Analytics, EU – Baltic States, Financial Services, Funds, Investments, Legislation, Pensioners

“Pension industry” has a special role in the EU member states’ economy; not only because people depend on pensions but also that pensions help them save and plan for their old age; this responsibility will only grow in the years ahead.

Pension’s role will increase in modern time: people are living longer, they're having fewer children and life expectancy is expected to continue increasing. The ratio of retired people to workers is set to double in the next thirty five years though public finances are going to remain under pressure.

The Commission is taking a lot of coordinating work to improve the environment for the pensions industry in Europe, to deepen capital markets, to support pension funds' capacity to invest for the long term, and to deliver a better service to their members and beneficiaries. There's a great deal of work to take the single market a step further and to build trust in Europe's financial sector. With the help from the member states, the Commission will respond to the huge demographic challenge Europe faces, and strengthen Europe's financial services sector with the pensions industry at its heart.

Among three EU financial supervisory authorities one deals with insurance supervision and pensions: European Insurance and Occupational Pensions Authority.

Pension’s problems

Pension’s issues have strong implications for the member states’ economies. However, not all the answers are with pensions’ funds: older retirement ages are going to be part of the solution; hence reforms have been introduced in a number of EU countries. But in order to address the problem, occupational and personal pension schemes have to be taken into consideration.

At the moment, only about 40% of the EU's workforce has the opportunity to pay into a work-based pension: this is taking place in just a few member states, e.g. the Netherlands, Denmark, Sweden, Finland, Ireland and the UK. In many countries, occupational pensions are still not an option for most of the workforce. Personal pensions are more widely available but relatively few people are interested in investing in them.

Policies to ensure people save enough for their old age are in the EU the responsibility of national governments. Supporting the sharing of best practice, the EU institutions feel that more could be done to create the right environment for pension funds to prosper and to deliver higher returns for those who invest in them.

Pension as investment

These issues are closely connected to the EU deeper capital markets: fewer barriers to the provision of pension services across borders would increase competition between pension providers, enable services to be sold into bigger markets and create economies of scale that should benefit investors.

Institutional investors that manage the workplace pensions “unite” about 80 million European citizens and some €3.5 trillion worth of assets, which in itself could be a huge contribution to growth. Thus, pension funds are better placed to support the long term investment projects that are essential for European competitiveness.

Presently, at the sustained period of low interest rates, the states are going to put significant pressure on occupational pension schemes - particularly defined benefit schemes - by lowering the investment returns. Adjusting to the new regulatory framework that has flowed from the financial crisis is an added challenge that takes resource and energy.

Building deeper capital markets

Pension’s “bright future” is based on two factors: first, once legislation linked to the crisis is completed, a period of legislative calm is needed so that businesses can concentrate on managing their clients' investments; second, the need for improving broader investment environment.

These issues are at the heart of EU project to build deeper capital markets, i.e. the Capital Markets Union.

The Commission tries to knock down barriers to the free flow of capital: in the near future, the Commission will propose amendments to EU legislation to build up venture capital markets, and looking at how to use public money to attract private investment through a pan European fund-of-funds. To free up banking lending and support investment in the wider economy, the Commission has already tabled a proposal to restart Europe’s securitisation markets by defining simple, transparent and standardised securitisation and lowering capital requirements that are associated with them.

To make it easier for companies to raise money on public markets, the Commission has made proposals to create a Prospectus regime that's simpler, faster and cheaper, while amending Solvency II to define infrastructure as an asset class and reduced capital ratios for this type of investment by about a third. That change came into effect on 2^nd April, 2016 and will support investment in European infrastructure.

To dismantle barriers to investment funds operating across borders, the Commission has launched a consultation to get a better idea of the barriers that stand in the way of services being offered in different countries. At the end of 2016, proposals will be brought aimed at reducing differences between national insolvency regimes, building on national regimes that work well. The goal will be to make company restructuring easier and increase certainty for those wanting to invest across European borders. 

Respondents to the Call for Evidence have said that overall the measures put in place following the crisis are working well, but that some legislation is not proportionate enough; that it could be weighing down the amount of financing available to the wider economy; and that the compliance burden is too heavy.

Pensions and double taxation

Pension Funds have called for a permanent exemption from some of EMIR's rules on central clearing; that's why in 2015 the Commission extended the temporary exemption. The Call for Evidence has shown that the member states have to be cautious about further reforms that might have an impact on market liquidity. Directly relevant to the pensions industry is the idea to make cross border investments easier by simplifying the system to reclaim tax when investments are subject to double taxation.

At the moment, many cross border investments are penalised by double taxation on dividend income, interest payment and capital gains. The process for reclaiming these withheld taxes can be complicated and off-putting. Besides, the cost of reimbursements foregone, the administrative burden of reclaiming tax and the opportunity costs linked to delayed repayments has been estimated at over €8 billion a year across the EU.

The Commission is working with national governments to develop a code of conduct for more efficient withholding tax procedures. The goal is to apply tax relief immediately where appropriate so as to avoid complicated refund processes. And when refund procedures can't be avoided, to make the process straightforward and quick, with standardised application procedures available online.  

Some efforts are made to support cross border provision of personal pension products so that consumers can benefit from a wider range of products, competing across borders. The Commission will be launching a consultation and feasibility study to map the existing market.

Public hearing will be held in October 2016 to discuss responses, consider practical suggestions to overcome barriers, and give pension providers the opportunity to explain their products.

Strengthening governance and transparency

Work has continued to strengthen governance and transparency, and improve the cross border provision of occupational pensions in Europe. The pace of discussions to revise the Institutions for Occupational Pensions Directive, IORP2, has recently picked up. This work is necessary to encourage occupational pensions to take on a greater role, to increase transparency so that those who invest in these pensions are clear on the risks they're taking, and how their investment is performing over time.

To ensure high standards of governance in pension industry, there is a need for the right level of risk assessment consistently undertaken before investments are made and that records are kept of these assessments. Certain key functions in occupational pension funds: internal auditors, risk managers and in some cases actuaries have to be filled by professionals.

To increase transparency, IORP2 will introduce summary documents providing key information about the risks and potential returns attached to certain pensions, and the requirement for pension holders to receive regular, understandable Pension Benefit Statements detailing how investments are progressing. The IORP2 proposal should clarify the rules and simplify the procedures for IORPs to operate across borders. It would make cross border transfers between IORPs in different countries possible and improve the coordination of oversight and supervision between different jurisdictions. This is particularly important for multinationals to get the best possible return for their occupational pension holders in different countries, but should also help SMEs that want to grow into bigger markets and offer their staff occupational pensions.

Pension legislation shall be kept proportionate: e.g. exemptions will be granted for smaller IORPs that would only have to comply with minimum requirements for the safekeeping of assets. There are no EU plans to harmonise solvency rules for occupational pensions and there are no plans to introduce a standardised risk assessment process.

IOPR2 will modernise the framework for the regulation of occupational pensions across the EU. It will protect consumers by improving governance and transparency, and encourage economies of scale in bigger markets. This legislation would come into force by the end of the year and would be applied by the end of 2018.

More on the issue see:

http://europa.eu/rapid/press-release_SPEECH-16-2324_en.htm?locale=en