of a pan-European pension scheme will be tax. Mr Feely is confident that in 15 years, the European pensions industry will have evolved from one of individual arrangements in different countries to a single pension scheme.

"Clearly, the issue is what happens in transition," he adds.

At the moment, the progress towards a single market for pensions is being fought by the multinationals through the courts - the most high-profile case being that of Rolf Danner, a German dentist who moved to Finland and wanted German rules to be applied to his Finnish pension scheme.

The EFRP believes it has found a way forward. The federation's model of a European Institution for Occupational Retirement Provision, which it hopes to promote as a pilot scheme, envisages that member-states would be able to preserve their own approach to taxation of pension arrangements.

But, by separating tax from regulation, the EFRP scheme regulated in one member country would be able to offer benefits to workers within the same company resident in another member-state, while complying with the country's tax rules.

The scheme envisages assets and liabilities "co-mingling" in such an arrangement. There is one solvency test, one set of government procedures and a single - not 15 - trustee body.

Mr Feely does not think the adoption of the EFRP model will happen overnight. Companies are unlikely to want to scrap their existing plans.

He insists the scheme is tax-neutral. Until now, resistance has come from governments in countries worried that they may provide tax exemptions on contributions while another country takes the tax when benefits are paid out.

Another issue is that, when company pension fund arrangements are pooled, a company in a country where funds tend to be in surplus - such as the UK - could end up subsidising those divisions in deficit.

But the EFRP warns in its latest report: "If the EFRP proposal, or one like it, is not adopted in the near future, then it could be the European Court of Justice that decides how the single licence will operate from a tax perspective.

"Its decision could undermine the tax neutrality principle that the EFRP seeks to maintain, and could be unworkable from a member-state perspective."

According to Mr Feely: "These are real issues for companies and they're looking for solutions all the time." An EFRP poll conducted among leading European multinationals found their main concern was that employees should be able to stay in one pension plan over their careers.

At the moment, if a multinational wants to move a key employee abroad, it has to set up a one-person pension arrangement.

The poll also found that companies wanted the ability to have pension assets held as a single fund, rather than having to match assets to certain country-specific liabilities. The savings involved just on the investment side - having fewer fund managers - are not inconsiderable for big companies. BP estimates it would save €40 million a year through having an identical scheme for all its European employees.