Towards a single market for supplementary pensions

1) OBJECTIVE

With an eye to creating a single market for supplementary pensions, improve the supplementary pension schemes on the basis of the results of the consultations following the Green Paper on supplementary pensions of 10 June 1997. Enable supplementary pension schemes to take greater advantage of the single market and the euro.

2) COMMUNITY MEASURES

Commission Communication of 11 May 1999 - towards a single market for supplementary pensions (results of the consultations on the Green Paper on supplementary pensions in the single market).

3) CONTENTS

The maintenance of a high standard of welfare protection is an objective shared by all Member States of the European Union. One of the major challenges in this connection lies in controlling the cost of this protection, while ensuring economic and social cohesion and making a positive contribution to economic growth.

Pensions are a key component of the welfare protection systems. Expenditure by state pension schemes accounts for nearly half of all welfare spending, or between 9 and 15% of the GDP of the Member States, and this proportion is likely to rise as a result of demographic ageing.

Generally speaking, pension systems are based on three pillars:

• the first pillar consists of the social security schemes;
• the second occupational schemes;
• the third personal retirement plans.

The supplementary schemes encompass the second and third pillars. Hence they are designed to supplement the state schemes.

The Green Paper on supplementary pensions prompted a hundred or so responses from the European institutions, notably the European Parliament and the Economic and Social Committee, but also from the Member States, the social partners and the financial sector.

The Commission has also drawn on the talks which culminated in the Financial Services Action Plan of 11 May 1999, which devotes much space to the pensions issue [COM(99) 232 final].

While Member States are free to organise their pension systems as they wish, the Commission must ensure that the supplementary schemes take advantage of the single market freedoms. This is not the case at present.

Specifically:

• occupational pension schemes are often subject to investment and management rules which, without improving the protection of beneficiaries, prevent funds from using capital markets and the euro effectively when it comes to recycling the contributions received. This limits the return on investment and hence raises the cost of the benefits;
• labour mobility is restricted by the way supplementary schemes are currently organised. Pension rights are often difficult to acquire and especially to transfer from one Member State to another;
• the freedom to provide services hardly functions in practice as far as supplementary pensions are concerned, for reasons to do with the differences between tax systems.

Hence the Commission is keen to put in place a Community framework for supplementary pensions which might hinge on three main measures:

- The drawing up of a proposal for a directive on prudential rules for occupational pension funds Once adopted this Directive should:

• ensure optimal protection of the beneficiaries;
• allow the pension funds to make the most of the single market and the euro;
• ensure equal treatment between the providers of employment-linked supplementary pensions and avoid distortions to competition in respect of other service providers, such as life insurance companies;
• allow mutual recognition of prudential schemes existing in the Member States (cross-border membership).

- Removing obstacles to labour mobility The lack of a system for coordinating supplementary pensions is a real barrier to labour mobility in the European Union.

The Commission considers it is important to:

• simplify the conditions for the acquisition of supplementary pension rights and limit the qualifying periods;
• lay down common rules on the transfer of rights;
• ensure better coordination of the tax systems and the mutual recognition of systems;
• create a "pensions forum" to discuss issues of labour mobility in the Union.

- Coordination of the Member States' tax systems National disparities in the fiscal treatment of life insurance and pension products, as well as their complexity and specificity, are serious obstacles to labour mobility. While harmonisation is not on the agenda, and mindful of the need to safeguard the tax revenues of the Member States, the Commission considers it necessary to strive to eliminate national tax discrimination against products of institutions in other Member States (insurance companies, pension funds).

To this end, the Commission and the Member States have begun to cooperate with a view to examining ways of removing the main barriers. One of the most pressing problems is the fiscal treatment of contributions and premiums paid to institutions established in a Member State other than the one in which the member or policy holder is resident. This issue is being discussed in the Tax Policy Group, a high-level forum for dialogue between the Commission and the Member States in the field of taxation.